U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20107 / May 9, 2007 SEC v. Albert E. Parish, Jr., Parish Economics LLC and Summerville Hard Assets LLC, Civil Action No. 2:07-CV-00919-DCN (D. S. C.) On May 4, 2007, the Honorable David C. Norton, U. S. District Judge for the District of South Carolina, entered an Order of Permanent Injunction as to defendants Albert E. Parish (Parish), Parish Economics, LLC (Parish Economics) and Summerville Hard Assets LLC (Summerville). The order restrained and enjoined the defendants from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The order further restrained and enjoined Parish and Parish Economics from violating, or aiding and abetting violations of, Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 . The defendants consented to the entry of the order without admitting or denying any of the allegations of the Commission's complaint.
The Commission's complaint, filed on April 5, 2007, alleged that Parish and Parish Economics fraudulently operated five investment funds which commenced operations at various times since 1986. Four of the funds were described as "informal pools of money" through which investors could invest in, respectively, commodities and securities futures products (the Futures Pool), bonds (the Hedged Income Pool), stocks (the Stock Pool), and hard assets such as expensive watches, jewelry and fine art (Hard Asset Pool). The fifth fund is defendant Summerville. Summerville also purported to invest in various hard assets such as jewelry and collectibles. The Commission alleged that the defendants provided statements to investors and placed information on the Parish Economics website representing that the funds had been trading profitably and that the funds collectively held $134 million in assets. In fact, brokerage accounts represented to hold millions of dollars of assets for the funds do not hold significant funds.
Parish is a Summerville, SC promoter. Parish Economics and Summerville are South Carolina limited liability corporations controlled by Parish.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20108 / May 10, 2007 SEC v. Jack Calvin, et al., 03-CV-10586-MEL (D. Mass.) Final Judgment Entered Against Defendant James Proffitt in "Prime Bank" Fraud Matter The Securities and Exchange Commission announced today that, on May 9, 2007, the federal district court in Massachusetts entered a Final Judgment by consent against James Proffitt of Tomkinsville, Kentucky in a securities fraud case filed during 2003. The Final Judgment permanently enjoins Proffitt from violating Sections 17(a), 5(a) and 5(c) of the Securities Act of 1933 and Sections 15(a) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, the Final Judgment finds Proffitt liable for disgorgement of $232,967 and prejudgment interest of $74,406, but waives all but $20,000 of the disgorgement and prejudgment interest and does not impose a civil penalty based upon Proffitt's financial condition. Proffitt consented, without admitting or denying the allegations, to the entry of the Final Judgment.
On March 31, 2003, the Commission filed a Complaint against five defendants, including Proffitt, and one relief defendant. The Commission's Complaint alleged that Proffitt and the other defendants offered and sold securities in a purported trading program called Growth Benefit Systems (GBS) that was completely fictitious. The defendants allegedly solicited investors by, among other things, telling them that their funds would be pooled to purchase "Prime Bank" instruments that would be traded by top-rated banks and promising returns as high as 20% per month. In fact, according to the Complaint, the GBS trading program never existed and defendants' representations to investors were therefore false.
Previously, the Commission received default judgments against one defendant on December 3, 2003 and against two other defendants on September 9, 2003. On November 9, 2004, the Court granted the Commission's Summary Judgment motion against the relief defendant and on January 16, 2007, the Court entered a Final Judgment by consent against another defendant. The Final Judgment against Proffitt ends the Commission's litigation against all of the defendants in this case.
For further information, please see Litigation Release Nos. 18056 (March 31, 2003), 18544 (January 15, 2004) and 19974 (January 19, 2007).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20109 / May 10, 2007 SEC v. World Information Technology, Inc., Civil Action No. 06-CV-13181 (VM) (S.D.N.Y.)
Court Enters Permanent Injunctions Against World Information Technology, Inc. and Gary Morgan in "Pump and Dump" Scheme The Securities and Exchange Commission announced that on May 2, 2007, the Honorable Victor Marrero, United States District Judge for the Southern District of New York entered a default final judgment of permanent injunction against World Information Technology, Inc. and Gary Morgan. The default final judgment enjoins World Information and Gary Morgan against future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, enjoins World Information from violating Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder, enjoins Morgan from aiding and abetting violations of Section 13(a) of the Exchange Act, and Rules 12b-20 and 13a-13, and enjoins Morgan from violating Sections 5 of the Securities Act, Sections 13(d) and 16(a) of the Exchange Act, and Rules 13a-14, 13d-1, 13d-2, and 16a-3 thereunder. In addition, the default final judgment bars Morgan from serving as an officer or director of a public company, and orders Morgan to pay $866,710.30 in disgorgement, plus prejudgment interest of $176,360.22, and a $110,000.00 civil penalty.
