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U.S. Securities and Exchange Commission

SEC News Digest

Issue 2011-26
February 8, 2011

COMMISSION ANNOUNCEMENTS

SEC Charges Hedge Fund Managers and Traders In $30 Million Expert Network Insider Trading Scheme

The Securities and Exchange Commission today charged a New York-based hedge fund and four hedge fund portfolio managers and analysts who illegally traded on confidential information obtained from technology company employees moonlighting as expert network consultants. The scheme netted more than $30 million from trades based on material, nonpublic information about such companies as AMD, Seagate Technology, Western Digital, Fairchild Semiconductor, and Marvell.

The charges are the first against traders in the SEC's ongoing investigation of insider trading involving expert networks. The SEC filed its initial charges in the case last week against technology company employees who illegally tipped hedge funds and other investors with material nonpublic information about their companies in return for hundreds of thousands of dollars in sham consulting fees.

In its amended complaint filed today in federal court in Manhattan, the SEC alleges that four hedge fund portfolio managers and analysts received illegal tips from the expert network consultants and then caused their hedge funds to trade on the inside information.

"It is illegal for company insiders who moonlight as consultants to sell confidential information about their companies to traders, and it is equally illegal to buy that corruptly obtained information and trade on it," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Instead of competing on a level playing field with other investors, these hedge fund managers sought to illegally trade today on what others would not learn until tomorrow."

The SEC's ongoing investigation is focusing on the activities of expert networks that purportedly provide professional investment research to their clients. While it is legal to obtain expert advice and analysis through expert networking arrangements, it is illegal to trade on material nonpublic information obtained in violation of a duty to keep that information confidential.

The technology company insiders who tipped the confidential information were expert network consultants to the firm Primary Global Research LLC (PGR).

The SEC's amended complaint alleges:

  • Samir Barai of New York, N.Y., the founder and portfolio manager of Barai Capital Management, obtained inside information about several technology firms from company insiders, and then traded on the inside information on behalf of Barai Capital.
     
  • Jason Pflaum of New York, N.Y., a former technology analyst at Barai Capital Management, obtained inside information about technology companies and shared it with Barai. After Pflaum shared the confidential information with him, Barai used it to illegally trade on behalf of Barai Capital.
     
  • Noah Freeman of Boston, Mass., a former managing director at a Boston-based hedge fund, obtained inside information regarding Marvell and shared it with Donald Longueuil of New York, N.Y., a former managing director at a Connecticut-based hedge fund. Longueuil caused his hedge fund to trade on the inside information. Freeman also obtained inside information about another technology company and caused his hedge fund to trade on the nonpublic information.

The SEC's amended complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and additionally charges Barai, Pflaum, Freeman and Longueuil with aiding and abetting others' violations of Section 10(b) and Rule 10b-5 thereunder. The complaint also charges Barai, Pflaum and Barai Capital with violations of Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties.

Sanjay Wadhwa, Jason Friedman, Joseph Sansone, Daniel Marcus - members of the SEC's Market Abuse Unit in New York - have conducted the SEC's investigation with Matthew Watkins, Neil Hendelman, Diego Brucculeri and James D'Avino of the New York Regional Office. The SEC's litigation effort will be led by Valerie Szczepanik and Kevin McGrath. The SEC thanks the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in the matter.

For more information about this enforcement action, contact:

George Canellos
Director, SEC's New York Regional Office
(212)336-1020

David Rosenfeld
Associate Director, SEC's New York Regional Office
(212) 336-0153

Sanjay Wadhwa
Deputy Chief, Market Abuse Unit, Division of Enforcement
(212) 336-0181

(Press Rel. 2011-40; LR-21844)


ENFORCEMENT PROCEEDINGS

In the Matter of Steven Byers

On Feb. 7, 2011, the Commission issued an Order Making Findings and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934 against Steven Byers (Byers). The proceedings are based on Byers' guilty plea and allocution entered before the United States District Court for the Southern District of New York, in United States v. Steven Byers et al., No. 08-cr-1092 (DC).

In the Order, the Commission finds that Byers, age 48, was the Chairman and owner of private equity firm Wextrust Capital, LLC (Wextrust Capital) from 2003 to August 2008. Wextrust Capital was a globally diversified private equity company formed in or about 2003, specializing in investments in real estate and specialty finance opportunities. Wextrust Capital was affiliated with several companies of a similar name, including Wextrust Securities, LLC (Wextrust Securities), a broker-dealer registered with the Commission.

