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i didn't realize that, my bad for not doing adequate dd.i guess chris didn't learn his lesson, looks like he's about to.
i wonder what chris messalass and laroach are doing? maybe one of them is cutting a deal and rolling over on the other or others. i'd say their first line of defense will be requesting delays, they'll prolong walking up those 13 steps as long as they can. i kind of doubt they're in a rush to put their heads on the chopping block, any written defense they submit will just dig their hole deeper. everyone be sure to say a prayer the two, i personally think it will take devine interventions to bail those boys out of this mess.
the sad part of all this, we didn't even know he had all those issues with finra and the sec. if i had known i sure wouldn't have bought any shares of this stock, i feel like he hood winked us to.
am i reading this correctly, eddy bought a high dollar car with pbhg shares? if so why?
thats a fair asessment, that 1 for 24k was a black eye. i think most here know eddy could care less about people at our level, were just victims that supply a means for his eventual retirement.
do you think that includes the shares that cm and the roach hold, some 3% of the company? i don't believe it's the same, remember whom were dealing with. these guys pass paper money around with little thought of us, with all that in mind i think trab is going to be a money maker. it's just knowing when to pull the trigger, still curious to see how all this plays out in the month of december.
seems like everything that was posted by him is bs, here all the companies sit with zero volume.
when they answer questions put to them by the sec will that be publically posted for us to read? if they don't reply i'm pretty sure that would be an instant admission of guilt. as stated this will be interesting to see how this plays out, investor A must be a heavy hitter, seems like it's hard to get the sec's attention. when you read the sec complaint it's obvious someone spent alot of time investigating, looks pretty serious to me.
As of September 23, 2011, we had 45,081,720 shares of common stock outstanding
NOTE 8 – COMMON STOCK, OPTIONS AND WARRANTS
During the three months ended August 31, 2011, the Company authorized the issuance of 932,556 shares of common stock as stock grants to consultants for services, charging $80,328 to marketing expense and $5,000 to consulting expense included in general and administrative expenses based upon the fair value of the shares on date of grant. During the six months ended August 31, 2011, the Company issued 2,529,396 shares of common stock for services valued at $2,164,289 based upon the stock price on date of grant. The Company also issued 150,000 shares of common stock to a note holder in consideration of the extension of the due date of a note, charging $96,000 to general and administrative expense.
On March 23, 2011, a related party converted $20,000 of convertible debt into 200,000 shares of common stock at $0.10 per share. During the three months ended August 31, 2011 a related party converted $68,183 of convertible debt into 2,035,714 shares of common stock at prices between $0.03 and $0.06 per share. 400,000 warrants held by a related party expired on August 31, 2011 and 150,000 warrants held by related parties were cancelled.
The Company issued 166,000 shares of common stock as result of a private placement of units consisting of 2 shares of common stock and a five year warrant to purchase a share at $1.25 per share during the six months ended August 31, 2011. Additionally the Company recorded as issued 302,000 shares of common stock from the private placement that had previously been classified as liability for unissued common stock. The Company is awaiting documentation to issue shares to one stockholder who purchased $5,000 in private placement units, resulting in a liability for unissued common stock of $5,000.
During the sixth months ended August 31, 2011 the Company awarded 9,288,000 warrants and stock options to directors and consultants. These warrants and options vested upon grant and the Company charged $9,798,300 to general and administrative expenses and $1,330,500 to sales and marketing expenses based upon the fair value of the warrants and options on date of grant.
The following table summarizes the warrants and options outstanding at August 31, 2011:
Hensley Charles owns 7479300 and he sells continuosly
(a) LeadDog Capital Markets, LLC (“ LeadDog LLC ”) is the beneficial owner of convertible promissory notes (“ Notes ”) and convertible debentures (“ Debentures ”) that may be converted into common stock of TheraBiogen, Inc., formerly known as Kushi Resources, Inc. (“ Issuer ”). The Notes and underlying common stock are being held pursuant to the terms of several escrow agreements. The terms of the Notes and the Debentures prohibit LeadDog LLC from converting the Notes and Debentures to the extent such conversion would result in LeadDog LLC and its affiliates beneficially owning (as determined in accordance with Section 13(d) of the Securities and Exchange Act of 1934 (“ Exchange Act ”)and the rules promulgated thereunder) in excess of 9.5% of the then issued and outstanding shares of common stock, including the shares issuable upon a conversion. Although LeadDog LLC has sole voting and dispositive control of the common stock upon purchase, Chris Messalas and Joseph B. LaRocco as managing members of LeadDog Capital Markets, LLC (the general partner of LeadDog LP) may be deemed to have the right to direct the voting and dispositive control over such common stock. LeadDog Capital Markets, LLC is considered an affiliate of LeadDog LP so the combined beneficial ownership of LeadDog LP and LeadDog Capital Markets, LLC cannot exceed 9.5% of the then issued and outstanding shares of common stock of the Issuer, including the shares issuable upon a conversion.
Sole Voting Power 587,265 = 1.51%
Sole Voting Power 645,905 = 1.66%
what those 587,265 and 645,905 shares can be converted to, i'm not sure.
they can pay all the investors back and it still won't stop the sec, sec charging them with fraudulent financials and lying in order to line their pockets. both the roach and messalass signed off on fraudulent docs. i see civil penalties coming their way.
i would like front row seat when they fry him, and i hope this has teeth by the time the sec deals the blow. http://ih.advfn.com/p.php?pid=nmona&article=50226578
has anyone spoken to eddy, i don't see any of these companies trading. and what happened with the new ceo, is he even on board any more?
for one thing, i don't think cm sold any shares. i truly believe he had peeps buying on the open market well before nyc62 showed up on the scene, of course those peeps sold into the run. i have no proof of that just suspicions. a million shares at .0004 and then sold at .004= a 3600 dollar profit not bad for a 2 or 3 hundred dollar news release. i'm not sure of how many shares were traded from the time nyc62 showed up and to march 25 2008.
your right, the worst thing i see happening is a change in executive officers. it may not come to that, maybe hickel is clean and the only trash in the place is messalas and larocco. for the sake of this stock i hope that will be the findings.
i can't wait to read them myself, i think investor A has them over a barrel.
been nice of our scum ceo to let us in on some profits, but the way it looks we have more time on our hands.
scrk, trab and bicb has taken a hit today, my suspicions are cm and the roach are trying to get some cash. they may have a dry spell, a hundred bucks is better than 1 dollar. i wouldn't put anything past those two, now looking back on all the silence from ctno and msto it all makes sence. i spoke with the roach one time and he told me to never call him again, i was nice when i called. all i wanted to do was verify a web site posting of ctno.
there are quite a few of us with well over 1 mil. shares, it has been pretty obvious that no dilution was taking place unless cm was doing some bartering behind the scenes. with what we think we know about cm anything will be possible or should i say not beneath him.
agreed, typically the caveat emptor is there for some unscrupulous reason. lets hope bhrt keeps moving forward.
it won't be long this will be trading in the tripple zero's, crazy to of waited this long for some releaf and this's the pill we get. if the charges against cm and jl are true i hope the sec turns them inside out, when people like us buy these so called lotto plays were not considering thieves, cons, and fraud.
-gl hawk, i have to see this to the end. i've had this to long to sell at this level, still hoping good things happen to good people and you know what happens to the bad. all of us here deserve to see the sunlight, at least we know now what kind of scum was behind ctno.
it seemed to mirror what bhrt is working on, are they contenders? rcll has a caveat emptor on pink sheets maybe thats a good thing for bhrt?
my fingers are crossed, i think that would be the only possible outcome of ctno. if all the alegations are true messalass and the roach could be barred for life from public companies, he would have appoint a different officer to ctno. by the way that 75k trade wasn't me.
i don't think they'll (chris messalas and the roach) be the seller here, but they may be on trab, msto, ueec, bicb and i'm sure there are others. i haven't seen any selling on ueec or msto as of yet, i wonder if it would even be legal for them to sell at this point? if they know they be vindecated they can sell but knowing there not going to be i think selling would be considered insider info? i foregot to add one of the selling canidates scrk.
i'm certain they are one in the same, check out addresses. kelly t. hickel, middle name must be terry. this whole sec gig is going to exspose alot of internal problems, i think all involved are very busy trying to cover the turd in the middle of the office. if you'll notice joseph laroach (LAROCCO)has had dealings will all the companies, he's and esq. that to me is brazenly bold in a dark sense. all these players at 120 wall street think they are above the law. messalas moved ctno out of 120 wall street this year to carson city nevada, i would say they all new this sec violation was coming.
this was emailed to me today, wtf!
