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U.S. Securities and Exchange Commission

SEC News Digest

Issue 2009-234
December 8, 2009


SEC Blocks Early-Stage Ponzi Scheme Involving Purported Investments in Personal Injury Settlements

The Securities and Exchange Commission today halted a Ponzi scheme involving a New York firm that solicited investments involving personal injury lawsuit settlements but instead shipped the money overseas. The SEC obtained a court order freezing the assets of the firm, its president, and several companies holding money from the scam that began several months ago.

The SEC alleges that Rockford Funding Group LLC used cold calling and a Web site to raise at least $11 million from more than 200 investors in 41 different states and Canada since March 2009. Rockford Group falsely touted itself as a leading private equity firm with an $800 million pipeline of investments and many Fortune 500 companies as clients, and told investors their money would be safely invested in structured settlements in private lawsuits.

According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, Rockford Group does not appear to engage in any investment activity that would generate any returns for investors, let alone its claimed returns of at least 15 percent annually. Instead, dividend payments made to investors have been funded by other investors' contributions, and Rockford Group transferred most of the money collected from investors to banks in Latvia and Hong Kong.

"Rockford Group dressed itself up as a high-powered firm with a safe strategy to make huge returns, but everything was a lie," said George Canellos, Director of the SEC's New York Regional Office. "Rockford Group pressured investors through cold calls and fooled them with a Web site, but fortunately the scheme was detected early on."

The SEC alleges that Rockford Group lured investors by promising high returns and falsely assuring investors that it is a member of the Securities Investor Protection Corporation (SIPC) with up to $4 million in insurance to meet customer claims. According to the SEC's complaint, however, Rockford Group is not a member of SIPC.

Misrepresentations that Rockford Group made to mislead investors, according to the SEC's complaint, included:

  • False claims that the firm has been in existence since 1999, when it actually was not incorporated until December 2008.
  • False claims that during the past 10 years, its "portfolio has increased 251 percent compared to a 12.8 percent increase in the Dow Jones Index."
  • Promotional material falsely identifying 20 Fortune 500 corporations as Rockford's major institutional pension plan clients.
  • False statements to at least one investor that Rockford Group is "going public" and that large investors in its Fixed Dividend Contracts will receive special access to shares sold in its initial public offering.

The SEC further alleges that Rockford Group has no structured settlement assets and does not appear to engage in any investment activity that would generate returns for investors. Besides making dividend payments to investors that are funded by other investors' contributions, Rockford Group misappropriated more than $10.4 million of investor funds by transferring these funds to foreign bank accounts located in Latvia and Hong Kong to supposedly pay for "cooling systems," "construction equipment," "electronic systems," and other equipment unrelated to the firm's claimed investment strategies. According to the SEC's complaint, the investor funds were wired to foreign bank accounts in the names of twelve entities whose relationship to Rockford is unknown. The Commission charged those entities as well as Genadi Yagodayev, the president and sole member of Rockford Group and sole signatory on its bank accounts, as relief defendants for the purposes of recovering investor assets from them.

The SEC's complaint charges Rockford with violating the antifraud and registration provisions of the federal securities laws, and seeks an injunction, disgorgement and financial penalties. The SEC also charges the recipients of investor funds as relief defendants, and seeks disgorgement and prejudgment interest. The Honorable Paul G. Gardephe, U.S. District Court Judge for the Southern District of New York, granted the Commission's motion for emergency relief, including an order temporarily restraining Rockford from committing further violations of the antifraud and registration provisions of the securities laws, and an order freezing Rockford's assets and the assets of the relief defendants. [SEC v. Rockford Funding Group, et. al., Civil Action No. 1:2009CV10047 (PGG)(SDNY)] (LR-21329; Press Rel. 2009-261)


SEC Charges California Firm and CEO With Defrauding Customers in Sales of Risky Mortgage-Backed Securities

The Securities and Exchange Commission today charged Irvine, Calif.-based Brookstreet Securities Corp. and its President and CEO Stanley C. Brooks with fraud for systematically selling risky mortgage-backed securities to customers with conservative investment goals. The fraud cost many Brookstreet investors their savings, homes, or retirement cushions, and eventually caused the firm to collapse.

The SEC alleges that Brookstreet and Brooks developed an internal program through which the firm's registered representatives sold particularly risky and illiquid types of Collateralized Mortgage Obligations (CMOs) to more than 1,000 seniors, retirees, and others for whom they were unsuitable. The SEC further alleges that Brookstreet continued to promote and sell risky CMOs to retail investors even after Brooks received numerous indications and personal warnings that these were "dangerous" investments that could become worthless overnight. One trader even called Brookstreet's program a "scam." Finally, in a last-ditch effort to save Brookstreet from failing during the financial crisis, Brooks directed the unauthorized sale of CMOs from Brookstreet customers' cash-only accounts, causing substantial investor losses.

According to the SEC's complaint, filed in federal district court in Santa Ana, Calif., Brookstreet customers invested approximately $300 million through the firm's CMO program between 2004 and 2007. The SEC alleges that Brooks knew, or was reckless in not knowing, that Brookstreet and its registered representatives were selling unsuitable CMOs to retail customers.

The SEC's complaint specifically alleges that the defendants violated the antifraud provisions of Section 17(a) of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 thereunder. The Commission seeks permanent injunctive relief against both defendants, and disgorgement of ill-gotten gains with prejudgment interest, and financial penalties against Brooks.

The SEC previously charged 10 Brookstreet registered representatives with making misrepresentations to investors related to the sale of risky CMOs. [SEC v. Brookstreet Securities Corp., Civil Action No. SACV 09-01431 DOC (ANx) (C.D. Cal.)] (LR-21328)





Modified: 12/08/2009