Byers was also an owner and controlling person of Wextrust Securities. Records from Wextrust Securities show that Byers was managing that broker-dealer, had an internal representative number, and solicited investors while associated with the broker-dealer.

On April 13, 2010, Byers pleaded guilty to one count of securities fraud in violation of Title 15, United States Code, Sections 78j(b) and 78ff; Title 17, Code of Federal Regulations, Section 240.10b-5; and Title 18, United States Code, Section 2, and one count of conspiracy to commit securities fraud, mail fraud, and wire fraud in violation of Title 18, United States Code, Sections 371, 1341, and 1343, before the United States District Court for the Southern District of New York, in United States v. Steven Byers et al., No. 08-cr-1092 (DC).

In his guilty plea and allocution, Byers admitted, among other things, that from at least November 2005 through August 2008, Byers and others misappropriated approximately $9.2 million in funds raised from the purchasers of preferred membership interests in GSA Investors, LLC, by representing that the funds would be used to purchase and operate seven commercial properties that were leased to the United States General Services Administration (GSA). In reality, the seven GSA properties were never purchased. Instead, virtually all of the funds raised from investors to purchase the properties were diverted by Byers and others to unrelated projects and purposes including the payment of other investors. Byers did not disclose the diversion of investor funds to the GSA investors and he and others continued for years to make misrepresentations to investors including mailing to investors false K1 forms showing fictitious income. Byers made the misrepresentations with the intent of inducing investors to invest new money.

Based on the above, the Order bars Byers from association with any broker or dealer. (Rel. 34-63861; File No. 3-14160)


In the Matter of Mark Kurland

On Feb. 7, 2011, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions against Mark Kurland. The Order finds that Kurland was a Senior Managing Director and General Partner at New Castle Funds, LLC (New Castle), a Delaware limited liability company and registered investment adviser based in White Plains, New York, that was formerly part of Bear Stearns Asset Management. He has held Series 7, 16, 24, 63 and 65 securities licenses. On Oct. 16, 2009, the Commission filed a civil action against Kurland in SEC v. Galleon Management, LP, et al., Civil Action No. 1:09-CV-8811 (SDNY). On January 31, 2011, the Court entered an order permanently enjoining Kurland, by consent, from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission's complaint alleged that, in connection with the purchase, offer or sale of securities, Kurland knew, recklessly disregarded, or should have known, that the material non-public information he received from a tipper was disclosed or misappropriated in breach of a fiduciary duty, or similar relationship of trust and confidence, and Kurland is liable for the trading that occurred in New Castle funds because he effectuated trades on behalf of New Castle, controlled New Castle and/or unlawfully tipped inside information to New Castle. On May 21, 2010, in a parallel criminal action, Kurland pleaded guilty to one count of securities fraud and one count of conspiracy to commit securities fraud in violation of 15 U.S.C. 78j(b) and 78ff and 18 U.S.C. 371 before the United States District Court for the Southern District of New York in United States v. Mark Kurland, 10-CR-0069.

Based on the above, the Order bars Mark Kurland from association with any investment adviser. Mark Kurland consented to the issuance of the Order without admitting or denying the findings in the Order, except he admitted to the entry of the injunction and the conviction. (Rel. IA-3156; File No. 3-14238)


Delinquent Filers' Stock Registrations Revoked

The registrations of the registered securities of Campo Electronics, Appliances and Computers, Inc., Capco Energy, Inc., Carmel Energy, Inc., CeleXx Corp., CenCor, Inc., Central Realty Investors, Inc., and Checkmate Electronics, Inc., have been revoked. Each had repeatedly failed to file required annual and quarterly reports with the Securities and Exchange Commission. Thus, each violated a crucial provision of the federal securities laws that requires public corporations to publicly disclose current, accurate financial information so that investors may make informed decisions. The revocations were ordered in an administrative proceeding before an administrative law judge. (Rel. 34-63866; File No. 3-14185)


In the Matter of Frederick J. Birks

On Feb. 7, 2011, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act), Making Findings and Imposing Remedial Sanctions (Order) against Frederick J. Birks (Birks). The Order finds that from May 2004 through May 2005, Birks was a registered representative associated with a broker-dealer registered with the Commission. Birks is a resident of New Jersey. On Aug.18, 2010, a final judgment was entered by consent against Birks permanently enjoining him from future violations of Section 5 of the Securities Act of 1933, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and Section 15(a) of the Exchange Act in the civil action entitled Securities and Exchange Commission v. Dean A. Esposito, et al., Civil Action Number 08-80130, in the United States District Court for the Southern District of Florida. The Commission's complaint alleged that Birks participated in the manipulation of the common stock, and acted as an unregistered broker selling unregistered securities, of Weida Communications, Inc., a publicly-traded company based in Florida.

