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Tennessee Commodities Trader Indicted on Fraud Charges May 25, 2010

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A federal grand jury has indicted Christian Leon Kis, 39, of Hendersonville, Tennessee, charging him with two counts of mail fraud and one count of money laundering. Kis, through his businesses, Raptor Group and Raptor Capitol, Inc., operated as a commodity pool for investments in commodity futures contracts.

According to the indictment, beginning in December 2003 until about December 31, 2005, Kis devised a scheme to defraud clients with existing investments, as well as new clients, by representing that investments in commodity futures contracts had resulted in a profit for 2003 and 2004, which he knew to be false.

Kis’s false statements caused one investor to mail a $100,000 additional investment check from Burlington, Vermont and another investor to mail a $10,000 additional investment check from New York to Kis in Hendersonville, Tennessee. Kis then conducted a monetary transaction with the proceeds of his mail fraud investment scheme by transferring $100,000 between financial institutions.

Man Indicted on Charges That He Defrauded Investors of $1.7 Million March 25, 2010

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Samuel M. Serritella, 65, of Garfield, has been charged with securities fraud, theft by deception, misapplication of entrusted property, money laundering, and misconduct by a corporate official, all in the second degree.

The charges resulted from an investigation by the New Jersey Bureau of Securities and the Division of Criminal Justice. Serritella was initially charged by complaint on July 21, 2009. Deputy Attorney General Francine S. Ehrenberg presented the case to the state grand jury for the Division of Criminal Justice Major Crimes Bureau.

Serritella was president, chief financial officer and chairman of International Surfacing Inc., based at 5 Erie Street in Garfield. Between February 2002 and May 2008, Serritella allegedly obtained in excess of $1.7 million from more than 300 investors by selling them shares of International Surfacing. The shares were not registered with the Bureau of Securities as required by law, and Serritella was not registered as an agent authorized to sell securities in New Jersey.

Most investors were from New Jersey, and many of them were police officers and firefighters. Serritella represented that he was manufacturing therapeutic horseshoes with a cushioning layer of rubber on them. He held investment conferences where he told investors they could get in on the ground floor by purchasing shares in a company he planned to take public. He allegedly told at least one group of investors during a hotel meeting that the venture’s clients included a prince in Dubai who purchased the shoes for his camels. He also falsely claimed that they were being used by Olympic competitors and would be used in the Olympics in Athens, Greece.

Serritella allegedly stole more than $350,000 in investor funds to pay for personal expenses. Although he used some funds for startup costs for the company, including renting a building and paying salaries, he never purchased the necessary equipment and tools to manufacture the horseshoes, and the venture failed.

Serritella allegedly deposited the investors’ funds into several bank accounts that he controlled. He allegedly wrote checks to himself, made cash withdrawals at ATMs, paid credit card bills, and made debit card purchases using investor funds in the accounts. He used the funds to pay for such personal expenses as airline and hotel bills, tavern bills, and medical costs. He also allegedly used investor funds to make personal loans to friends totaling $64,000.
At the time that Serritella was initially charged in July 2009, New Jersey Bureau of Securities Chief Marc B. Minor issued an order assessing a penalty of $20,000 against Serritella for violation of the New Jersey Uniform Securities Law. The Bureau Chief found that Serritella committed securities fraud and sold unregistered securities as an unregistered agent.

Three Charged in Alleged Grifco International Stock Fraud March 13, 2010

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Three men have been indicted for allegedly defrauding investors who purchased stock from 2004 until 2007 in a publicly-traded company called Grifco International Inc.  Evan “Nick” Jarvis and Jim Dial both of Houston, and Alex Ellerman of Chicago, were charged with conspiracy and wire fraud in a eight-count indictment returned by a grand jury on Wednesday, March 3, 2010. 

The FBI’s two-year investigative effort with assistance from the U.S. Securities and Exchange Commission and the Harris County District Attorney’s Office led to the indictment which alleges that between 2004 and 2007 Jarvis, Dial, and Ellerman issued shares of Grifco stock (GFCI) to themselves, disseminated false and misleading information about the company in an effort to increase the price of the stock and then sold the overpriced stock to unsuspecting investors in the public market place. As a result of the fraud, the indictment alleges Jarvis received $2,096,239; Dial received $1,659,198 and Ellerman received $1,061,205.

