U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21865 / February 25, 2011
Securities and Exchange Commission v. Todd M. Ficeto, Florian Homm, Colin Heatherington, Hunter World Markets, Inc., and Hunter Advisors, LLC, et al., Case No. CV-11-1637 GHK (RZx) (C.D. Cal. February 24, 2011)
SEC CHARGES SECURITIES PROFESSIONALS AND TRADERS IN INTERNATIONAL HEDGE FUND PORTFOLIO PUMPING SCHEME
The Securities and Exchange Commission charged two securities professionals, a hedge fund trader, and two firms involved in a scheme that manipulated several U.S. microcap stocks and generated more than $63 million in illicit proceeds through stock sales, commissions and sales credits.
The SEC alleges that Florian Homm of Spain and Todd M. Ficeto of Malibu, Calif., conducted the scheme through their Beverly Hills, Calif.-based broker-dealer Hunter World Markets Inc. (HWM) with the assistance of Homm’s close associate Colin Heatherington, a trader who lives in Canada. They brought microcap companies public through reverse mergers and manipulated upwards the stock prices of these thinly-traded stocks before selling their shares at inflated prices to eight offshore hedge funds controlled by Homm. Their manipulation of the stock prices allowed Homm to materially overstate by at least $440 million the hedge funds’ performance and net asset values (NAVs) in a fraudulent practice known as “portfolio pumping.”
The SEC additionally brought administrative proceedings against HWM’s trader and chief compliance officer, who each agreed to settle the SEC’s charges against them.
According to the SEC’s complaint filed in the U.S. District Court for the Central District of California, Homm along with Ficeto and Heatherington conducted the scheme from September 2005 to September 2007. Homm misused the assets of the hedge funds to allow him, Ficeto, Heatherington and HWM to manipulate upward the prices of the U.S. microcap stocks in which the hedge funds held a position. They used a number of classic manipulative techniques such as placing matched orders, placing orders that marked the close or otherwise set the closing price for the day, and conducting wash sales. This manipulation enabled Ficeto, Homm and Heatherington to generate enormous profits through Ficeto’s and Homm’s co-ownership of HWM and their sale of the microcap stock shares to the hedge funds at inflated prices. Ficeto garnered further illicit profits through his control of Hunter Advisors, LLC, which directed the investment activities of a “fund of funds” that also participated in the stock manipulation.
The SEC’s complaint alleges that the principal traders at HWM and the London-based hedge funds manager Absolute Capital Management Holdings Limited (ACMH) exchanged hundreds of instant messages (IMs) that were recorded on a secret, alternate messaging system that allowed them to communicate freely without fear that their scheme would be detected by the SEC. As reflected in those secret IM messages, ACMH’s trader (typically Heatherington) under Homm’s direction would instruct Ficeto or HWM’s trader (Tony Ahn) acting under Ficeto’s direction to place matched orders, transactions that marked the close, or wash sales for the purpose of artificially raising or stabilizing the microcap stock prices.
The SEC’s complaint charges Ficeto, Homm, Heatherington, and HWM with violating, or aiding and abetting violations of, Sections 10(b) and 15(c)(1) of the Securities Exchange Act of 1934 (Exchange Act), and Rule 10b-5 thereunder, and Sections 206(1) and (2) of the Investment Advisers Act of 1940 (Advisers Act), and additionally charges Ficeto with violating Section 17(a) of the Securities Act of 1933, and Hunter Advisors with violating Section 206(1) and (2) of the Advisers Act. The SEC’s complaint also charges HWM and Ficeto with recordkeeping violations of Section 17(a) of the Exchange Act, and Rules 17a-4(b)(4) and 17a-8 (HWM only) thereunder. The SEC seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and financial penalties. The SEC also seeks an order permanently barring Ficeto from participating in any penny stock offering or from serving as an officer or director of a public company.
The SEC instituted separate but related administrative proceedings against Ahn and HWM’s former chief compliance officer Elizabeth Pagliarini, who each agreed to settle their cases without admitting or denying the SEC’s findings. Ahn agreed to pay a $40,000 penalty, comply with certain undertakings, and be barred from association with a broker and dealer for five years. Pagliarini agreed to a $20,000 penalty and one-year suspension as a supervisor with a broker or dealer.