For further information, see Litigation Release No. 19910 (November 15, 2006).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20110 / May 10, 2007 Accounting and Auditing Enforcement Release No. 2608 / May 10, 2007 SEC v. Penthouse International, Inc., Charles Samel and Jason Galanis, 05 CV 0780 (RWS) (S.D.N.Y.) The Securities and Exchange Commission today announced that it has settled its enforcement action against Penthouse International, Inc., Charles Samel, a former Director and Executive Vice-President of Penthouse, and Jason Galanis, a former shareholder. On April 27, 2007, the Honorable Robert W. Sweet of the United States District Court for the Southern District of New York entered final judgments that permanently enjoined Samel and Galanis from violating Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, and from aiding and abetting violations of Section 15(d) of the Exchange Act, and Rules 12b-20, 15d-11, and 15d-13 thereunder, and in the case of Samel, Rule 15d-14 as well. Penthouse was also permanently enjoined from violations of these provisions. In addition, Samel and Galanis were each ordered to pay civil penalties of $60,000 and are barred for a period of five years from serving as officers or directors of public companies. Penthouse, Samel and Galanis, without admitting or denying the allegations in the complaint, consented to the entry of these final judgments.
The Securities and Exchange Commission filed its action against Penthouse, Samel and Galanis on January 24, 2005. The Commission's complaint alleged that Penthouse, Samel and Galanis engaged in accounting fraud and financial reporting violations at Penthouse in connection with the company's Form 10-Q for the quarter ended March 31, 2003. According to the complaint, Penthouse improperly included as revenue on the financial statements for that quarter $1 million received as an up-front payment in connection with a five-year website management agreement. The inclusion of the $1 million payment under the agreement increased Penthouse's reported revenue by approximately 9%, from $11,072,000 to $12,072,000 and changed a quarterly net loss of $167,000 to a purported net profit of $828,000. The Complaint alleged that Penthouse's Form 10-Q was materially misleading in several other respects. For example, the Commission alleged that it bore an unauthorized electronic signature of Robert C. Guccione, Penthouse's principal executive officer and principal financial officer, and thus represented that Guccione had reviewed and signed it, and the accompanying Sarbanes-Oxley certification. According to the complaint, this representation was false, as Guccione had not seen or approved the filing of the Form 10-Q or the Sarbanes-Oxley certification. Further, according to the complaint, Penthouse's auditors and outside counsel also had not reviewed the filing, a fact that also was not disclosed in the filing.
The Comission's complaint alleged that Samel and Galanis prepared and filed the false Form 10-Q, and they did so knowing or recklessly disregarding that Guccione had not seen or approved it, that Penthouse's auditor had not performed its required review of the Form 10-Q, and that it would be improper to include the $1 million payment as revenue for the quarter ended March 31, 2003.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20111 / May 10, 2007 SEC v. Zahra Ghods and RUSA Cap., Inc., Defendants, and Unisource Cap., LLC, Relief Defendant, Civil Action No. 1:07-CV-1047 (NDGA May 8, 2007) On May 8, 2007, the Securities and Exchange Commission (Commission) filed a Complaint for Injunctive Relief (Complaint) in the United States District Court for the Northern District of Georgia against Zahra Ghods, a U. S. citizen who currently resides in Hong Kong, and RUSA Cap., Inc. (RUSA), an entity located in Newport Beach, California that Ghods owns and controls.
The Complaint alleges that from as early as February 2004 through May 2006, Ghods and RUSA actively participated in a fraudulent prime bank scheme perpetrated by Geoffrey Gish (Gish) and several entities that he controlled. That prime bank scheme involved the sale of approximately $29.6 million of securities to more than 300 investors located throughout the United States. The Commission previously filed an emergency action against Gish and his affiliated companies on May 17, 2006. SEC v. Geoffrey Gish, et al., Case No.1:06-cv-1171-CC (N.D. Ga.).
The Complaint alleges that Ghods and RUSA participated in one of the three fraudulent prime bank schemes that Gish offered, Zamindari Capital, LLC, and received approximately $9 million of investor funds. Zamindari was represented to be a high yield investment program that generated lucrative profits by purchasing debt instruments from major international banks at a discount and quickly reselling them at face value. RUSA was the entity that would supposedly trade these debt instruments for Zamindari investors.