All three defendants are charged with conspiracy and six counts of wire fraud. Ellerman is also accused of obstructing a United States Securities and Exchange Commission investigation of Grifco by deleting information from a computer that was subject to a subpoena on Aug. 12, 2008.

Lawyers must scrutinize all documents associated with a securities fraud investigation February 26, 2010

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You get a call from a client who is under investigation for securities fraud.  To make your job even easier, you are able to figure out (because you are told or you are good enough to piece  it together) the specific trades at issue.  So, you focus your attention on the circumstances and documents surrounding the trade itself.  You think that the Government has nothing and they will figure that out eventually (probably with your help).  Case closed right?  Not quite.

Consider the case of Kevin O. Kelley.   From 1999 until 2004, he operated Acorn Research & Management, Inc. (“Acorn”), where he worked as a stock broker. Kelley was also employed as a registered representative of Royal Alliance, a broker-dealer, and served as the managing executive of
its Stamford, Connecticut office.  He defrauded his stock brokerage clients through schemes involving four separate securities: Coyote Network Systems (“Coyote”), First Venture Leasing (“FVL”), E-Tel Corporation
(“E-Tel”), and AusAm Biotechnologies (“AusAm”).

While the schemes involved different companies, they all had a similar  pattern.  Kelley had an ownership (and/or other) interest in these companies but he failed to disclose this to his clients.  He advised his clients to buy the companies and that they were good and/or safe investments.  These companies failed and investors lost money.  In addition, Kelley misappropriated some funds for his own use that should been used for investments. 

To hide the fact that his investors had lost money or that their money was never used for investments to begin with, he started to issue bogus account statements.  Prior to the start of the jury trial, Kelley moved to strike the portions of the superseding indictment that referred to bogus account statements, arguing that the use of bogus account statements is insufficient to establish a securities violation because the false statements were not
made in connection with the sale or purchase of securities.  The motion was denied by the District Court.  On appeal, Kelley argued that because the bogus account statements were created and disseminated two to four years after the purchases of the related securities, they were not made in connection with the sale or purchase of a security.  Thus, they should not have been admitted into evidence.

However, the 2nd Circuit held that references to the bogus statements were admitted as evidence because they tended to demonstrate Kelley’s intent to defraud his clients and the scope of the schemes he employed. See Perez, 387 F.3d at 209 (“While falsehoods told by a defendant in hope of evading prosecution are not themselves sufficient evidence on which to base a conviction, such falsehoods may strengthen an inference of guilt supplied by other evidence.”). They were never offered as proof of independent violations but instead, they were relevant evidence with respect to the charged securities law violations. See SEC v. Holschuh, 694 F.2d 130, 143 (7th Cir. 1982) (“[A] scheme to defraud may well include later efforts to avoid detection of the fraud.” (internal quotations omitted)). The statements provided the jury with evidence both that Kelley had intended to defraud his clients and that he continued efforts to avoid detection by deceiving his clients about the value of the investments, often up to two years after a particular investment ceased to have any value. The account statements also indicate that Kelley’s actions in defrauding his clients were not simple mistakes but were instead part of a larger, intentional scheme to defraud. See id. at 144 (“The court was entitled to consider the lulling activities because they were evidence of a scheme which, viewed as a whole, was sufficiently closely connected to the sale and was relevant to the question of intent.” (footnote omitted)).

It is often  this “other crimes evidence” that is the most difficult to deal with.  It seems like Kelley was not prepared to meet this evidence at trial and that he had hoped that it would have been kept out.  Any lawyer handling this type of case must examine all evidence that can be connected with the investment at issue no matter how remote it may seem (in this case, years later).

Misrepresentations without intent to cause loss is enough for securities fraud February 26, 2010

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In US v Hickey, the 9th Circuit reiterated the fact that the intent to cause a loss to investors is not an element for securities fraud.  For Hickey, his misrepresentations to investors is what did him in. 

 John A. Hickey (“Hickey”) and his business partner, Mamie Tang (“Tang”), induced over 700 individuals to invest approximately $20 million in two real estate development funds. Their plan was to purchase land in Northern
California, prepare the land for residential development, and then resell the properties to developers at a profit. As it turned out, however, the investors were duped by false representations regarding land title, guarantees, and securitization of the funds.  This was problem number one. 

Forensic accounting also showed that Hickey and Tang appropriated money from the funds for personal use.  This was problem number two.