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Quote of The Day
Go back to bed. It is all right. One of us will be here all night.
This time, after going to the far side or the Pass, he suddenly Shaneen has long speeches for to tell you now. [She sits down with an amused
i don't know how many company fronts are at the 120 wall streed addy. i think the moneys just float around to all these people with said companies. hickel is in my opinion right smack in the middle of it all. if i'm wrong i'll be the first to fess up. the charges that i posted means messalass and laRoach will be scrambling to get cash, there not going to have any means for awhile.
i posted on scrk about the following and now trab, i think your going to see some sell off by messalas and larocco and probably some others. the following will explain.
be careful with this one, and exerpt from sec charges against two dirt bags that share the same address.
h. Hickel, a Fund investor and the Chairman of the Advisory Committee for LeadDog, was also an officer or director of five of the six public companies in the Fund’s portfolio, as well as an officer or director of several other private companies in which Respondent LeadDog directed fund investments. Hickel was also an employee of the broker-dealer controlled by Respondent Messalas, Brookstone. In November 2008, the Fund lent $20,000 to an entity controlled by Hickel, and LeadDog recorded the loan as an asset of the Fund. When Hickel failed to satisfy the loan and the note went into default, the Respondents took no action to collect the loan or otherwise protect the Fund’s interests.
FULL TEXT:
URL: http://www.sec.gov/litigation/admin/2011/33-9277.pdf
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
Release No. 9277 / November 15, 2011
SECURITIES EXCHANGE ACT OF 1934
Release No. 65750 / November 15, 2011
INVESTMENT ADVISERS ACT OF 1940
Release No. 3314 / November 15, 2011
INVESTMENT COMPANY ACT OF 1940
Release No. 29861 / November 15, 2011
ADMINISTRATIVE PROCEEDING
File No. 3-14623
In the Matter of
LEADDOG CAPITAL MARKETS, LLC, F/K/A LEADDOG CAPITAL PARTNERS, INC., CHRIS MESSALAS, AND JOSEPH LAROCCO, ESQ.,
Respondents.
ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933, SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934, SECTIONS 203(e), 203(f) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940, SECTION 9(b) OF THE INVESTMENT COMPANY ACT OF 1940, AND RULE 102(e) OF THE SECURITIES AND EXCHANGE COMMISSION’S RULES OF PRACTICE
I.
The Securities and Exchange Commission (“Commission”) deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), Sections 203(e), (f) and (k) of the Investment Advisers Act of 1940 (“Advisers Act”) and Section 9(b) of the Investment Company Act of 1940 (“Investment Company Act”) against LeadDog Capital Markets, LLC, f/k/a LeadDog Capital Partners Inc. (“LeadDog”), Chris Messalas (“Messalas”) and Joseph LaRocco, Esq. (“LaRocco”) (collectively, “Respondents”).
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II.
After an investigation, the Division of Enforcement alleges that:
SUMMARY
1. From approximately November 2007 through approximately August 2009 (the “Relevant Period”), Respondents raised at least $2.2 million from twelve investors for investment in LeadDog Capital LP (the “Fund”), a purported hedge fund. Respondents Messalas and LaRocco jointly owned and controlled the Fund’s adviser. During the Relevant Period, at Messalas’ direction the Fund was almost entirely invested in illiquid penny-stocks or other micro-cap private companies, each of which had received “going concern” opinions from their auditors, all but one of which had a consistent history of net losses, and most of which Respondents or their affiliates owned or controlled.
2. Respondents, however, deliberately, or at a minimum recklessly, painted a materially different picture of the Fund to existing and/or prospective investors. To induce one elderly investor (“Investor A”) to invest $500,000 in the Fund, for example, Respondents represented falsely orally and in written materials in or about February 2009 that at least half of the Fund’s assets were liquid and could be marked to market each day, that other assets would be valued in conformity with GAAP, and, further, that Investor A could exit the Fund at any time. Respondents succeeded in obtaining $500,000 from Investor A between February and August 2009 (making him the Fund’s largest single investor). In August 2009, when Investor A learned for the first time that the Fund was in fact heavily concentrated in illiquid securities, he demanded the return of his investment. Respondents refused, and disclosed to Investor A for the first time that the Fund’s investments were illiquid. To date, Respondents have refused to liquidate anything other than a small portion of Investor A’s investment in the Fund.
3. Respondents also made deliberate, or at a minimum, reckless, misrepresentations and material omissions of fact regarding LeadDog and the Fund on internet websites. Respondents used these websites to, among other things, tout their experience in the securities industry, but through misrepresentations and material omissions to the operators of those websites (who acted as conduits in publishing Respondents’ information), deliberately concealed from the investing public that from 2004 through 2009 Messalas directly or indirectly was involved in at least one NASD customer arbitration asserting securities law violations against him, and at least one broker-dealer he controlled, Carlton Capital Markets, Inc. (“Carlton Capital”), had been repeatedly fined, censured and, ultimately, expelled by FINRA. Respondents also deliberately concealed these material facts from Investor A, in response to his direct written questions on the subject.
4. Respondents, finally, misrepresented to and concealed from existing and prospective investors the substantial conflicts of interests and related party transactions that characterized Respondents’ relationship to the Fund’s illiquid investments.
3
Respondents deliberately, or at a minimum recklessly, misrepresented in a May 13, 2009 letter to the Fund’s auditor that the only related party transaction involving the Fund was a 2% management fee paid to Messalas and LaRocco. Respondents thus concealed from the auditor, and thus investors, that: (i) Messalas and LaRocco collected various undisclosed fees and other payments made in connection with LeadDog investment activities for the Fund; (ii) Messalas directed the Fund’s investment in several companies in which he had a substantial ownership interest; and (iii) a substantial number of the companies the Fund had invested in were controlled by individuals connected to Respondents. As a result of Respondents’ deliberate and material misrepresentations and omissions, the Fund’s audit report disclosed none of the foregoing conflicts and related party transactions, and Messalas and LaRocco then distributed this false and misleading financial statement to existing and prospective investors in the Fund.
RESPONDENTS
5. LeadDog collectively refers to LeadDog Capital Partners, Inc. (“LD Partners”), LeadDog Capital Markets, LLC, (“LD Markets”) and LeadDog Capital Equities, LLC (“LD Equities”), each of which Messalas and LaRocco owned and controlled, and which at different times served as general partners, investment advisers and/or administrators to the Fund. LD Partners, a Delaware company formed in 2007, was the general partner, investment adviser and administrator of the Fund through December 31, 2008, after which LD Markets (a New York company formed in 2008) became the general partner and investment adviser, with LD Equities (also a New York company formed in 2008) becoming the administrator. At all times during the Relevant Period LeadDog was an investment adviser within the meaning of the Advisers Act.
6. Messalas, age 45, resides in Staten Island, New York. Messalas owned 100% of LeadDog through September 2008, and 60% thereafter when LaRocco purchased a 40% interest, and he was primarily responsible both for LeadDog’s investment decisions on behalf of the Fund and for determining the fair value of the Fund’s holdings. From 1996 to 2009, Messalas was a registered representative of nine successive broker-dealers. During the Relevant Period alone, he was a registered representative of three successive broker-dealers, and held Series 7, 24 and 63 securities licenses. Messalas has a history of customer and FINRA complaints. In November 2004, Messalas entered into a $45,000 settlement with a customer whose NASD arbitration complaint alleged that Messalas caused $1.6 million in losses as a result of misrepresentations, omissions, churning and suitability violations. In August 2005, FINRA censured and fined the broker-dealer that Messalas owned and controlled, Carlton Capital, $10,000 for its failure to comply with the Bank Secrecy Act of 1970. In November 2008, FINRA censured and fined Carlton Capital $40,000 for improperly providing registered representatives with access to unrecorded telephone lines and permitting representatives to accept customer orders on unrecorded lines. In January 2009, FINRA expelled Carlton Capital for its failure to pay the $40,000. When that broker-dealer closed, Messalas opened a branch office of Brookstone Securities, Inc. (“Brookstone”) at the same location, which he controlled. Messalas owned 100% of LD Partners through September 2008, and 60% thereafter. Messalas is a 60% owner of LD
4
Markets. At all times during the Relevant Period Messalas was an investment adviser within the meaning of the Advisers Act.
