SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16347 / November 8, 1999
Accounting and Auditing Release No. 1203 / November 8, 1999
Securities and Exchange Commission v. S. Jay Goldinger, Civil Action No. CV 99-11539-LGB (CTx) (C.D. Cal.) (Nov. 8, 1999)
Securities and Exchange Commission v. Charles S. Strauch and Charles W. McBrayer, Civil Action No. CV 99-1384-GLT (EEx) (C.D. Cal.) (Nov. 8, 1999)
SEC CHARGES FORMER MONEY MANAGER S. JAY GOLDINGER
WITH DEFRAUDING PAIRGAIN TECHNOLOGIES, INC.
PairGain and Two of its Top Executives Charged with
Financial Disclosure Violations
The Securities and Exchange Commission today charged S. Jay Goldinger, once a well-known Beverly Hills-based money manager, with stealing $15.9 million from the Tustin, California-based public company PairGain Technologies, Inc. The theft occurred as part of a Ponzi-like scam whereby Goldinger commingled the funds of PairGain and his other clients, then engaged in a massive securities-futures trading misallocation scheme. Through the scheme, which occurred during 1994 and 1995, Goldinger shifted tens of millions of dollars from certain clients, including PairGain, to other clients, while simultaneously generating enormous commissions, fees, and income for himself. The Commission also charged PairGain-a designer, manufacturer, and distributor of telecommunication products-and two of its top executives with failing to properly account for and timely disclose what initially appeared to be investment losses from unauthorized trading, but in reality were thefts by Goldinger.
The SEC's complaints, filed in the Central District of California, allege that:
From September 1993 until November 1995, PairGain invested some of its excess cash with Goldinger. Goldinger told the company that he could outperform Treasury securities by using certain proprietary strategies. Goldinger misrepresented his strategy as fully hedged and low risk. Unbeknownst to anyone at PairGain, Goldinger was commingling the company's funds with other investors' funds, placing futures trades, and routinely shifting profitable trades to some clients and losses to other clients through massive trade misallocations. Goldinger's scheme eventually collapsed when he began to suffer overall trading losses, leaving PairGain and others with tens of millions of dollars in losses.
In 1994, PairGain first became concerned about Goldinger's trading and learned that his options trading was highly risky. That year the company's trading account statements seemed to show large losses (due to Goldinger's trade misallocations), but account statements prepared by Goldinger appeared to reflect healthy profits. When questioned, Goldinger lied, claiming that PairGain had gains. Unable to determine what Goldinger was doing and uncertain whether the company had gains or losses, PairGain asked for its money back. Goldinger returned all the company's money with a sizable profit-but not through liquidating PairGain's investments, as he claimed. Rather he raised the money by secretly transferring profitable trades to PairGain through his misallocation scheme.
The following year, 1995, PairGain invested $28.1 million with Goldinger but told him to buy only short-maturity Treasury securities. Instead, Goldinger covertly shifted almost all of the company's money to other clients who wanted to cash out or whose accounts he had previously plundered. By early June 1995, the company again questioned Goldinger's trading. When confronted, Goldinger admitted that he had engaged in unauthorized options trading. Goldinger then told the company that it would have a very sizable loss if he liquidated PairGain's investments by the end of June (the company's quarter-end). PairGain believed that its losses would be approximately $2 million if Goldinger liquidated. In reality, the losses amounted to $26 million and were from Goldinger's improper shifting of losing trades to the company.
The company never attempted to independently verify the amount and reasons for its losses. Instead, for the next five months (from July through mid-November 1995) PairGain relied solely on Goldinger's version of events. PairGain instructed Goldinger to try to recoup the company's losses, and to do so Goldinger placed increasingly-heavy risky bets in Treasury options for PairGain's account. At the same time, PairGain failed to properly account for and disclose its investment losses in two quarterly filings with the Commission and falsely stated that its funds were held in investment grade, interest bearing securities. All the while, PairGain, its chairman and former chief executive officer, Charles S. Strauch, and its chief financial officer, Charles W. McBrayer, each knew or was reckless in not knowing that the company had material investment losses and that its remaining funds were exposed on risky options. Finally, in December 1995, after Goldinger told PairGain that he could not recover any more of the company's funds, PairGain disclosed that it had lost $15.9 million on investments with Goldinger.
Simultaneously with the filing of the complaint against him, without admitting or denying the complaint's allegations, Goldinger agreed to settle the charges against him by consenting to a final judgment. The final judgment will prohibit Goldinger from violating or aiding and abetting or causing violations of Section 17(a) of the Securities Act of 1933 (Securities Act) and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(5), and 15(c)(1)(A) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 12b-20, 13a-13, and 13b2-1 thereunder. The judgment will also order Goldinger to pay back his ill-gotten gains (plus prejudgment interest thereon) and civil money penalties in amounts to be determined later. Goldinger has also agreed to the entry of a Commission order barring him from associating with any securities broker or dealer.
Likewise, without admitting or denying the SEC's allegations, Strauch and McBrayer each agreed to settle the complaint's charges by consenting to a final judgment. Strauch's final judgment will prohibit him from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and order him to pay $25,000 in civil money penalties. McBrayer's final judgment will prohibit him from violating or aiding and abetting or causing violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-13, and 13b2-1 thereunder. The judgment will also order McBrayer to pay civil money penalties totaling $25,000.
Today, the Commission also instituted related administrative proceedings against PairGain. Without admitting or denying the Commission's findings, PairGain consented to an order finding that the company violated the antifraud provisions of the Exchange Act as well as the periodic reporting, books and records, and internal control provisions of the Exchange Act. The order directed PairGain to cease and desist from committing or causing any violations or future violations of the following provisions: Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, and 13a-13 thereunder. In the Matter of PairGain Technologies, Inc., Exchange Act Release No. 42114, November 8, 1999.
Also today, the United States Attorney for the Central District of California announced that PairGain has agreed to plead guilty today to a felony for failing to maintain internal accounting controls and accurate financial books and record in violation of the federal securities laws. U.S. v. PairGain Technologies, Inc., SA CR 99-115-DOC (C.D. Cal., Nov. 8, 1999). In a related criminal action, the U.S. Attorney further announced that Goldinger has been charged with four felony counts of wire fraud in connection with his fraudulent misallocation scheme. The Commodity Futures Trading Commission today also charged Goldinger and his brokerage firm, Capital Insight Brokerage, Inc., with commodities fraud. CFTC v. S. Jay Goldinger, Civil Action No. CV 99-11543 WMB (BQRx) (C.D. Cal.) (Nov. 8, 1999).
The Commission thanks the CFTC and the U.S. Attorney's Office for their cooperation in this matter.