As the investment scam progressed, it devolved into a Ponzi scheme;  and this was before Madoff made “ponzi scheme” a household word. Hickey used the money from later investors to pay earlier investors the “interest” they were owed. When the money ran out and the fraud was exposed, the investors had lost approximately $18.5 million.

When the investment scheme fell apart in mid-1994, the Securities and Exchange Commission (“SEC”) filed a civil enforcement action against Hickey, resulting in a consent decree that included a $1.1 million disgorgement payment. The investors also obtained an as-yet-unpaid $10 million civil judgment. Like many of these cases, the civil case eventually lead to a criminal case as Hickey was indicted in July of 1997. 

With all of these problems in his case, you would be surprised that his attorney took this case to trial huh?  Well the case did go to trial and it seems like Hickey had a flawed trial strategy as it seemingly ignored the problems in the case.

Hickey hired an expert witness, Stephen Roulac, who testified at length
about real estate finance—about the topic generally, market conditions, the reasonableness of Hickey’s plan for the funds, whether the amount of money Hickey raised was reasonable given his stated plan, and whether the plan was likely to succeed.  Of course, none of this took into account that Hickey lined his pockets while he was lying to his clients about the investment.  His trial theme seems to have been that lying is ok if he had good intent (or a lack of criminal intent).

The district court barred him from testifying that he believed that if the SEC had not intervened, Hickey’s investments would have been profitable and the investors would not have lost money. Hickey argued that this testimony would have established that he did not have an intent to
defraud investors.  However, both the district court and the 9th Circuit found that loss to investors is not an element of either mail fraud or securities fraud, nor is an intent to cause loss. See United States v. Utz, 886 F.2d 1148, 1151 (9th Cir. 1989) (for mail fraud, “[i]t is enough . . . that the government charge and the jury find either that the victim was actually deprived of money or property or that the defendant intended to defraud the victim of same.”) (emphasis in original); United States v. Benny, 786 F.2d 1410, 1417 (9th Cir. 1986) (actual loss is not an element of securities fraud).

At trial, Hickey was free to advance the claim that he did not intend to defraud the victims.  While an honest, good-faith belief in the truth of the misrepresentations may negate intent to defraud, a good-faith belief that the victim will be repaid and will sustain no loss is not a defense.” Benny, 786 F.2d at 1417. In other words, even if Hickey genuinely believed his
investment scheme would be profitable and would result in gains for his investors, he would still be guilty of securities fraud and mail fraud if he knowingly lied to investors about the risks associated with his plan. As a result, his expert’s testimony was properly excluded.

Not only was his expert’s testimony properly excluded by the trial court, it should have been excluded by the defense attorney.   Several years went by between the civil suit and the criminal case.  There was no reason why this case should not have been prepared for trial unless the client bought his own line of BS which is a common problem in these cases.  Convincing someone that they need to spend a large sum of money to prep for a trial when they haven’t even been arrested yet is not easy.  If the trial prep was done, witnesses could have been interviewed and all of these problems could have been dealt with.

This case shows us that while intent is important, the focus needs to first be on the misrepresentations.  Its one thing to make a mistake or leave out some  important information, its another thing to do that while your investors lose money and you make a ton.

Texas Attorney Convicted for Role in Pump-and-Dump Stock Schemes January 31, 2010

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A securities attorney was convicted this week by a federal jury in Alexandria, Va., for participating in multi-million dollar pump-and-dump stock manipulation schemes. Phillip Windom Offill Jr., of Dallas, was indicted on March 12, 2009, and was found guilty of one count of conspiracy to commit registration violations, securities fraud and nine counts of wire fraud.

Offill, an attorney in Dallas and a former attorney with the SEC, was retained by David Stocker, a Phoenix attorney who pleaded guilty in March 2009 in the Eastern District of Virginia to conspiracy to commit securities fraud. Ffrom approximately March 2004 through October 2004, Offill and Stocker evaded federal securities registration requirements and provided co-conspirators with millions of unregistered and “free-trading” shares of nine companies’ common stock that the co-conspirators could not have otherwise legally obtained. Many of the shares were subsequently sold by co-conspirators to investors in the general public. By evading the registration requirements, the co-conspirators were able to hide from the investing public the actual financial condition and business operations of the companies. The companies included Emerging Holdings Inc.; MassClick Inc.; China Score Inc.; Auction Mills Inc.; Custom-Designed Compressor Systems Inc.; Ecogate Inc.; Media International Concepts Inc.; Vanquish Productions Inc.; and AVL Global Inc.