7. LaRocco, age 53, resides in New Canaan, Connecticut. Since September 2008, LaRocco has been a managing member, general counsel, and a 40% owner of LeadDog. LaRocco is an attorney, licensed in Connecticut, whose legal practice included advising hedge funds on compliance with federal securities laws and regulations. LaRocco was responsible for all legal functions on behalf of the Fund, and most administrative functions. LaRocco has practiced before the Commission, representing clients in several Commission investigations. LaRocco is not registered with the Commission in any capacity. LaRocco purchased a 40% interest in LD Partners in September 2008 from Messalas, and also owns 40% of LD Markets.
RELATED ENTITY
8. The Fund is organized as a Delaware limited partnership that offered up to $25 million of its securities to accredited investors via unregistered offerings, claiming an exemption from registration under Section 4(2) and Rule 506 of Regulation D of the Securities Act. The Fund purports to invest in private and publicly traded domestic and international securities, equities, debt instruments, convertible securities, options, and derivatives. Through June 2009, the Fund raised approximately $2.2 million from twelve investors.
FACTS
9. Messalas and LaRocco jointly own, operate and control LeadDog, the investment adviser to the Fund. Messalas was primarily responsible both for LeadDog’s investment decisions on behalf of the Fund and for determining the fair value of the Fund’s holdings. LaRocco provided legal services, and was principally responsible for all marketing and administrative functions, including compiling the Fund’s private placement memoranda (“PPM”) and marketing materials. LeadDog claimed total assets under management of $3.9 million as of September 2009, and approximately $4.25 million in assets under management as of July 2010. Investors in the Fund contributed approximately $2.2 million in capital, and its General Partners – Messalas and LaRocco – contributed approximately $16,000. Messalas and LaRocco personally solicited investors for the Fund orally and through written materials such as private placement memoranda, financial statements and written responses to investor questionnaires. Respondents also advertised the Fund and its performance on Hedgefund.net and Hedgeco.net, two public websites that provide subscribers with information about potential investment opportunities.
10. From November 2007 through August 2009, LeadDog and Messalas directed the Fund to acquire securities of the following public companies: Therabiogen, Inc., Paradise Music and Entertainment, Inc., United EcoEnergy Corp., The Center for Wound Healing Inc., American Post Tension Inc., and Spring Creek Capital Corp., (respectively, Therabiogen, Paradise, EcoEnergy, Wound Healing, Post Tension and Spring Creek). Each of these securities was illiquid and in 2008 and 2009, all but one of these
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public portfolio companies reported net losses that ranged between $70,000 and $4 million, and each received a “going concern” opinion from its respective auditor. The Fund also held an investment in AudioStreet, Inc., an illiquid private company, and 3A NOW AG, an illiquid Swiss company that lists on the Frankfurt Stock Exchange.
11. In addition, the Fund made loans to two parties that had connections with the Respondents: (i) Philip Forman (“Forman”), an investor in the Fund, and officer or director of two companies in the Fund’s portfolio, and (ii) FSR. Inc., an entity controlled by Terry Hickel (“Hickel”), an associate of Messalas who was also an officer or director of multiple public or private companies in the Fund portfolio.
12. Respondents created and distributed to prospective investors PPMs dated November 1, 2007, November 1, 2008, and January 1, 2009. The PPMs are substantially identical, and each sought to raise $25 million in limited partnership interests for the Fund. LeadDog also provided investors and prospective investors with audited financial statements for the period November 2007 through December 2008.
Respondents’ Misrepresentations and Omissions to the Fund’s Largest Investor
13. From February through August 2009, LeadDog and its principals successfully induced Investor A to invest $500,000 in the Fund, by deliberately misrepresenting the Fund’s liquidity and the nature of its investment holdings, and the liquidity of Investor A’s investment in the Fund. Respondents also deliberately concealed, in response to a question from Investor A, Messalas’ history of customer and FINRA complaints against him and a broker-dealer he controlled.
14. After learning of the Fund as a potential investment opportunity from information Respondents published on Hedgeco.net, Investor A contacted Messalas on February 17, 2009, and requested that LeadDog submit written responses to a Due Diligence Questionnaire (“DDQ”) that contained a series of direct questions concerning, among other things, the Fund’s investments and LeadDog’s operations. Six days later, LaRocco emailed Investor A (copying Messalas) and provided him with the Fund’s PPM. Two days after that, Messalas and LaRocco both signed LeadDog’s written responses to Investor A’s DDQ and submitted it to him via fax.
15. Investor A asked Respondents in his DDQ: “What percent of the Fund assets are invested in non-liquid assets and cannot be marked to market each day?” Respondents responded falsely “50%.” In response to another question from Investor A, Respondents also represented falsely, without qualification, that it would take approximately six months to liquidate the Fund’s entire portfolio. Respondent’s statements regarding the composition and liquidity of the fund’s portfolio were false and misleading. In fact, all of the Fund’s non-cash investments – 92% of the Fund’s total assets – were illiquid, and none could be marked to market on a daily basis. Respondents knew these statements were false and misleading when they made them, or at a minimum acted with reckless disregard for the truth.
6
16. Respondents also falsely and deliberately, or at a minimum, recklessly, represented to Investor A orally in February 2009 that notwithstanding any lock-up provisions to the contrary, he could liquidate his entire investment in the Fund at any time.
17. In addition, Investor A asked Respondents in his DDQ whether Respondents were the subject of any civil, criminal or regulatory complaints. In response, Respondents deliberately and falsely concealed from Investor A Messalas’ history of NASD and FINRA complaints, including the censures, fines and expulsion levied against his firm, Carlton Capital, referred to above in paragraph 6, and described in greater detail below in paragraph 23. On the contrary, Respondents deliberately provided a materially misleading biography of Messalas that omitted any discussion of Carlton Capital at all, but nonetheless touted that he had “over 15 years experience in the Securities industry,” noted he was the “Managing Director of Private Equities” at Brookstone, and that he “has his series 7, 24 and 63 Securities licenses with Brookstone Securities, Inc., a broker-dealer firm licensed with the Financial Industry Regulatory Authority.”
18. Respondents also deliberately and falsely misrepresented to Investor A in their responses to his DDQ that “Gary T. Amato, CPA, P.C.” was the Fund’s “Administrator.” In reality, Amato served only as a bookkeeper to the Fund, and LeadDog was the Administrator to the Fund through January 1, 2009, at which point Messalas and LaRocco transferred the administrative functions to another entity they jointly controlled, LD Equities.
19. After receiving these oral and written material representations from Respondents, Investor A invested $500,000 in the Fund in stages from February through August 2009, an amount that constituted approximately 15% of the total capital invested in the Fund, and made him its largest single investor.
20. In August 2009, after he completed his investment in the Fund, Investor A reviewed the Fund’s audited financial statements (which Respondents had sent him in July), and learned for the first time that Respondents’ representation that 50% of the Fund’s assets were in liquid securities was false. Investor A demanded the return of his investment, and except for $50,000 remitted to Investor A in December 2010, Respondents have refused to comply, admitting that the Fund was not sufficiently liquid to redeem his investment.
Respondents’ Misrepresentations and Omissions
Regarding Messalas’ History of Regulatory Complaints
21. LaRocco, with Messalas’ knowledge, deliberately supplied false and misleading information about Messalas’ regulatory history, as well as the Fund’s operations, to Hedgefund.net and Hedgeco.net, two websites that provide background, performance and other information about hedge fund investment opportunities to subscribers. Hedgefund.net and Hedgeco.net published LeadDog’s misrepresentations as part of their profile of LeadDog on the respective websites. LaRocco and Messalas were
7
aware that Hedgefund.net and Hedgeco.net would act as conduits in publishing the false information they provided to investors and prospective investors.
