Initial Decision Barring Joseph C. Lavin Declared Final
The Commission has declared final the initial decision of an administrative law judge barring Joseph C. Lavin from association with any investment adviser. The initial decision found that, on March 21, 2008, Lavin pleaded guilty in the United States District Court for the Western District of Washington to one count of wire fraud and one count of money laundering in United States v. Lavin, No. CR07 366RAJ (W.D. WA).
Lavin was the manager of Global Asset, partners LLC, a registered investment adviser that managed investment funds. Lavin pled guilty to allegations that he defrauded investors and obtained money and property by means of materially false and misleading statements, sent false account statements, and caused investors to wire funds by means of interstate commerce. Lavin was sentenced to a prison term of fifty four months, followed by three years of supervised release, and ordered to make restitution in the amount of $11,612,538.55. (Rel. IA-2870; File No. 3-13222)
In the Matter of Michael W. Crow
An Administrative Law Judge issued an Initial Decision in the Matter of Michael W. Crow, Admin. Proc. 3-13309 (April 22, 2009). The Initial Decision finds that, following a seven-day bench trial, U.S. District Court Judge Colleen McMahon issued a Final Judgment on Nov. 13, 2008, in which she permanently enjoined Michael W. Crow (Crow) from aiding and abetting violations of Sections 15(a), 15(b)(1), and 15(b)(7) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 15b3-1 and 15b7-1 promulgated thereunder. Crow was found jointly and severally liable and ordered to disgorge almost five-and-a-half million dollars, together with prejudgment interest, and to pay a civil monetary penalty of $250,000. In 1998, a federal district court enjoined Crow from future antifraud violations and barred him from serving as an officer or director of a public company, and the Commission, in an administrative proceeding, denied him the privilege of appearing before the Commission as an accountant.
Based on these findings, the Administrative Law Judge found that the public interest requires that Crow be barred from association with any broker, dealer, or investment adviser, pursuant to Section 15(b) of the Exchange Act and Section 203(f) of the Investment Advisers Act of 1940. (Initial Decision No. 376; File No. 3-13309)
In the Matter of Aegis Consumer Funding Group, Inc.
An Administrative Law Judge has issued an Order Making Findings and Revoking Registrations by Default (Default Order) in the Matter of Aegis Consumer Funding Group, Inc., Administrative Proceeding No. 3-13425. The Order Instituting Proceedings alleged that Aegis Consumer Funding Group, Inc., APS Holding Corp., Dakota Mining Corp., Digital Communications Technology Corp., Horn Silver Mines, Inc., and TCC Industries, Inc., each failed repeatedly to file required annual and quarterly reports while their securities were registered with the Securities and Exchange Commission.
The Default Order finds the allegations to be true as to the Respondents. It revokes the registrations of each class of registered securities of Aegis Consumer Funding Group, Inc., APS Holding Corp., Dakota Mining Corp., Digital Communications Technology Corp., Horn Silver Mines, Inc., and TCC Industries, Inc., pursuant to Section 12(j) of the Securities Exchange Act of 1934. (Rel. 34-59810; File No. 3-13425)
In the Matter of Hennessee Group, LLC and Charles J. Gradante
The Securities and Exchange Commission today charged New York-based investment adviser Hennessee Group LLC and its principal Charles J. Gradante with securities law violations for failing to perform their advertised review and analysis before recommending that their clients invest in the Bayou hedge funds that were later discovered to be a fraud.
In a settled administrative proceeding, the Commission issued an order finding that Hennessee Group and Gradante did not perform key elements of the due diligence that they had represented they would conduct prior to recommending investments in the Bayou hedge funds. The SEC also finds that they failed to conduct a reasonable investigation into red flags concerning Bayou. Hennessee Group and Gradante routinely represented to clients and prospective clients that they would not recommend investments in hedge funds that did not satisfy all phases of their due diligence evaluation.
According to the Commission's order, approximately 40 clients invested millions of dollars in the Bayou hedge funds from February 2003 through August 2005 after the Hennessee Group recommended those investments. Most of the money was lost through trading or dissipated by Bayou's principals, who defrauded their investors by fabricating Bayou's performance in client account statements and year-end financial statements. The SEC charged the managers of the Bayou hedge funds with fraud in 2005.
The Commission's order finds that Hennessee Group and Gradante failed to conduct the portfolio and trading analysis that it had advertised to clients. Instead of analyzing Bayou's results and processes through a review of Bayou's historical trading methods to determine whether the fund was, in fact, successfully executing its purported day-trading strategy, Hennessee Group and Gradante decided not to perform any analysis after Bayou refused to produce its trading data. They relied entirely on Bayou's uncorroborated representations about its strategy and its purported rates of return.
The Commission's order also finds that despite conflicting reports from Bayou about the identity of their independent auditor, Hennessee Group and Gradante failed to verify Bayou's relationship with its auditor. In fact, the accounting firm that purportedly conducted Bayou's annual audit was a non-existent entity fabricated by one of Bayou's principals, who was identified in publicly available state accountancy board records as the registered agent for the bogus accounting firm.
According to the Commission's order, Hennessee Group and Gradante also failed to respond to red flags concerning Bayou that came to their attention while they were monitoring Bayou on behalf of their clients. In particular, they failed to inquire or investigate when Bayou provided contradictory responses regarding the identity of its auditor or to adequately inquire about a rumor that one of Bayou's principals was affiliated with Bayou's purported outside auditing firm.
