Fort Lauderdale Securities Law Blog

Investment Advisor and Broker/Dealer Fraud and Misrepresentation Litigation and FINRA Arbitration Attorney, Russell L. Forkey, Esq.

May, 2012:

Securities and Exchange Commission v. A.L. Waters Capital, LLC, et al., Civil Action No. 12-cv-10783-DJC (District of Massachusetts)

Commission Obtains Preliminary Injunction and Asset Freeze Against Massachusetts-Based Parties Who Misappropriated Investor Funds

The Securities and Exchange Commission recently announced that it has charged Arnett L. Waters, a resident of Milton, Massachusetts, and two entities under his control, broker-dealer A.L. Waters Capital, LLC and investment adviser Moneta Management, LLC, with a scheme to defraud investors. The Commission's Complaint alleges that, from at least 2009 to the present, the defendants used fictitious investment-related partnerships to draw in investors, misappropriate their investment money, and spend it on personal expenses. The action was filed in federal court in Boston, and on May 3, 2012, the court entered an order that, among other things, freezes the assets of the defendants and two other parties charged as relief defendants, including Arnett Waters' wife.

The Commission's complaint alleges that the defendants have raised at least $780,000 from at least 8 investors. Among the investors was a church that placed a $500,000 investment with the defendants as recently the end of March 2012. According to the Commission's complaint, the defendants promised the church that its money would be invested in a portfolio of securities, but instead a significant amount of the church's investment was misappropriated by the defendants just days after the investment was made. The Commission also alleges that the defendants made multiple misrepresentations to investors, to the Financial Industry Regulatory Authority ("FINRA") and to Commission staff to conceal the fact that investor money was misappropriated in a fraudulent scheme.

The action was filed in federal court in Boston on May 1, 2012, and on May 3, 2012, the U.S. District Court in Massachusetts issued a preliminary injunction that, among other things, prohibits the defendants from continuing to violate certain federal securities laws and freezes the assets of the defendants and other parties named as relief defendants who are alleged to have received proceeds of the fraud. The parties agreed to this preliminary relief. The Court's order further provides that the defendants are prohibited from soliciting or accepting additional investor funds and from altering or destroying any relevant documents, and also requires the defendants to provide an accounting of their assets and uses of investor funds.

The Commission's complaint alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. The Commission also alleges that Arnett Waters and Moneta Management violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The Complaint also named Arnett Waters' wife, Janet Waters, and a third entity controlled by Arnett Waters, Port Huron Partners, L.P., as relief defendants. In its action, the Commission seeks the entry of a permanent injunction against the defendants, disgorgement of ill-gotten gains by both the defendants and relief defendants plus pre-judgment interest thereon, and the imposition of civil monetary penalties against the defendants.

Securities Fraud and Misrepresentation Litigation and FINRA Arbitration Attorney, Russell L. Forkey, Esq.

May, 2012:

SEC Charges New Jersey Man in Real Estate Investment Scam

The Securities and Exchange Commission recently charged a New Jersey man with operating a Ponzi-like scheme involving a series of investment vehicles formed for the purported purpose of purchasing and managing rental apartment buildings in New Jersey and Pennsylvania.

The SEC alleges that David M. Connolly induced investors to buy shares in real estate investment vehicles he created through his firm Connolly Properties Inc. He promised investors monthly dividends based on cash-flow profits from rental income at the apartment buildings as well as the growth of their principal from the appreciation of the property. However, the real estate investments did not produce the projected dividends, and Connolly instead made Ponzi-like dividend payments to earlier investors using money from new investors. Connolly, who lives in Watchung, N.J., also siphoned off at least $2 million in investor funds for his personal use.

The U.S. Attorney's Office for the District of New Jersey, which conducted a parallel investigation of the matter, today announced that Connolly was indicted on one count of securities fraud among other criminal charges.

According to the SEC's complaint filed in federal court in New Jersey, none of Connolly's securities offerings in the investment vehicles were registered with the SEC as required under the federal securities laws. Connolly began offering the investments in 1996 and ultimately raised in excess of $50 million from more than 200 investors in more than 25 investment vehicles. However, beginning in at least 2006, Connolly misrepresented to investors that their funds would be used exclusively for the property related to the particular vehicle in which they invested. Connolly instead commingled the funds in bank accounts that he alone controlled and used for a variety of purposes that weren't disclosed to investors, including $2 million in payments he made to himself that vastly exceeded any dividends to which he would be entitled through his ownership stake. Between 2007 and 2010, Connolly also wrote checks to "cash" in excess of $2.5 million. Even after Connolly stopped making dividend payments to investors in April 2009, he still continued to pay himself dividends as well as a $250,000 "salary" out of investor funds.

The SEC alleges that Connolly lacked sufficient revenues from rental income at the apartment buildings, so he continued to raise millions of dollars for new investment vehicles. He used the funds to pay purported monthly cash-flow dividends in excess of 10 percent to investors in older investment vehicles. Connolly refinanced properties and improperly used the cash proceeds to continue the scheme, which ultimately collapsed in 2009 when new investor funds dried up and rental income was insufficient to support payments on the mortgages. The properties owned by the investment vehicles were forced into foreclosure, wiping out the equity of the investors.