22. Hedgefund.net required Respondents to submit written responses to a questionnaire that contained questions concerning, among other things, any legal or regulatory disputes involving LeadDog or its employees. In their 2008 and 2009 responses to the Hedgefund.net questionnaire, Respondents represented falsely that there was no “litigation, complaints, arbitration, regulatory action and/or other disputes involving” LeadDog, or its employees, in the past 5 years.
23. As noted above, in reality, Messalas, acting either directly or through Carlton Capital, the broker-dealer he controlled, was involved in several NASD and FINRA complaints or actions during the preceding 5-year period. Respondents thus deliberately concealed material information that:
a. In November 2004, Messalas entered into a $45,000 settlement with a customer whose NASD arbitration complaint alleged that Messalas caused $1.6 million in losses as a result of misrepresentations, omissions, churning and suitability violations;
b. In August 2005, FINRA censured and fined Carlton Capital $10,000 for its failure to comply with the Bank Secrecy Act of 1970;
c. In November 2008, FINRA censured and fined Carlton Capital $40,000 for improperly providing registered representatives with access to unrecorded telephone lines and permitting representatives to accept customer orders on unrecorded lines; and
d. FINRA expelled Carlton Capital for its failure to pay the $40,000 fine in January 2009.
24. Respondents also misrepresented to Hedgefund.net and Hedgeco.net that Amato was the Fund’s “Administrator.” As described in paragraph 18, above, Amato served as a bookkeeper to the Fund. The Fund’s Administrator was LeadDog and later LD Equities – both entities controlled jointly by Respondents Messalas and LaRocco.
Respondents Concealed from the Fund’s Auditor and
Investors Substantial Conflicts of Interests and Related Party Transactions
25. During the audit of the Fund’s financial statements for the period ended December 31, 2008, its auditor sought confirmation from Respondents that there were no related parties or transactions, first orally, then in writing via a management representation letter. LaRocco, with Messalas’ knowledge, lied to the auditors at the outset of the audit, and claimed that he and LeadDog had disclosed all related parties and transactions. Respondents then repeated this false representation in the management representation letter
8
dated May 13, 2009 that LaRocco signed, and provided to the auditor. Specifically, LeadDog represented:
The following have been properly recorded or disclosed in the financial statement: [ ] Related-party transactions and other transactions with affiliates, including fees, commissions, sales, purchases, loans, transfers, leasing arrangements, guarantees, and amounts receivable from or payable to related parties.
26. The Respondents deliberately concealed from the Fund’s auditor and the Fund’s investors a tangled web of related party transactions and conflicts of interests. For example, the Respondents omitted to disclose that: (i) Messalas and LaRocco collected various undisclosed fees and other payments made in connection with LeadDog investment activities for the Fund; (ii) Messalas had invested the Fund in several companies in which he also had a substantial ownership interest; and (iii) Parties related to the Respondents controlled or participated extensively in Fund investments. Specifically, Respondents concealed the following material information from the Fund’s auditor and investors:
Undisclosed Interests in the Fund’s Portfolio Companies
a. Messalas formed AudioStreet in 2008, and designated himself as the company’s president, secretary, treasurer, sole director, and chairman; Messalas was also AudioStreet’s controlling shareholder. In February 2009, Messalas caused the Fund to purchase 1.5 million shares of AudioStreet.
b. Acting through an entity he solely controls, Roadrunner Capital Group, Inc. (“Roadrunner”), Messalas controlled 20% of EcoEnergy shares. In 2007, Messalas directed the Fund to purchase 2.1 million shares of EcoEnergy. With the 2.1 million shares, in total Messalas controlled 26% of EcoEnergy shares.
Undisclosed Compensation
c. Carlton Capital, Messalas’ broker-dealer, obtained $20,000 in fees from the Fund for its role as placement agent for private offerings on behalf of EcoEnergy and Paradise.
d. Brookstone, the broker-dealer Messalas controlled, after FINRA expelled Carlton Capital, obtained approximately $30,000 in commissions from the Fund on the sale of EcoEnergy shares in private placements. LaRocco was also paid legal fees of $2,000 in connection with the EcoEnergy offering.
e. LaRocco obtained $5,000 in legal fees in connection with the Fund’s purchase of convertible debentures issued by Paradise.
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f. Messalas and LaRocco, as the managing members of LeadDog, also received $13,600 in undisclosed so-called “structuring and due diligence fees” related to the Fund’s investments.
Undisclosed Related Parties
g. Spring Creek’s registered investment adviser, Carlton Wealth Management LLC, was owned and operated by Messalas’ sister-in-law and a LeadDog employee, Nicole DePasquale (“DePasquale”). Spring Creek paid Depasquale a monthly management fee of $1,500, plus a 3% performance fee, and she was employed by LeadDog as Messalas’ assistant.
h. Hickel, a Fund investor and the Chairman of the Advisory Committee for LeadDog, was also an officer or director of five of the six public companies in the Fund’s portfolio, as well as an officer or director of several other private companies in which Respondent LeadDog directed fund investments. Hickel was also an employee of the broker-dealer controlled by Respondent Messalas, Brookstone. In November 2008, the Fund lent $20,000 to an entity controlled by Hickel, and LeadDog recorded the loan as an asset of the Fund. When Hickel failed to satisfy the loan and the note went into default, the Respondents took no action to collect the loan or otherwise protect the Fund’s interests.
i. Forman was an officer and/or director of two of the Fund portfolio companies, and a Fund investor. In November 2008, the fund lent $50,000 to Forman. The loan to Forman also went unpaid, and Respondents again took no action to collect the $50,000 the Fund is owed.
27. As a result of Respondents’ deliberate false representations and omissions to the Fund’s auditor, on May 13, 2009 the auditor issued a clean audit report on the Fund’s financial statements. However, based on information provided by the Respondents, the Fund’s audited financial statements represented falsely that the sole related party compensation relating to the Fund was the 2% management fee the Fund paid to Messalas and LaRocco.
28. Messalas and LaRocco distributed the false and misleading financial statements to Investor A and other current investors shortly thereafter, and began routinely providing the financials to prospective investors as part of the Fund’s package of marketing materials.
29. Upon learning of Respondents’ omissions in October 2009, the auditor resigned. Several weeks later it issued an audit retraction letter to LeadDog, citing its failure to disclose related party associations to the auditors during the course of the 2008 audit.
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VIOLATIONS
30. As a result of the conduct described above, Respondents willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.
31. As a result of the conduct described above, Messalas and LaRocco willfully aided and abetted and caused LeadDog’s violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.
32. As a result of the conduct described above, LeadDog and Messalas willfully violated Section 206(4) of the Advisers Act which makes it “unlawful for any investment adviser . . . to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative,” and Rule 206(4)-8 thereunder, which makes it unlawful for an investment adviser to a pooled investment vehicle to engage in “fraudulent, deceptive, or manipulative” conduct with respect to any investor or prospective investor in a pooled investment vehicle.
33. As a result of the conduct described above, Messalas willfully aided and abetted and caused LeadDog’s violations of Section 206(4) of the Advisers Act which makes it “unlawful for any investment adviser . . . to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative,” and Rule 206(4)-8 thereunder, which makes it unlawful for an investment adviser to a pooled investment vehicle to engage in “fraudulent, deceptive, or manipulative” conduct with respect to any investor or prospective investor in a pooled investment vehicle.
34. As a result of the conduct described above, LaRocco willfully aided and abetted and caused LeadDog’s and Messalas’ violations of Section 206(4) of the Advisers Act which makes it “unlawful for any investment adviser . . . to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative,” and Rule 206(4)-8 thereunder, which makes it unlawful for an investment adviser to a pooled investment vehicle to engage in “fraudulent, deceptive, or manipulative” conduct with respect to any investor or prospective investor in a pooled investment vehicle.
III.
