Frank J. Russo, Defendant in SEC Enforcement Action, Sentenced in Federal Court on Related Criminal Charges
The Commission announced today that on February 25, Frank J. Russo, a defendant in a previously-filed Commission enforcement action, was sentenced in U.S. District Court for the District of Massachusetts to 18 years in prison to be followed by 3 years of supervised release. Russo pleaded guilty to charges of investment adviser fraud and mail fraud. The Commission's action was filed in June 2006.
In addition to his jail sentence, Russo was ordered to pay $20 million in restitution to defrauded investors and to pay a $500,000 fine. Russo entered a guilty plea to charges that from 1982 through 2006, he misrepresented to investors that they could expect "above average" positive returns, and that their investments would be safe. In fact, according to prosecutors, he did not invest his victims' money as promised, lost more than $20 million in investor funds.
The Commission had previously filed an emergency enforcement action against Russo and three related entities on June 6, 2006, in federal district court in Massachusetts alleging violations of the registration and antifraud provisions of the securities laws. The Commission obtained, by consent, preliminary injunctions, asset freezes and other relief against Russo and the three entities on that date. On June 28, 2006, the Commission amended its complaint to add Veritasiti Corporation, a California corporation, as a relief defendant based on its receipt of proceeds from the alleged fraud and obtained, by consent, an asset freeze against Veritasiti. The Commission's action is still pending against all parties. In addition, Massachusetts Secretary of State William Francis Galvin's Securities Division had previously filed an administrative action against Russo on May 25, 2006, alleging violations of state securities laws and imposing a temporary restraining order requiring him to cease all investment advisory activities. [U.S. v. Frank J. Russo, USDC, District of Massachusetts, Cr.A. No. 07-10127-WGY; SEC v. Frank J. Russo, FJR Corporation, Russo Associates Limited Partnership and Eliot Partners, USDC, District of Massachusetts, C.A. No. 06-10984-RGS)] (LR-20468)
SEC Charges Six Defendants in Multi-Million Dollar Securities Fraud Targeting the Filipino Community, Church Members, and Military Personnel
On February 27, the Commission filed civil securities fraud charges stemming from a $10 million securities fraud that victimized over 75 investors from several affinity groups, including the Southern California Filipino community, church members, and military personnel.
The Commission's complaint, filed in U.S. District Court in Riverside, California, alleges that James B. Duncan, Hendrix M. Montecastro, and Maurice E. McLeod, operating through Murrieta, California-based Pacific Wealth Management, LLC (PWM) and Murrieta-based Stonewood Consulting, Inc., promised investors "financial freedom" within three years in exchange for control over their finances. The defendants offered investors securities in the form of investment contracts to purchase and maintain investment homes on behalf of investors. The complaint further alleges that James Duncan raised $1.2 million in a separate offering of preferred membership units in Total Return Fund, LLC, to approximately 20 investors. The complaint alleges that the proceeds raised in both offerings were commingled and used to run a Ponzi-like scheme that fell apart in late 2006.
The Commission's complaint further alleges that between October 2004 and June 2006, the defendants solicited investors using investment seminars and "referral partners," one of which was a member of the Air Force who solicited his fellow servicemen. As alleged in the complaint, the defendants falsely represented to investors that their funds would be invested in real estate, stocks, foreign currency, precious metals, and various other investments, and that the earnings on such investments would help make the mortgage payments on the investment homes purchased on their behalf. The complaint alleges that, instead of investing client funds as promised, the defendants operated a Ponzi-like scheme by using new investor money to make the mortgage payments on previously purchased investment homes.
Further, the complaint alleges that the defendants failed to disclose several key facts about the purchase of the investment homes, including that the defendants charged exorbitant real estate transaction fees financed by the investors, and that the defendants submitted false mortgage loan applications on behalf of investors. The complaint also alleges that Duncan, who was touted as a financial genius, failed to disclose his prior securities laws violations.
Finally, the complaint alleges that Duncan and Total Return Fund misrepresented how investor money would be used. Specifically, the complaint alleges that while the Total Return Fund offering documents stated that 95% of investor funds would go towards the purchase of real estate, business assets, or accounts receivable, in fact, investor funds were used to pay returns to prior investors, and were used as part of the PWM fraud.
The Commission's complaint alleges that the defendants violated the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. The complaint also alleges that the defendants violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission seeks permanent injunctions, disgorgement of ill-gotten gains, and civil penalties against each of the defendants. The complaint also names Christopher J. Oetting, Anthony M. Contreras, and Biocybernaut Institute, Inc., as relief defendants, alleging that they received ill-gotten gains from the defendants' fraudulent conduct. [SEC v. James B. Duncan; Hendrix M. Montecastro; Maurice E. McLeod; Pacific Wealth Management, LLC; Stonewood Consulting, Inc.; and Total Return Fund, LLC, Defendants, and Christopher J. Oetting, dba Oetting Industries; Anthony M. Contreras; and Biocybernaut Institute, Inc., Relief Defendants, Case No. CV 08-01323 CAS (CTx) (C.D. Cal.)] (LR-20469)
INVESTMENT COMPANY ACT RELEASES
MLIG Variable Insurance Trust and Roszel Advisors, LLC
An order has been issued on an application filed by MLIG Variable Insurance Trust and Roszel Advisors, LLC under Section 12(d)(1)(J) of the Investment Company Act for an exemption from Sections 12(d)(1)(A) and (B) of the Act, and under Sections 6(c) and 17(b) of the Act for an exemption from Section 17(a) of the Act. The order permits certain registered open-end management investment companies to acquire shares of other registered open-end management investment companies and unit investment trusts that are within and outside the same group of investment companies. (Rel. IC-28169 - February 26)
Eaton Vance Mutual Funds Trust, et al.
A notice has been issued giving interested persons until March 24, 2008, to request a hearing on an application filed by Eaton Vance Mutual Funds Trust, et al., for an order under Section 6(c) of the Investment Company Act for an exemption from Rule 12d1-2(a) under the Act. The order would permit funds of funds relying on Rule 12d1-2 under the Act to invest in certain financial instruments. (Rel. IC-28170 - February 26)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by NYSE Arca to amend Rule 7.31 to modify the Primary Only Order type (SR-NYSEArca-2008-19) 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 March 3, 2008. (Rel. 34-57377)
A proposed rule change filed by the Boston Stock Exchange (SR-BSE-2008-11) relating to the substitution of a term in the rules of the Boston Options Exchange has become immediately 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 March 3, 2008. (Rel. 34-57382)
Proposed Rule Change
The Boston Stock Exchange filed a proposed rule change (SR-BSE-2008-05), as modified by Amendment No. 5, under Rule 19b-4 of the Securities Exchange Act of 1934, to amend the rules of the Boston Options Exchange related to Obvious Error procedures. Publication is expected in the Federal Register during the week of March 3, 2008. (Rel. 34-57383)
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