To entice investors to invest in Zamindari, the Complaint alleges that Ghods represented that all investor funds would remain in a blocked account, from which no withdrawals could be made. In truth, no such blocked account existed. Ghods transferred approximately $830,000 of investor funds to Unisource Cap, LLC, another company that she owned and controlled, and then used those funds to pay miscellaneous personal expenses. Ghods also claims that she used $2.2 million of investor funds for the development of an iron ore mine in Mexico that Unisource purportedly owns. Ghods transferred the remaining $5 million of investor funds to an offshore bank account, and those funds were then transferred to a third party.
The Complaint further alleges that, to create the false appearance that their investments were safe, Ghods told Gish and several investors that RUSA guaranteed all investments with a $100 million certificate of deposit that RUSA held at Canadian Imperial Bank of Commerce, a Canadian financial institution. In fact, no certificate of deposit existed.
The Complaint alleges that Ghods and RUSA violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and that relief defendant Unisource, directly or indirectly, obtained funds or other assets to which it has no legitimate claim, and has been unjustly enriched thereby. The Complaint also seeks (i) permanent injunctions enjoining defendants Ghods and RUSA against future violations; (ii) disgorgement of ill-gotten gains plus prejudgment interest; (iii) imposition of civil penalties against defendants Ghods and RUSA; and (iv) an order appointing a receiver for defendant RUSA.
See also: L.R. 19705 / May 19, 2006; and L. R. 19759 / July 13, 2006.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20112 / May 10, 2007 SEC v. Jennifer Xujia Wang, et al., Civil Action No. 07-3715 (S.D.N.Y.) SEC Charges Two Securities Professionals With Insider Trading The Securities and Exchange Commission ("Commission") announced that it charged Jennifer Xujia Wang (Wang), an employee of Morgan Stanley & Co., Inc. (Morgan Stanley), and her husband, Ruben Chen a.k.a. Ruopian Chen (Chen), a former employee of ING Investment Management Services, LLC (ING), with insider trading.
In an emergency civil action filed in the United States District Court for the Southern District of New York, the Commission charged Chen and Wang with using online brokerage accounts in Wang's mother's name, Zhiling Feng (Feng), to purchase securities of three companies on the verge of announcing they would be acquired. Wang and Chen used material non-public information from Wang's employer, Morgan Stanley, which was contacted to provide services in connection with the acquisitions.
Acting on the Commission's request, the Court today issued a temporary restraining order which, among other things, freezes the defendants' assets and orders repatriation of funds taken out of the United States.
The Commission's complaint alleges that Wang and Chen obtained illegal profits of more than $600,000 by trading on the basis of material nonpublic information before the public announcements of three acquisitions: Morgan Stanley Real Estate's (MSRE) December 19, 2005 announcement of its acquisition of Town & Country Trust; MSRE's August 21, 2006 announcement of its acquisition of Glenborough Realty Trust; and Formation Capital, LLC and JER Partners' January 16, 2007 announcement of its agreement to acquire Genesis HealthCare Corporation.
The complaint further alleges that Wang was privy to material nonpublic information concerning each of these pending acquisitions. Since August 29, 2005, Wang has been employed as a Vice President of Morgan Stanley in a group that supported the Principal Transaction Group, which provides financing for MSRE and other entities' potential acquisitions. In this position, Wang received documents via e-mail and had access to documents on a shared network drive which demonstrated that the firm was providing financing on certain acquisitions before they were publicly announced.
The Commission's complaint alleges that Chen and Wang funded and exercised control over Feng's online brokerage accounts. When Feng's first brokerage account was opened, it was funded with money from a checking account in Wang and Chen's name. In addition, Feng, who lives in Beijing, China, did not access the two online brokerage accounts that were opened in her name on the days of the relevant trading. Rather, most of the logins to the brokerage accounts were from Internet Protocol addresses at ING and from Chen and Wang's home in New Jersey.
As a result of the conduct described in the complaint, the Commission alleges that Chen and Wang violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and, as permanent relief, seeks permanent injunctions against future violations, disgorgement of all ill-gotten gains, prejudgment interest, and civil penalties. The complaint names Feng as a relief defendant and seeks disgorgement of Chen and Wang's ill-gotten gains, plus prejudgment interest from her.
The Commission would like to acknowledge the assistance of the Chicago Board Options Exchange, Options Regulatory Services Authority.