In view of the allegations made by the Division of Enforcement, the Commission deems it necessary and appropriate in the public interest that public administrative and cease-and-desist proceedings be instituted to determine:
A. Whether the allegations set forth in Section II hereof are true and, in connection therewith, to afford Respondents an opportunity to establish any defenses to such allegations;
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B. What, if any, remedial action is appropriate in the public interest against Respondent LeadDog pursuant to Section 203(e) of the Advisers Act including, but not limited to, disgorgement and civil penalties pursuant to Section 203 of the Advisers Act;
C. What, if any, remedial action is appropriate in the public interest against Respondent Messalas pursuant to Section 15(b)(6) of the Exchange Act, including, but not limited to, disgorgement and civil penalties pursuant to Section 21B of the Exchange Act;
D. What, if any, remedial action is appropriate in the public interest against Respondents Messalas and LaRocco pursuant to Section 203(f) of the Advisers Act, including, but not limited to, disgorgement and civil penalties pursuant to Section 203 of the Advisers Act;
E. What, if any, remedial action is appropriate in the public interest against Respondents pursuant to Section 9(b) of the Investment Company Act including, but not limited to, disgorgement and civil penalties pursuant to Section 9 of the Investment Company Act; and
F. What, if any, remedial action is appropriate in the public interest against Respondent LaRocco pursuant to Rule 102(e)(1) of the Commission’s Rules of Practice, including, but not limited to, denying, temporarily or permanently, the privilege of appearing or practicing before the Commission.
G. Whether, pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, and Section 203(k) of the Advisers Act, Respondents should be ordered to cease and desist from committing or causing violations of and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, whether Respondents should be ordered to pay a civil penalty pursuant to Section 8A(g) of the Securities Act, Section 21B(a) of the Exchange Act, and Section 203(i) of the Advisers Act, and whether Respondents should be ordered to pay disgorgement pursuant to Section 8A(e) of the Securities Act, Sections 21B(e) and 21C(e) of the Exchange Act, and Section 203 of the Advisers Act.
IV.
IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days from service of this Order at a time and place to be fixed, and before an Administrative Law Judge to be designated by further order as provided by Rule 110 of the Commission’s Rules of Practice, 17 C.F.R. § 201.110.
IT IS FURTHER ORDERED that Respondents shall file an Answer to the allegations contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 of the Commission’s Rules of Practice, 17 C.F.R. § 201.220.
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If a Respondent fails to file the directed answer, or fails to appear at a hearing after being duly notified, that Respondent may be deemed in default and the proceedings may be determined against him/it upon consideration of this Order, the allegations of which may be deemed to be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f) and 201.310.
This Order shall be served forthwith upon Respondents personally or by certified mail.
IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an initial decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) of the Commission’s Rules of Practice.
In the absence of an appropriate waiver, no officer or employee of the Commission engaged in the performance of investigative or prosecuting functions in this or any factually related proceeding will be permitted to participate or advise in the decision of this matter, except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the provisions of Section 553 delaying the effective date of any final Commission action.
By the Commission.
Elizabeth M. Murphy
Secretary
hickel should respond, a flat denial of any wrong doings!
be careful with this one, and exerpt from sec charges against two dirt bags that share the same address.
h. Hickel, a Fund investor and the Chairman of the Advisory Committee for LeadDog, was also an officer or director of five of the six public companies in the Fund’s portfolio, as well as an officer or director of several other private companies in which Respondent LeadDog directed fund investments. Hickel was also an employee of the broker-dealer controlled by Respondent Messalas, Brookstone. In November 2008, the Fund lent $20,000 to an entity controlled by Hickel, and LeadDog recorded the loan as an asset of the Fund. When Hickel failed to satisfy the loan and the note went into default, the Respondents took no action to collect the loan or otherwise protect the Fund’s interests.
FULL TEXT:
URL: http://www.sec.gov/litigation/admin/2011/33-9277.pdf
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
Release No. 9277 / November 15, 2011
SECURITIES EXCHANGE ACT OF 1934
Release No. 65750 / November 15, 2011
INVESTMENT ADVISERS ACT OF 1940
Release No. 3314 / November 15, 2011
INVESTMENT COMPANY ACT OF 1940
Release No. 29861 / November 15, 2011
ADMINISTRATIVE PROCEEDING
File No. 3-14623
In the Matter of
LEADDOG CAPITAL MARKETS, LLC, F/K/A LEADDOG CAPITAL PARTNERS, INC., CHRIS MESSALAS, AND JOSEPH LAROCCO, ESQ.,
Respondents.
ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933, SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934, SECTIONS 203(e), 203(f) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940, SECTION 9(b) OF THE INVESTMENT COMPANY ACT OF 1940, AND RULE 102(e) OF THE SECURITIES AND EXCHANGE COMMISSION’S RULES OF PRACTICE
I.
The Securities and Exchange Commission (“Commission”) deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), Sections 203(e), (f) and (k) of the Investment Advisers Act of 1940 (“Advisers Act”) and Section 9(b) of the Investment Company Act of 1940 (“Investment Company Act”) against LeadDog Capital Markets, LLC, f/k/a LeadDog Capital Partners Inc. (“LeadDog”), Chris Messalas (“Messalas”) and Joseph LaRocco, Esq. (“LaRocco”) (collectively, “Respondents”).
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II.
After an investigation, the Division of Enforcement alleges that:
SUMMARY
1. From approximately November 2007 through approximately August 2009 (the “Relevant Period”), Respondents raised at least $2.2 million from twelve investors for investment in LeadDog Capital LP (the “Fund”), a purported hedge fund. Respondents Messalas and LaRocco jointly owned and controlled the Fund’s adviser. During the Relevant Period, at Messalas’ direction the Fund was almost entirely invested in illiquid penny-stocks or other micro-cap private companies, each of which had received “going concern” opinions from their auditors, all but one of which had a consistent history of net losses, and most of which Respondents or their affiliates owned or controlled.
2. Respondents, however, deliberately, or at a minimum recklessly, painted a materially different picture of the Fund to existing and/or prospective investors. To induce one elderly investor (“Investor A”) to invest $500,000 in the Fund, for example, Respondents represented falsely orally and in written materials in or about February 2009 that at least half of the Fund’s assets were liquid and could be marked to market each day, that other assets would be valued in conformity with GAAP, and, further, that Investor A could exit the Fund at any time. Respondents succeeded in obtaining $500,000 from Investor A between February and August 2009 (making him the Fund’s largest single investor). In August 2009, when Investor A learned for the first time that the Fund was in fact heavily concentrated in illiquid securities, he demanded the return of his investment. Respondents refused, and disclosed to Investor A for the first time that the Fund’s investments were illiquid. To date, Respondents have refused to liquidate anything other than a small portion of Investor A’s investment in the Fund.
3. Respondents also made deliberate, or at a minimum, reckless, misrepresentations and material omissions of fact regarding LeadDog and the Fund on internet websites. Respondents used these websites to, among other things, tout their experience in the securities industry, but through misrepresentations and material omissions to the operators of those websites (who acted as conduits in publishing Respondents’ information), deliberately concealed from the investing public that from 2004 through 2009 Messalas directly or indirectly was involved in at least one NASD customer arbitration asserting securities law violations against him, and at least one broker-dealer he controlled, Carlton Capital Markets, Inc. (“Carlton Capital”), had been repeatedly fined, censured and, ultimately, expelled by FINRA. Respondents also deliberately concealed these material facts from Investor A, in response to his direct written questions on the subject.
4. Respondents, finally, misrepresented to and concealed from existing and prospective investors the substantial conflicts of interests and related party transactions that characterized Respondents’ relationship to the Fund’s illiquid investments.
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Respondents deliberately, or at a minimum recklessly, misrepresented in a May 13, 2009 letter to the Fund’s auditor that the only related party transaction involving the Fund was a 2% management fee paid to Messalas and LaRocco. Respondents thus concealed from the auditor, and thus investors, that: (i) Messalas and LaRocco collected various undisclosed fees and other payments made in connection with LeadDog investment activities for the Fund; (ii) Messalas directed the Fund’s investment in several companies in which he had a substantial ownership interest; and (iii) a substantial number of the companies the Fund had invested in were controlled by individuals connected to Respondents. As a result of Respondents’ deliberate and material misrepresentations and omissions, the Fund’s audit report disclosed none of the foregoing conflicts and related party transactions, and Messalas and LaRocco then distributed this false and misleading financial statement to existing and prospective investors in the Fund.