In connection with Emerging Holdings, MassClick and China Score, evidence at trial showed that Offill knowingly participated in a conspiracy known as a “pump-and-dump” scheme to manipulate the price of these companies’ securities. Co-conspirators falsely manipulated the price and volume of some of the companies’ stock by making materially false and misleading statements in press releases and in spam e-mails to tens of millions of e-mail addresses throughout the United States in an effort to create artificial demand for the three companies’ stock. After fraudulently “pumping” the market price and demand for the companies’ stock, co-conspirators “dumped” shares by selling them for large profits to the general investing public in the over-the-counter market through listings on Pink Sheets, an inter-dealer electronic quotation and trading system. These shares were purchased by unsuspecting investors, including investors in the Eastern District of Virginia, and were often rendered virtually worthless.

Ten other defendants have pleaded guilty and eight of them have been sentenced in federal court in Alexandria, Va., for their roles in related stock manipulation schemes. David B. Stocker will be sentenced on March 8, 2010. Kenneth Owen pleaded guilty to conspiracy to commit securities fraud and will be sentenced in federal court in Los Angeles on Aug. 25, 2010. Michael R. Saquella was sentenced to 10 years in prison; Justin Medlin was sentenced to six years in prison; Steven P. Luscko and Gregory A. Neu were each sentenced to five years in prison; Lawrence Kaplan was sentenced to three years in prison; Brian G. Brunette was sentenced to a one year in prison; Anthony Tarantola was sentenced to six months in prison; and Henry “Hank” Zemla was sentenced to three months in prison.

The case, which was referred by the Market Regulation Department of Financial Industry Regulatory Authority (FINRA), was investigated by the FBI and the U.S. Postal Inspection Service, with assistance from FINRA’s Criminal Prosecution Advisory Group.

Should you roll the dice when the public wants your head? August 17, 2009

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This sounds like a real BS case.  Unless I am missing something, I don’t really see the criminal element here.  It seems like more of a civil case.  However, this case was likely over before it even started.  As an attorney, it is a  frustrating situation to be in.  The prosecution may not have enough evidence to convict the client, but the public’s attitude about your client and/or the type of crime can really tip the balance.  Hopefully, his attorney made him aware of this risk so that he could make an intelligent decision.

Benton J. Campbell, United States Attorney for the Eastern District of New York, announced that a federal jury in Brooklyn returned verdicts today in which they found former Credit Suisse broker Eric Butler guilty of conspiracy and securities fraud after a three week trial. When sentenced by Senior United States District Judge Jack B. Weinstein, Butler will face a maximum sentence of 45 years’ imprisonment.

The evidence at trial established that Butler and Julian Tzolov, another former Credit Suisse Broker, defrauded their clients in order to obtain higher sales commissions.1 Butler and Tzolov sold auction rate securities (“ARS”) backed by mortgages to Credit Suisse clients who, in fact, had placed orders to buy ARS backed by government-guaranteed student loans. Butler and Tzolov told their clients that student loan-backed ARS were very low-risk investments guaranteed by the United States government and that the market for the securities was very liquid. As a result, a number of the companies agreed to invest money in these ARS. However, without the knowledge or consent of the companies, Butler and Tzolov began to use the companies’ funds to purchase riskier higher-yield, mortgage-backed collateralized debt obligations, or “CDOs,” which paid Butler and Tzolov higher commissions. CDOs are assetbacked products built from a portfolio of fixed-income assets, including mortgages, subprime mortgages, and second mortgages, many of which were not guaranteed by the government. Butler and Tzolov concealed their scheme by falsifying the names of the ARS the clients bought and otherwise misleading the clients into believing they had bought ARS backed by student loans. In approximately August 2007, the scheme was discovered when the market for the mortgage-backed CDOs purchased by the companies collapsed and various auctions for CDOARS began to fail. The resulting losses to investors totaled almost $1 billion.

“The defendant’s fraudulent misrepresentations saddled investors with unknown risks they did not bargain for,” stated United States Attorney Campbell. “This case shows that those who engage in such schemes will be held to account for their criminal activity.” Mr. Campbell expressed his grateful appreciation to the Federal Bureau of Investigation and the United States Securities & Exchange Commission for their assistance during the trial.