Based on the above, the Order bars Birks from association with any broker or dealer. Birks consented to the issuance of the Order without admitting or denying any of the findings in the Order except he admitted the entry of the injunction. (Rel. 34-63862; File No. 3-14240)


In the Matter of Dean A. Esposito

On Feb. 7, 2011, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act), Making Findings and Imposing Remedial Sanctions (Order) against Dean A. Esposito (Esposito). The Order finds that, from May 2004 through May 2005, Esposito was a registered representative associated with a broker-dealer registered with the Commission. On Aug. 18, 2010, a final judgment was entered by consent against Esposito permanently enjoining him from future violations of Section 5 of the Securities Act of 1933, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and Section 15(a) of the Exchange Act in the civil action entitled Securities and Exchange Commission v. Dean A. Esposito, et al., Civil Action Number 08-80130, in the United States District Court for the Southern District of Florida. The Commission's complaint alleged that Esposito participated in the manipulation of the common stock, and acted as an unregistered broker selling unregistered securities, of Weida Communications, Inc., a publicly-traded company based in Florida.

Based on the above, the Order bars Esposito from association with any broker or dealer. Esposito consented to the issuance of the Order without admitting or denying any of the findings in the Order, except he admitted the entry of the injunction. (Rel. 34-63863; File No. 3-14241)


In the Matter of Joseph Devito

On Feb. 7, 2011, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act), Making Findings and Imposing Remedial Sanctions (Order) against Joseph DeVito (DeVito). The Order finds that, from February 2004 through April 2005, DeVito was a person associated with a broker-dealer registered with the Commission. On Aug. 18, 2010, a final judgment was entered by consent against DeVito, permanently enjoining him from future violations of Section 5 of the Securities Act of 1933 and Section 15(a) of the Exchange Act in the civil action entitled Securities and Exchange Commission v. Dean A. Esposito, et al., Civil Action Number 08-80130, in the United States District Court for the Southern District of Florida. The Commission's complaint alleged that DeVito acted as an unregistered broker selling unregistered securities of Weida Communications, Inc., a publicly-traded company based in Florida, from at least February 2004 through April 2005.

Based on the above, the Order bars DeVito from association with any broker or dealer with the right to reapply for association after a period of eighteen months to the appropriate self-regulatory organization, or if there is none, to the Commission. DeVito consented to the issuance of the Order without admitting or denying any of the findings in the Order, except he admitted the entry of the injunction. (Rel. 34-63864; File No. 3-14242)


In the Matter of Walter A. Tye

On Feb. 7, 2011, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act), Making Findings and Imposing Remedial Sanctions (Order) against Walter A. Tye (Tye). The Order finds that, from February 2004 through April 2005, Tye was a former registered representative who was seeking to become associated with a broker-dealer registered with the Commission. On Aug. 18, 2010, a final judgment was entered by consent against Tye, permanently enjoining him from future violations of Section 5 of the Securities Act of 1933 and Section 15(a) of the Exchange Act in the civil action entitled Securities and Exchange Commission v. Dean A. Esposito, et al., Civil Action Number 08-80130, in the United States District Court for the Southern District of Florida. The Commission's complaint alleged that Tye acted as an unregistered broker selling unregistered securities of Weida Communications, Inc., a publicly-traded company based in Florida, from at least February 2004 through April 2005.

Based on the above, the Order bars Tye from association with any broker or dealer with the right to reapply for association after a period of eighteen months to the appropriate self-regulatory organization, or if there is none, to the Commission. Tye consented to the issuance of the Order without admitting or denying any of the findings in the Order, except he admitted the entry of the injunction. (Rel. 34-63865; File No. 3-14243)


In the Matters of Banc of America Securities LLC, now known as Merrill Lynch, Pierce, Fenner & Smith Incorporated, successor by merger