RESPONDENTS
5. LeadDog collectively refers to LeadDog Capital Partners, Inc. (“LD Partners”), LeadDog Capital Markets, LLC, (“LD Markets”) and LeadDog Capital Equities, LLC (“LD Equities”), each of which Messalas and LaRocco owned and controlled, and which at different times served as general partners, investment advisers and/or administrators to the Fund. LD Partners, a Delaware company formed in 2007, was the general partner, investment adviser and administrator of the Fund through December 31, 2008, after which LD Markets (a New York company formed in 2008) became the general partner and investment adviser, with LD Equities (also a New York company formed in 2008) becoming the administrator. At all times during the Relevant Period LeadDog was an investment adviser within the meaning of the Advisers Act.
6. Messalas, age 45, resides in Staten Island, New York. Messalas owned 100% of LeadDog through September 2008, and 60% thereafter when LaRocco purchased a 40% interest, and he was primarily responsible both for LeadDog’s investment decisions on behalf of the Fund and for determining the fair value of the Fund’s holdings. From 1996 to 2009, Messalas was a registered representative of nine successive broker-dealers. During the Relevant Period alone, he was a registered representative of three successive broker-dealers, and held Series 7, 24 and 63 securities licenses. Messalas has a history of customer and FINRA complaints. In November 2004, Messalas entered into a $45,000 settlement with a customer whose NASD arbitration complaint alleged that Messalas caused $1.6 million in losses as a result of misrepresentations, omissions, churning and suitability violations. In August 2005, FINRA censured and fined the broker-dealer that Messalas owned and controlled, Carlton Capital, $10,000 for its failure to comply with the Bank Secrecy Act of 1970. In November 2008, FINRA censured and fined Carlton Capital $40,000 for improperly providing registered representatives with access to unrecorded telephone lines and permitting representatives to accept customer orders on unrecorded lines. In January 2009, FINRA expelled Carlton Capital for its failure to pay the $40,000. When that broker-dealer closed, Messalas opened a branch office of Brookstone Securities, Inc. (“Brookstone”) at the same location, which he controlled. Messalas owned 100% of LD Partners through September 2008, and 60% thereafter. Messalas is a 60% owner of LD
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Markets. At all times during the Relevant Period Messalas was an investment adviser within the meaning of the Advisers Act.
7. LaRocco, age 53, resides in New Canaan, Connecticut. Since September 2008, LaRocco has been a managing member, general counsel, and a 40% owner of LeadDog. LaRocco is an attorney, licensed in Connecticut, whose legal practice included advising hedge funds on compliance with federal securities laws and regulations. LaRocco was responsible for all legal functions on behalf of the Fund, and most administrative functions. LaRocco has practiced before the Commission, representing clients in several Commission investigations. LaRocco is not registered with the Commission in any capacity. LaRocco purchased a 40% interest in LD Partners in September 2008 from Messalas, and also owns 40% of LD Markets.
RELATED ENTITY
8. The Fund is organized as a Delaware limited partnership that offered up to $25 million of its securities to accredited investors via unregistered offerings, claiming an exemption from registration under Section 4(2) and Rule 506 of Regulation D of the Securities Act. The Fund purports to invest in private and publicly traded domestic and international securities, equities, debt instruments, convertible securities, options, and derivatives. Through June 2009, the Fund raised approximately $2.2 million from twelve investors.
FACTS
9. Messalas and LaRocco jointly own, operate and control LeadDog, the investment adviser to the Fund. Messalas was primarily responsible both for LeadDog’s investment decisions on behalf of the Fund and for determining the fair value of the Fund’s holdings. LaRocco provided legal services, and was principally responsible for all marketing and administrative functions, including compiling the Fund’s private placement memoranda (“PPM”) and marketing materials. LeadDog claimed total assets under management of $3.9 million as of September 2009, and approximately $4.25 million in assets under management as of July 2010. Investors in the Fund contributed approximately $2.2 million in capital, and its General Partners – Messalas and LaRocco – contributed approximately $16,000. Messalas and LaRocco personally solicited investors for the Fund orally and through written materials such as private placement memoranda, financial statements and written responses to investor questionnaires. Respondents also advertised the Fund and its performance on Hedgefund.net and Hedgeco.net, two public websites that provide subscribers with information about potential investment opportunities.
10. From November 2007 through August 2009, LeadDog and Messalas directed the Fund to acquire securities of the following public companies: Therabiogen, Inc., Paradise Music and Entertainment, Inc., United EcoEnergy Corp., The Center for Wound Healing Inc., American Post Tension Inc., and Spring Creek Capital Corp., (respectively, Therabiogen, Paradise, EcoEnergy, Wound Healing, Post Tension and Spring Creek). Each of these securities was illiquid and in 2008 and 2009, all but one of these
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public portfolio companies reported net losses that ranged between $70,000 and $4 million, and each received a “going concern” opinion from its respective auditor. The Fund also held an investment in AudioStreet, Inc., an illiquid private company, and 3A NOW AG, an illiquid Swiss company that lists on the Frankfurt Stock Exchange.
11. In addition, the Fund made loans to two parties that had connections with the Respondents: (i) Philip Forman (“Forman”), an investor in the Fund, and officer or director of two companies in the Fund’s portfolio, and (ii) FSR. Inc., an entity controlled by Terry Hickel (“Hickel”), an associate of Messalas who was also an officer or director of multiple public or private companies in the Fund portfolio.
12. Respondents created and distributed to prospective investors PPMs dated November 1, 2007, November 1, 2008, and January 1, 2009. The PPMs are substantially identical, and each sought to raise $25 million in limited partnership interests for the Fund. LeadDog also provided investors and prospective investors with audited financial statements for the period November 2007 through December 2008.
Respondents’ Misrepresentations and Omissions to the Fund’s Largest Investor
13. From February through August 2009, LeadDog and its principals successfully induced Investor A to invest $500,000 in the Fund, by deliberately misrepresenting the Fund’s liquidity and the nature of its investment holdings, and the liquidity of Investor A’s investment in the Fund. Respondents also deliberately concealed, in response to a question from Investor A, Messalas’ history of customer and FINRA complaints against him and a broker-dealer he controlled.
14. After learning of the Fund as a potential investment opportunity from information Respondents published on Hedgeco.net, Investor A contacted Messalas on February 17, 2009, and requested that LeadDog submit written responses to a Due Diligence Questionnaire (“DDQ”) that contained a series of direct questions concerning, among other things, the Fund’s investments and LeadDog’s operations. Six days later, LaRocco emailed Investor A (copying Messalas) and provided him with the Fund’s PPM. Two days after that, Messalas and LaRocco both signed LeadDog’s written responses to Investor A’s DDQ and submitted it to him via fax.
15. Investor A asked Respondents in his DDQ: “What percent of the Fund assets are invested in non-liquid assets and cannot be marked to market each day?” Respondents responded falsely “50%.” In response to another question from Investor A, Respondents also represented falsely, without qualification, that it would take approximately six months to liquidate the Fund’s entire portfolio. Respondent’s statements regarding the composition and liquidity of the fund’s portfolio were false and misleading. In fact, all of the Fund’s non-cash investments – 92% of the Fund’s total assets – were illiquid, and none could be marked to market on a daily basis. Respondents knew these statements were false and misleading when they made them, or at a minimum acted with reckless disregard for the truth.
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16. Respondents also falsely and deliberately, or at a minimum, recklessly, represented to Investor A orally in February 2009 that notwithstanding any lock-up provisions to the contrary, he could liquidate his entire investment in the Fund at any time.
17. In addition, Investor A asked Respondents in his DDQ whether Respondents were the subject of any civil, criminal or regulatory complaints. In response, Respondents deliberately and falsely concealed from Investor A Messalas’ history of NASD and FINRA complaints, including the censures, fines and expulsion levied against his firm, Carlton Capital, referred to above in paragraph 6, and described in greater detail below in paragraph 23. On the contrary, Respondents deliberately provided a materially misleading biography of Messalas that omitted any discussion of Carlton Capital at all, but nonetheless touted that he had “over 15 years experience in the Securities industry,” noted he was the “Managing Director of Private Equities” at Brookstone, and that he “has his series 7, 24 and 63 Securities licenses with Brookstone Securities, Inc., a broker-dealer firm licensed with the Financial Industry Regulatory Authority.”