Indictment for $1.7 million in securities fraud illustrates an important first step for attorneys July 22, 2009

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I often say that, in the context of white collar crime, the difference between a criminal case and a civil case is thin, usually blurry line.  One of the key factors that pushes a case over to the criminal side of the line is personal use of money.  In other words, if the money at issue was used solely for business purposes, it will likely be a civil case.  Likewise, as soon as you use the same money to enrich yourself, you will be looking at criminal charges.

Thus, the first thing I do in any case that could turn into a white collar crime case is to get my client’s financial records to assess their criminal exposure.  The attorney’s actions at the first sign of trouble could impact the entire case.  If this is a civil case but the State thinks otherwise, you may have to play this card now.  If there is some serious criminal exposure, trying to get a favorable resolution early on may we worth considering.

A good example of a white collar crime case where the defendant’s personal expenses will be at the heart of the State’s case is found in the press release below:

TRENTON – Attorney General Anne Milgram announced that a Bergen County man was charged today with defrauding hundreds of investors of more than $1.7 million by selling unregistered shares of stock in his startup horseshoe manufacturing company, which he claimed already had a prince from Dubai as a client.

The man allegedly stole more than $350,000 in investor funds to pay for personal expenses. Although he also spent funds in an effort to launch the company, the venture failed.

According to Director Deborah L. Gramiccioni, the Division of Criminal Justice filed a criminal complaint today in Superior Court in Bergen County charging Samuel M. Serritella, 64, of Garfield, with the crimes of securities fraud, theft by deception, misapplication of entrusted property, money laundering and misconduct by a corporate official, all in the second degree.

The charges resulted from an investigation by the New Jersey Bureau of Securities. Also today, Bureau of Securities Chief Marc B. Minor issued an order assessing a penalty of $20,000 against Serritella for violation of the New Jersey Uniform Securities Law. The Bureau Chief found that Serritella committed securities fraud and sold unregistered securities as an unregistered agent.

“This defendant sold $1.7 million in fraudulent and unregistered securities to trusting investors,” said Attorney General Milgram. “He repaid their trust by stealing hundreds of thousands of dollars of their money and leaving them with worthless shares in a failed company.”

Serritella was president, chief financial officer and chairman of International Surfacing Inc., which was based at 5 Erie Street in Garfield. It is charged that between February 2004 and May 2006, Serritella fraudulently obtained in excess of $1.7 million from more than 300 investors, most of whom were New Jersey residents, by selling them shares of International Surfacing. The shares were not registered with the Bureau of Securities as required by law, and Serritella was not registered as an agent authorized to sell securities in New Jersey.

Serritella held investment conferences where he told investors they could get in on the ground floor by purchasing shares in a company he planned to take public. He allegedly told at least one group of investors during a hotel meeting that the venture’s clients included a prince in Dubai.

Serritella allegedly deposited the investors’ funds into several bank accounts that he controlled. He allegedly misappropriated funds totaling approximately $354,720 for personal expenses. Seritella allegedly wrote checks to himself, made cash withdrawals at ATMs, paid credit card bills, and made debit card purchases using investor funds in the accounts. He used the funds to pay for such personal expenses as airline and hotel bills, tavern bills, and medical costs. He also allegedly used investor funds to make personal loans to three friends totaling $84,000.

Serittella used some funds for startup costs for the company, such as rent for a building, salaries, and payments to a company contracted to assist in manufacturing horseshoes.

“The Division of Criminal Justice is focusing on more complex white collar crime cases, including securities fraud cases such as this one,” said Director Gramiccioni. “In prosecuting this case, we are working closely with the Bureau of Securities, which thoroughly investigated the alleged fraud and thefts committed by Serritella.”

“Investors need to protect themselves by remembering that an offer which seems too good to be true is often precisely that – untrue. Investment fraud is on the rise in these difficult economic times and investments that promise ‘guaranteed results’ or offer unusually high profits should be carefully scrutinized before any investment is made,” Bureau Chief Minor said.

The Bureau of Securities investigation was conducted by Acting Chief of Investigations Rudolph Bassman. Deputy Attorney General Victoria Manning represented the Bureau in its investigation.

Serritella has been ordered to appear before Superior Court Judge Harry G. Carroll in Bergen County on Wednesday, July 29 at 10 a.m.