The Commission's order finds that Hennessee Group and Gradante violated Section 206(2) of the Advisers Act. The order requires Hennessee Group and Gradante to pay $814,644.12 in disgorgement and penalties, and to cease and desist from committing or causing further violations. The parties also are required to adopt policies to ensure adequate disclosures in the future and to provide copies of the Commission's Order to all current and prospective clients for a period of two years.
Hennessee Group and Gradante consented to the entry of the Commission's order without admitting or denying the findings. (Rel. IA-2871; File No. 3-13454)
In the Matter of IDM Participating Income Co.
An Administrative Law Judge has issued an Order Making Findings and Revoking Registrations by Default in the Matter of IDM Participating Income Co., Administrative Proceeding No. 3-13429. The Order Instituting Proceedings (OIP) alleged that IDM Participating Income Co., IDM Participating Income Co. II, IDM Participating Income Co. III, IDM Participating Income Co. IV, IDM Participating Income Co. V, IDM Participating Income Co. VII, and IDM Participating Income Co. 90 each failed repeatedly to file required annual and quarterly reports while their securities were registered with the Securities and Exchange Commission.
The Default Order finds the allegations in the OIP to be true as to all of the Respondents. It revokes the registrations of each class of registered securities of IDM Participating Income Co., IDM Participating Income Co. II, IDM Participating Income Co. III, IDM Participating Income Co. IV, IDM Participating Income Co. V, IDM Participating Income Co. VII, and IDM Participating Income Co. 90, pursuant to Section 12(j) of the Securities Exchange Act of 1934. (Rel. 34-59809; File No. 3-13429)
SEC Settles Charges Against Two More Individuals in Related Insider Trading Cases
The Securities and Exchange Commission today announced that on April 17, the Honorable Arthur J. Schwab, U.S. District Court Judge for the Western District of Pennsylvania entered Final Judgments against Joseph J. Queri, Jr., a resident of Pittsburgh, Pennsylvania, and Kyle D. Kaczowski, a resident of Las Vegas, Nevada, in two separate district court cases. The Commission charged them, and fourteen other defendants, with insider trading in advance of Dick's Sporting Goods Inc.'s June 21, 2004 announcement that it intended to acquire Galyan's Trading Company, Inc. via a tender offer. Queri Jr. and Kaczowski agreed to the judgments. The Commission has now settled with eleven of the sixteen defendants. The complaints, which the SEC filed on September 30, 2008, alleged:
The day after the public announcement, Galyan's stock closed at $16.68, a 50.3% increase from the previous day's closing price of $11.10.
Without admitting or denying the allegations in the complaint, Queri, Jr. and Kaczowski consented to the entry of a Final Judgment in which they are permanently enjoined from future violations of the antifraud provisions of the securities laws, Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. Queri, Jr. also agreed to pay disgorgement of $1.00, to preserve the Commission's ability to establish a fair fund, and to pay a one-time civil penalty for tipping in the amount of $218,026.00. Kaczowski agreed to pay disgorgement of $20,193.00, plus prejudgment interest of $6,661.07, and a civil penalty for trading and tipping two friends in the amount of $30,133.00.
For additional information, please see Litigation Release Nos. 20765 (Oct. 1, 2008) and 20895 (Feb. 10, 2009). [SEC v. Joseph J. Queri, Jr., Gary M. Gosson, et al., Case No. 2:08-CV-01361-AJS (W.D. Penn.); SEC v. Joseph J. Queri, Jr., Joseph J. Queri, Sr., et al., Case No. 2:08-CV-01367-AJS (W.D. Penn.)] (LR-21008)
SEC Sues Texas Businessman for Conducting Fraudulent $40 Million Debenture Offering
On April 21, the Commission filed an emergency action in the Lubbock Division of the United States District Court for the Northern District of Texas against Lubbock, Texas businessman Benny L. Judah and his company, Excel Lease Fund, Inc. The Commission alleges that Judah and Excel raised approximately $40 million from hundreds of investors through a high-yield debenture offering that started in January 2006. The Commission further alleges that Judah and Excel made several false and misleading representations and omissions in connection with the offer and sale of the debentures. Among other things, the Commission claims that Judah and Excel represented to investors that investor funds would be used to retire an earlier series of debentures and for certain other legitimate business purposes. In fact, however, Judah used millions in investor proceeds to fund his securities day-trading habit and to make loans to other companies he owned. These unauthorized and undisclosed misuses of funds resulted in losses of millions of dollars. In addition, Judah and Excel failed to disclose material related party transfers to other companies Judah owned and overstated the assets supposedly backing the debentures by at least 30%.
The complaint alleges that Judah and Excel violated the antifraud provisions of 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. The complaint requests permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties against the Defendants. In addition, the Commission has filed motions asking the Court to enter orders freezing the assets of Judah and Excel and appointing a receiver to collect, marshal, manage and distribute these assets for the benefit of investors.
Without admitting or denying the Commission's allegations, Judah and Excel have consented to, and the Court has entered, the asset-freeze and receivership orders, as well as permanent injunctions against future violations of the antifraud provisions. Judah has also consented to, and the Court has entered, an injunction prohibiting him or any entity he owns or controls from issuing securities in the future. [SEC v. Benny L. Judah, et al., Civil Action No. 5:09-CV- 0087-C, USDC, NDTX (Lubbock Division)] (LR-21009)
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