18. Respondents also deliberately and falsely misrepresented to Investor A in their responses to his DDQ that “Gary T. Amato, CPA, P.C.” was the Fund’s “Administrator.” In reality, Amato served only as a bookkeeper to the Fund, and LeadDog was the Administrator to the Fund through January 1, 2009, at which point Messalas and LaRocco transferred the administrative functions to another entity they jointly controlled, LD Equities.
19. After receiving these oral and written material representations from Respondents, Investor A invested $500,000 in the Fund in stages from February through August 2009, an amount that constituted approximately 15% of the total capital invested in the Fund, and made him its largest single investor.
20. In August 2009, after he completed his investment in the Fund, Investor A reviewed the Fund’s audited financial statements (which Respondents had sent him in July), and learned for the first time that Respondents’ representation that 50% of the Fund’s assets were in liquid securities was false. Investor A demanded the return of his investment, and except for $50,000 remitted to Investor A in December 2010, Respondents have refused to comply, admitting that the Fund was not sufficiently liquid to redeem his investment.
Respondents’ Misrepresentations and Omissions
Regarding Messalas’ History of Regulatory Complaints
21. LaRocco, with Messalas’ knowledge, deliberately supplied false and misleading information about Messalas’ regulatory history, as well as the Fund’s operations, to Hedgefund.net and Hedgeco.net, two websites that provide background, performance and other information about hedge fund investment opportunities to subscribers. Hedgefund.net and Hedgeco.net published LeadDog’s misrepresentations as part of their profile of LeadDog on the respective websites. LaRocco and Messalas were
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aware that Hedgefund.net and Hedgeco.net would act as conduits in publishing the false information they provided to investors and prospective investors.
22. Hedgefund.net required Respondents to submit written responses to a questionnaire that contained questions concerning, among other things, any legal or regulatory disputes involving LeadDog or its employees. In their 2008 and 2009 responses to the Hedgefund.net questionnaire, Respondents represented falsely that there was no “litigation, complaints, arbitration, regulatory action and/or other disputes involving” LeadDog, or its employees, in the past 5 years.
23. As noted above, in reality, Messalas, acting either directly or through Carlton Capital, the broker-dealer he controlled, was involved in several NASD and FINRA complaints or actions during the preceding 5-year period. Respondents thus deliberately concealed material information that:
a. In November 2004, Messalas entered into a $45,000 settlement with a customer whose NASD arbitration complaint alleged that Messalas caused $1.6 million in losses as a result of misrepresentations, omissions, churning and suitability violations;
b. In August 2005, FINRA censured and fined Carlton Capital $10,000 for its failure to comply with the Bank Secrecy Act of 1970;
c. In November 2008, FINRA censured and fined Carlton Capital $40,000 for improperly providing registered representatives with access to unrecorded telephone lines and permitting representatives to accept customer orders on unrecorded lines; and
d. FINRA expelled Carlton Capital for its failure to pay the $40,000 fine in January 2009.
24. Respondents also misrepresented to Hedgefund.net and Hedgeco.net that Amato was the Fund’s “Administrator.” As described in paragraph 18, above, Amato served as a bookkeeper to the Fund. The Fund’s Administrator was LeadDog and later LD Equities – both entities controlled jointly by Respondents Messalas and LaRocco.
Respondents Concealed from the Fund’s Auditor and
Investors Substantial Conflicts of Interests and Related Party Transactions
25. During the audit of the Fund’s financial statements for the period ended December 31, 2008, its auditor sought confirmation from Respondents that there were no related parties or transactions, first orally, then in writing via a management representation letter. LaRocco, with Messalas’ knowledge, lied to the auditors at the outset of the audit, and claimed that he and LeadDog had disclosed all related parties and transactions. Respondents then repeated this false representation in the management representation letter
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dated May 13, 2009 that LaRocco signed, and provided to the auditor. Specifically, LeadDog represented:
The following have been properly recorded or disclosed in the financial statement: [ ] Related-party transactions and other transactions with affiliates, including fees, commissions, sales, purchases, loans, transfers, leasing arrangements, guarantees, and amounts receivable from or payable to related parties.
26. The Respondents deliberately concealed from the Fund’s auditor and the Fund’s investors a tangled web of related party transactions and conflicts of interests. For example, the Respondents omitted to disclose that: (i) Messalas and LaRocco collected various undisclosed fees and other payments made in connection with LeadDog investment activities for the Fund; (ii) Messalas had invested the Fund in several companies in which he also had a substantial ownership interest; and (iii) Parties related to the Respondents controlled or participated extensively in Fund investments. Specifically, Respondents concealed the following material information from the Fund’s auditor and investors:
Undisclosed Interests in the Fund’s Portfolio Companies
a. Messalas formed AudioStreet in 2008, and designated himself as the company’s president, secretary, treasurer, sole director, and chairman; Messalas was also AudioStreet’s controlling shareholder. In February 2009, Messalas caused the Fund to purchase 1.5 million shares of AudioStreet.
b. Acting through an entity he solely controls, Roadrunner Capital Group, Inc. (“Roadrunner”), Messalas controlled 20% of EcoEnergy shares. In 2007, Messalas directed the Fund to purchase 2.1 million shares of EcoEnergy. With the 2.1 million shares, in total Messalas controlled 26% of EcoEnergy shares.
Undisclosed Compensation
c. Carlton Capital, Messalas’ broker-dealer, obtained $20,000 in fees from the Fund for its role as placement agent for private offerings on behalf of EcoEnergy and Paradise.
d. Brookstone, the broker-dealer Messalas controlled, after FINRA expelled Carlton Capital, obtained approximately $30,000 in commissions from the Fund on the sale of EcoEnergy shares in private placements. LaRocco was also paid legal fees of $2,000 in connection with the EcoEnergy offering.
e. LaRocco obtained $5,000 in legal fees in connection with the Fund’s purchase of convertible debentures issued by Paradise.
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f. Messalas and LaRocco, as the managing members of LeadDog, also received $13,600 in undisclosed so-called “structuring and due diligence fees” related to the Fund’s investments.
Undisclosed Related Parties
g. Spring Creek’s registered investment adviser, Carlton Wealth Management LLC, was owned and operated by Messalas’ sister-in-law and a LeadDog employee, Nicole DePasquale (“DePasquale”). Spring Creek paid Depasquale a monthly management fee of $1,500, plus a 3% performance fee, and she was employed by LeadDog as Messalas’ assistant.
h. Hickel, a Fund investor and the Chairman of the Advisory Committee for LeadDog, was also an officer or director of five of the six public companies in the Fund’s portfolio, as well as an officer or director of several other private companies in which Respondent LeadDog directed fund investments. Hickel was also an employee of the broker-dealer controlled by Respondent Messalas, Brookstone. In November 2008, the Fund lent $20,000 to an entity controlled by Hickel, and LeadDog recorded the loan as an asset of the Fund. When Hickel failed to satisfy the loan and the note went into default, the Respondents took no action to collect the loan or otherwise protect the Fund’s interests.
i. Forman was an officer and/or director of two of the Fund portfolio companies, and a Fund investor. In November 2008, the fund lent $50,000 to Forman. The loan to Forman also went unpaid, and Respondents again took no action to collect the $50,000 the Fund is owed.
27. As a result of Respondents’ deliberate false representations and omissions to the Fund’s auditor, on May 13, 2009 the auditor issued a clean audit report on the Fund’s financial statements. However, based on information provided by the Respondents, the Fund’s audited financial statements represented falsely that the sole related party compensation relating to the Fund was the 2% management fee the Fund paid to Messalas and LaRocco.
28. Messalas and LaRocco distributed the false and misleading financial statements to Investor A and other current investors shortly thereafter, and began routinely providing the financials to prospective investors as part of the Fund’s package of marketing materials.
29. Upon learning of Respondents’ omissions in October 2009, the auditor resigned. Several weeks later it issued an audit retraction letter to LeadDog, citing its failure to disclose related party associations to the auditors during the course of the 2008 audit.
10
VIOLATIONS
30. As a result of the conduct described above, Respondents willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.
31. As a result of the conduct described above, Messalas and LaRocco willfully aided and abetted and caused LeadDog’s violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.