The Securities and Exchange Commission announced that it has granted to Banc of America Securities LLC, now known as Merrill Lynch Pierce Fenner & Smith Incorporated, successor by merger (BAS), on behalf of themselves and their current and future affiliates a waiver of the disqualification provisions of Section 27A(b)(1)(A)(ii) of the Securities Act of 1933 (Securities Act) and Section 21E(b)(1)(A)(ii) of the Securities Exchange Act of 1934 (Exchange Act). Those provisions disqualified BAS and its current and future affiliates from making use of the safe harbor for forward-looking statements provided by Section 27A of the Securities Act and Section 21E of the Exchange Act. The disqualifications arose by virtue of the Commission's findings, in an Order dated Dec. 7, 2010, that BAS had violated Section 15(c)(1)(A) of the Exchange Act, by engaging in certain improper bidding practices that involved the temporary investment of proceeds of municipal securities in reinvestment instruments. Sections 27A(b) of the Securities Act and 21E(b) of the Exchange Act authorize the Commission to waive the disqualifications. BAS requested the waiver and the Commission determined that the request for a waiver is appropriate and should be granted. (Rels. 33-9185; 34-63867; File No. 3-14153)


Securities and Exchange Commission Orders Hearing on Registration Revocation Against Three Public Companies for Failure to Make Required Periodic Filings

Today the Commission instituted public administrative proceedings to determine whether to revoke or suspend for a period not exceeding twelve months the registrations of each class of the securities of three companies for failure to make required periodic filings with the Commission:

  • Cellpoint, Inc. (CLPTQ)
  • Centacom Technologies, Inc. (n/k/a Telycom Technologies, Inc.)
  • Centaur Mining & Exploration Ltd.

In this Order, the Division of Enforcement (Division) alleges that the three issuers are delinquent in their required periodic filings with the Commission.

In this proceeding, instituted pursuant to Exchange Act Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the Administrative Law Judge will hear evidence from the Division and the Respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 or 13a-16 thereunder, are true. The Administrative Law Judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of each class of the securities of these Respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-63868; File No. 3-14244)


SEC Charges Wall Street Capital Funding LLC and Its Principals with Fraud in Their Promotion of Sham Companies

On Feb. 7, 2011, the Securities and Exchange Commission filed a civil action in the United States District Court for the Southern District of Florida alleging that the stock-promotion company Wall Street Capital Funding LLC (WSCF), its owners Philip Cardwell and Roy Campbell, and their associate Aaron Hume disseminated fraudulent information concerning a series of sham energy companies.

The complaint alleges that the defendants created and distributed various forms of promotional material for, among other issuers, a purported oil-exploration-and-development company known as PrimeGen Energy Corp. The complaint alleges, however, that PrimeGen was phony: its corporate headquarters were a rented mailbox in a UPS Store opened with a do-not-forward instruction; its phone line was unattended; and its web page was generated by copying the source code from another company's web site.

According to the Commission's complaint, the defendants' promotional materials typically expressed positive opinions about penny-stock companies, their revenues, and the future direction of their stock price. The complaint alleges, however, that defendants had no reasonable basis for their opinions, yet at the same time falsely created the appearance of an independent basis for their statements about the penny-stock companies. Moreover, the complaint alleges that even when the defendants received ample warning signs that a scam was afoot, they always did the same thing: they closed their eyes and published.

The Commission's complaint alleges that WSCF, Cardwell, Campbell, and Hume violated Section 17(a) of the Securities Act of 1933 (Securities Act), that WSCF, Cardwell, and Campbell directly violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and that Cardwell, Campbell, and Hume violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder as aiders and abettors. The complaint further asserts that Cardwell and Campbell are liable as control persons for WSCF's violations of the Exchange Act.

The SEC's complaint seeks a final judgment permanently enjoining the defendants from future violations of the federal securities laws and ordering them to pay civil penalties and disgorgement of ill-gotten gains plus prejudgment interest.

The SEC's case was investigated by Celeste A. Chase and Daniel R. Walfish of the SEC's New York Regional Office. The SEC's litigation efforts will be led by Todd D. Brody and Daniel R. Walfish. [SEC v. Wall Street Capital Funding LLC, Philip Cardwell, Roy Campbell, and Aaron Hume, United States District Court for the Southern District of Florida, Civil Action No. 11-cv-20413-DLG (S.D. Fla.)] (LR-21841)


SEC Obtains Permanent Injunction Against a California Lawyer for His Role in a Phony Investment Pool Scheme and Order Suspending Him From Appearing or Practicing Before the Commission

The Securities and Exchange Commission announced that it obtained a judgment of permanent injunction against Gustav George Bujkovsky, age 68, formerly of Escondido, California, for his role in perpetrating a phony investment pool scheme directed by his clients. Bujkovsky consented to the entry of the permanent injunction, entered on Nov. 22, 2010, which enjoins him from violating the antifraud and securities registration provisions of the federal securities laws.