The SEC's complaint charges Connolly with violating Sections 5(a), 5(c) and 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 SEC's complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

Investment Advisor and Broker/Dealer Fraud and Mismanagement FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.

May, 2012:

Securities and Exchange Commission v. Mark F. Spangler and The Spangler Group, Inc., Civil Action No. 2:12-cv-00856 (U.S. District Court for the Western District of Washington, filed May 17 2012)

SEC CHARGES SEATTLE-BASED FUND MANAGER FOR SECRETLY DIVERTING CLIENT FUNDS TO HIS OWN START-UP COMPANIES

Recently, the Securities and Exchange Commission charged a Seattle-based financial adviser and his firm with defrauding clients by secretly investing their money in two risky start-up companies he co-founded.

The SEC alleges that Mark Spangler, a former chairman of the National Association of Personal Financial Advisors, funneled approximately $47.7 million of client money into these private ventures despite representing that he would invest primarily in publicly traded securities. Spangler served as chairman and CEO of one of the companies, which is now bankrupt. Such risky investments were inconsistent with the investment strategies that Spangler promised his clients and contrary to their investment objectives.

The U.S. Attorney's Office for the Western District of Washington also announced parallel criminal charges against Spangler.

According to the SEC's complaint filed in federal court in Seattle, Spangler raised more than $56 million from his clients since 1998 for several private investment funds he managed. Beginning around 2003, without notifying investors in the funds, Spangler and his advisory firm The Spangler Group (TSG) began diverting the majority of client money into two private technology companies he created. One of the companies received nearly $42 million from the funds before shutting down operations. It had long been a cash-poor company with a history of net losses, generating less than $100,000 in revenue during its 11-year history. Yet Spangler continued to treat the funds as the company's piggy bank.

The SEC alleges that Spangler also did not tell investors that TSG collected fees for "financial and operational support" from these companies, which were essentially paying these fees with the client money they had received from the funds. Therefore, Spangler and his firm secretly reaped $830,000 from the companies in addition to any management fees that TSG received from clients.

According to the SEC's complaint, Spangler concealed his diversion of client funds for years. He disclosed it only after he placed TSG and the funds he managed into state court receivership in 2011.

The SEC's complaint charges Spangler and TSG with violating, among other things, the antifraud provisions of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. The complaint seeks injunctive relief, disgorgement with prejudgment interest, and financial penalties.

Securities Fraud, Misrepresentation and Mismanagement Litigation and FINRA Arbitration Attorney, Russell L. Forkey, Esq.

May, 2012:

SEC v. David Blech and Margaret Chassman, Civil Action No. 12-Civ-3703 (AJN)

Recently, the Securities and Exchange Commission charged a Manhattan resident with carrying out a complex market manipulation scheme in biopharmaceutical stocks after he was kicked out of the brokerage industry for fraud.

The SEC alleges that David Blech established more than 50 brokerage accounts in the names of family members, friends, and even a private religious institution. He used those accounts to buy and sell significant amounts of stock in two biopharmaceutical companies in order to create the artificial appearance of activity in their securities so he could maintain their market price and use it to his own financial advantage. Blech, who was previously convicted of securities fraud, also solicited investments for biopharmaceutical companies - including the two companies whose stock he manipulated - despite being barred by the SEC from acting as a broker-dealer.

The SEC further alleges that Blech and his wife Margaret Chassman, who also is charged in the case, flouted federal securities laws when they repeatedly made unregistered sales of securities and failed to disclose their transactions in the various brokerage accounts.

In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Blech.

According to the SEC's complaint filed in federal court in Manhattan, Blech engaged in his scheme at various points in 2007 and 2008, specifically manipulating the stocks of Pluristem Therapeutics Inc. and Intellect Neurosciences Inc. Blech first opened dozens of nominee accounts at several broker-dealers in the names of his wife, uncle, and sister-in law as well as a longtime friend and a company he controlled, and religious institution Central Yeshiva Beth Joseph that is managed by Blech's cousin. Blech then used the accounts to engage in deceptive activities and carry out matched trades in Pluristem's and Intellect's stocks. Blech's activity in these thinly-traded securities artificially inflated the stock price of both companies and created the false impression of a liquid market for each company. Blech then used the artificially inflated stock price to sell off his holdings of Pluristem and Intellect through the nominee accounts, and as collateral for a line of credit he established in his wife's name.

According to the SEC's complaint, Blech has committed prior violations of the securities laws. He pled guilty in 1998 to two counts of securities fraud and was sentenced to five years of probation. In 2000, he settled a related SEC enforcement action by accepting a permanent bar from associating with any broker-dealer.

The SEC's complaint charges Blech with violating Section 17(a)(1) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c), and for acting as an unregistered broker-dealer in violation of Section 15(b)(6)(B) of the Exchange Act The complaint also charges Blech and Chassman with violating Sections 5(a) and 5(c) of the Securities Act and for failing to make filings required by Sections 13(d) and 16(a) of the Exchange Act.

The SEC's complaint seeks a final judgment ordering Blech and Chassman to disgorge their ill-gotten gains plus prejudgment interest, pay financial penalties, and be permanently enjoined from future violations of the provisions of the federal securities laws they violated. The complaint seeks orders requiring Blech to comply with a prior SEC order barring him from association with a broker or dealer, and prohibiting him from various other stock activities.