32. As a result of the conduct described above, LeadDog and Messalas willfully violated Section 206(4) of the Advisers Act which makes it “unlawful for any investment adviser . . . to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative,” and Rule 206(4)-8 thereunder, which makes it unlawful for an investment adviser to a pooled investment vehicle to engage in “fraudulent, deceptive, or manipulative” conduct with respect to any investor or prospective investor in a pooled investment vehicle.
33. As a result of the conduct described above, Messalas willfully aided and abetted and caused LeadDog’s violations of Section 206(4) of the Advisers Act which makes it “unlawful for any investment adviser . . . to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative,” and Rule 206(4)-8 thereunder, which makes it unlawful for an investment adviser to a pooled investment vehicle to engage in “fraudulent, deceptive, or manipulative” conduct with respect to any investor or prospective investor in a pooled investment vehicle.
34. As a result of the conduct described above, LaRocco willfully aided and abetted and caused LeadDog’s and Messalas’ violations of Section 206(4) of the Advisers Act which makes it “unlawful for any investment adviser . . . to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative,” and Rule 206(4)-8 thereunder, which makes it unlawful for an investment adviser to a pooled investment vehicle to engage in “fraudulent, deceptive, or manipulative” conduct with respect to any investor or prospective investor in a pooled investment vehicle.
III.
In view of the allegations made by the Division of Enforcement, the Commission deems it necessary and appropriate in the public interest that public administrative and cease-and-desist proceedings be instituted to determine:
A. Whether the allegations set forth in Section II hereof are true and, in connection therewith, to afford Respondents an opportunity to establish any defenses to such allegations;
11
B. What, if any, remedial action is appropriate in the public interest against Respondent LeadDog pursuant to Section 203(e) of the Advisers Act including, but not limited to, disgorgement and civil penalties pursuant to Section 203 of the Advisers Act;
C. What, if any, remedial action is appropriate in the public interest against Respondent Messalas pursuant to Section 15(b)(6) of the Exchange Act, including, but not limited to, disgorgement and civil penalties pursuant to Section 21B of the Exchange Act;
D. What, if any, remedial action is appropriate in the public interest against Respondents Messalas and LaRocco pursuant to Section 203(f) of the Advisers Act, including, but not limited to, disgorgement and civil penalties pursuant to Section 203 of the Advisers Act;
E. What, if any, remedial action is appropriate in the public interest against Respondents pursuant to Section 9(b) of the Investment Company Act including, but not limited to, disgorgement and civil penalties pursuant to Section 9 of the Investment Company Act; and
F. What, if any, remedial action is appropriate in the public interest against Respondent LaRocco pursuant to Rule 102(e)(1) of the Commission’s Rules of Practice, including, but not limited to, denying, temporarily or permanently, the privilege of appearing or practicing before the Commission.
G. Whether, pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, and Section 203(k) of the Advisers Act, Respondents should be ordered to cease and desist from committing or causing violations of and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, whether Respondents should be ordered to pay a civil penalty pursuant to Section 8A(g) of the Securities Act, Section 21B(a) of the Exchange Act, and Section 203(i) of the Advisers Act, and whether Respondents should be ordered to pay disgorgement pursuant to Section 8A(e) of the Securities Act, Sections 21B(e) and 21C(e) of the Exchange Act, and Section 203 of the Advisers Act.
IV.
IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days from service of this Order at a time and place to be fixed, and before an Administrative Law Judge to be designated by further order as provided by Rule 110 of the Commission’s Rules of Practice, 17 C.F.R. § 201.110.
IT IS FURTHER ORDERED that Respondents shall file an Answer to the allegations contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 of the Commission’s Rules of Practice, 17 C.F.R. § 201.220.
12
If a Respondent fails to file the directed answer, or fails to appear at a hearing after being duly notified, that Respondent may be deemed in default and the proceedings may be determined against him/it upon consideration of this Order, the allegations of which may be deemed to be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f) and 201.310.
This Order shall be served forthwith upon Respondents personally or by certified mail.
IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an initial decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) of the Commission’s Rules of Practice.
In the absence of an appropriate waiver, no officer or employee of the Commission engaged in the performance of investigative or prosecuting functions in this or any factually related proceeding will be permitted to participate or advise in the decision of this matter, except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the provisions of Section 553 delaying the effective date of any final Commission action.
By the Commission.
Elizabeth M. Murphy
Secretary
the first we heard of a possible reverse was by a poster that went by NYC62
POST# 7334 http://investorshub.advfn.com/boards/read_msg.aspx?message_id=27465005
Hello everyone.
I am new here to Ihub and created a
name for the specific purpose of
posting here on the CGGP board. I
have been reading here for quite some
time and felt the need to help out. I
live and work in NYC and while I could
never reveal my identity, just know that
I am close to Mr. Messalas and his company.
There will be an announcement shortly, one
that will both excite you and amaze you. I
hear that CGGP
will be merging with a Chinese telecom company
with revenues in the quarter of a billion
dollar range. Announcement will come in due
course. Please do not ask me any questions
as I will refrain from answering. That means
ALL questions. Keep an eye out for news. Not
jusr here but other places too. I hear that
this company may be written up in an independent
China news service. Thank you very much. I think
any of you that are patient as some of you have written,
will be extremely pleased. Extremely.
the original new release:
Beijing Xinwei Telecom Technology Inc, after a year of waiting to list on the Szhezhen Stock Exchange has taken a different path according to chinanews.ca. In early 2007, Xinwei failed in its bid to list on the Szhezhen, and in its bid for an IPO. They are looking to reverse merge with a U.S. based company. Clayton Dunning Group, a listed Pink Sheet shell company, seems to be the front runner. In a China News telephone query, Zhen Shui, a Senior VP stated, "We have been looking for a candidate with no debt, and enough shares and liquidity options for our stakeholders. Rather than an expensive and time consuming IPO, we will merge with a U.S. public company shell and move straight to Nasdaq or NYSE quickly but on our own schedule. Clayton Dunning is one of several companies that our advisors have investigated and according to them, this is the one company that we will focus our efforts on. We will proceed with following announcements in weeks coming ahead. This merger will be beneficial for all parties involved, and former shell stockholders would retain 15-20% of new company." Shui would not comment on additional negotiation specifics or timetable, but said the agreement could be finalized by May. Xinwei reported revenues of U.S. $235 million in 2007.
About Beijing Xinwei Technology, Inc.
Beijing Xinwei Telecom Technology Inc, founded in Nov. 1995 and reorganized in 2000, owns advanced technology with whole essential intellectual property rights and becomes the drive of modern wireless communication industry. The company is a high-tech enterprise which integrates product research and development, manufacture, sales, installation and after-sale services. The headquarter and the research center locate in Beijing. Chongqing Xinwei, the subsidiary company, is one of the national core demonstration firms, which has modern manufacturing capability and quality control system. Shenzhen Research Institute plays an important role in industrialized product research. Beijing Xinwei Telecom Technology Inc, has over 2500 employees
anyone remember this denial from cm, news release of merger on 5/19 stock goes from ,000 to ,0044 and then the denial comes 5/25
http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20080325006251&newsLang=en
the ctno on that post that i posted was just interesting. anyways, i called the sec asked about ctno and the relation between the carlton listed on the sec complaint, according to the person i spoke with they are not the same.
nada, just came across it. interesting isn't it. if carlton was shut down by the sec how can we buy and sell? somthing is fish here, if in fact we are dead wouldn't it have been mandatory for messalass to let us know?
i think everyone at the wall street addy is guilty of greed, for the sake of everyone i hope the sec cleans house. unfortionenly for us it's not looking to good in the near future. the roach and messalass must be scrabling to get cash stashed. this could end up being tax evasion along with fraud.
yes and no, need to know for sure. the sec charges say that carlton was shut down. is that us or was it somthing else? were the THE CARLTON COMPANIES INC. suposedly carlton was shut down in 2009, messalas moves ctno to nevada in 2011 and that would of been at a considerable expense. this is all a little confusing, i see why cm has dodged every phone and email contact. what surprises me the most is a lawer being that stupid to get involved with fraud, if their found guilty civil penalties will follow. lawers lose license with felonies. who knows maybe the roach cut a deal and is ratting out all the players. first to roll over on everyone gets the deal.
So far i can't find ctno expulsion.
http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001030408&owner=include&count=40