On Feb. 2, 2011, the Commission instituted proceedings against Bujkovsky under to Rule 102(e) of the Commission's Rules of Practice suspending him from appearing or practicing before the Commission as an attorney based on the entry of the permanent injunction. Bujkovsky consented to the entry of the order without admitting or denying the Commission's findings.

The Commission's complaint, filed Sept. 21, 2010, in federal court in San Diego, alleged that while Bujkovsky represented MAK 1 Enterprises Group, LLC (MAK 1) and its principals, he defrauded certain MAK 1 investors, aided and abetted the fraud of MAK 1 and its principals, and he offered and sold MAK 1's unregistered securities. MAK 1 was a Ponzi scheme and was halted by an emergency action filed by the Commission in federal court in San Diego in August 2009, which charged MAK 1 and its principals with violations of the federal securities laws.

The Commission's claims for disgorgement plus prejudgment interest and civil penalties from Bujkovsky and disgorgement from relief defendant Betty Hansen remain pending.

Separately, Bujkovsky was sentenced on Jan. 3, 2011, after pleading guilty to felony counts of obstruction of justice (for making false statements to Commission staff in connection with the Commission's investigation of MAK 1) and income tax evasion. United States of America v. Gustav G. Bujkovsky, U.S. District Court for the Southern District of California, case no. 10CR3467LAB (filed Aug. 31, 2010). Bujkovsky was sentenced to 12 months in federal prison and to three years of supervised release thereafter with special conditions of supervision. [SEC v. Gustav George Bujkovsky, et al., United States District Court for the Southern District of California, Case No. 10-CV1965BEN] (LR-21842)


SEC Charges California Residents With Operating $3 Million Fraudulent "Prime Bank" Scheme

The Securities and Exchange Commission today charged two California residents and the company one of them controls for operating a fraudulent, high-yield, "prime bank" investment scheme that defrauded investors out of more than $3 million. The SEC also charged a California-based attorney for aiding in the scheme.

Prime bank schemes lure investors with false promises of enormous profits and an exclusive opportunity to participate in an international investing program. The SEC alleges that Curtis Peterson and Eric Maher solicited investors nationwide in late 2009 on behalf of Express International, LLC, a Pasadena-based entity managed by Peterson and his wife. Promising exorbitant returns of as much as 1000 percent per month, Peterson and Maher falsely told investors that their investments would be pooled to purchase international bank instruments that would then be "leased" to "top 25" international banks willing to pay substantial fees for the right to place the instruments on their balance sheets for a brief period of time.

According to the SEC's complaint, filed in U.S. District Court for the Central District of California, Peterson and Maher were aided and abetted by Ronald White, a California-based attorney. White controlled the trust account into which investors were instructed to wire their monies. White then converted those funds into cashier's checks payable to Peterson, thus allowing Peterson to dissipate investor funds for undisclosed purposes.

The SEC alleges that about 20 percent of investor funds were wired to a bank in Hungary, but none of that money was ever used to purchase any international bank instruments. Peterson used the remaining 80 percent of investor funds to pay his personal expenses and to pay third parties with no legitimate claim to the investor funds.

The SEC's complaint alleges that Peterson, Maher and Express International 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; that Maher also violated Section 15(a) of the Exchange Act; and that White aided and abetted Peterson, Maher, and Express International's violations of Section 10(b) and Rule 10b-5; and seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest thereon, and financial penalties, against each of them.

The SEC's complaint additionally names Peterson's wife, Ann Scott, and an entity Peterson controls - Curtis International Express, Inc. -- as relief defendants. The SEC seeks disgorgement of all monies they have received improperly from any of the defendants since September 2009. [SEC v. Curtis Peterson, Eric Maher, Ronald White, and Express International, LLC, et al., Case No. CV 11-1143 ODW (JEMx) (C.D. Cal.)] (LR-21843)


SELF-REGULATORY ORGANIZATIONS

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change filed by the EDGX Exchange (SR-EDGX-2011-02) relating to amendments to the EDGX Exchange Fee Schedule has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of February 7. (Rel. 34-63821)

A proposed rule change filed by National Stock Exchange to expand use of self trade prevention order modifiers (SR-NSX-2011-01) 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 February 7. (Rel. 34-63832)


SECURITIES ACT REGISTRATIONS


RECENT 8K FILINGS

http://www.sec.gov/news/digest/2011/dig020811.htm


Modified: 02/08/2011