LR-20113 May 11, 2007 One or More Unknown Purchasers of Call Options for the Common Stock of TXU Corp., Ajaz Rahim, Sunil Sehgal, Seema Sehgal, Hafiz Naseem, and Francisco Javier Garcia See also: Complaint in this matter http://www.sec.gov/litigation/litreleases/2007/lr20113.htm
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20113 / May 11, 2007 SEC v. One or More Unknown Purchasers of Call Options for the Common Stock of TXU Corp., Ajaz Rahim, Sunil Sehgal, Seema Sehgal, Hafiz Naseem, and Francisco Javier Garcia, Civil Action No. 07C1208 (N.D. Ill.) Securities and Exchange Commission Charges Ajaz Rahim, Pakistani Banker, With Insider Trading On May 11, 2007, the Commission charged Ajaz Rahim, a Pakistani banker who was employed by Faysal Bank in Karachi, Pakistan with insider trading based on material, non-public information he received from Hafiz Naseem, an employee of Credit Suisse (USA) LLC in New York. In a Third Amended Complaint in the insider trading case originally filed on March 2, 2007 against certain Unknown Purchasers of TXU call options, the Commission alleged that, on February 5, 6, 7, 8 and 23, 2007, Naseem, in breach of his duty to Credit Suisse and its client, telephoned Rahim and conveyed to him non-public, material information concerning the proposed but unannounced leveraged buyout of TXU Corp. by an investor group led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group., and other information. According to the Third Amended Complaint, Rahim, on February 23, 2007, purchased 6,700 TXU call option contracts with March 2007 expiration dates through UBS AG London, and 15,000 shares of TXU stock through Bank Julius Baer Co. Ltd. (Guernsey Branch). According to the Commission, these purchases allowed him to reap, following the public announcement of the buyout, trading profits of approximately $5.1 million.
The Third Amended Complaint further alleges that Naseem made calls from his office phone to Rahim's home and cell phones and alerted him to pending business combinations and deals involving 9 other issuers: Hydril Company, Trammell Crow Co., John Harland Co., Energy Partners Ltd., Veritas DGC Inc., Jacuzzi Brands, Caremark Rx, Inc., and Northwestern Corporation. The Third Amended Complaint alleges that, in at least 25 instances, Rahim placed trades in the securities of these issuers minutes after receiving a phone call from Naseem. According to the Third Amended Complaint, Credit Suisse served as an investment banker or financial advisor in all of the involved deals, and the phone calls to Rahim were made close in advance of — and frequently the day of or the day before — announcements of the proposed deals. The Third Amended Complaint also alleges that Rahim purchased securities in those companies in advance of public merger announcements through accounts held at Merrill Lynch Pierce Fenner & Smith and/or Bank Julius Baer Co. Ltd (Guernsey Branch), obtaining profits of $2,425,000. Finally, according to the Third Amended Complaint, Naseem, in order to insure he would obtain a personal, financial benefit from his misappropriations, in May 2006 opened up a brokerage account in Pakistan and granted trading authority over that account to Rahim, his "tippee."
The Commission alleges that, as a result of these activities, Rahim engaged in insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest thereon, and civil monetary penalties.
The Commission's original complaint against the Unknown Purchasers alleged that between February 21 and February 23 — prior to the public disclosure of TXU Corp.'s merger agreement — while in possession of material, nonpublic information regarding the acquisition offer, the Unknown Purchasers, using overseas accounts, purchased over 8,020 call option contracts for TXU stock. The unrealized illicit profits on these option contracts total approximately $5.4 million. On March 2, 2007 the United States District Court for the Northern District of Illinois in Chicago entered a Temporary Restraining Order freezing assets of the Unknown Purchasers. On March 28, 2007, the District Court approved an extension of the asset freeze as to the Unknown Purchasers who purchased TXU securities through Credit Suisse in Zurich and Francisco Javier Garcia, then identified as the Unknown Purchaser who purchased TXU securities through Fimat Banque Frankfurt Zweigniederlassung. The Court also approved a 60-day extension of the asset freeze as to Rahim, then identified as the Unknown Purchaser who traded through UBS AG London. Garcia, believed to be a resident of Switzerland, purchased at least 260 TXU call options in advance of the public announcement. As a result of his insider trading, Garcia is in a position to reap trading profits of at least $150,500, the Commission alleges.
As a result of an Amended Complaint filed by the Commission, on March 28, 2007, the United States District Court for the Northern District of Illinois in Chicago entered a Temporary Restraining Order freezing assets of Sunil and Seema Sehgal, a married couple residing in the United Kingdom. The Amended Complaint added the Sehgals as defendants in the March 2, 2007 case against certain Unknown Purchasers of TXU call options, and alleged that the Sehgals made highly profitable and suspicious purchases of 700 call option contracts for the common stock of TXU Corp. through accounts at Charles Schwab & Co., Inc., and Clark Dodge & Co, Inc., in January and February 2007. The Commission alleged that, as a result of the increase in price of TXU stock following the public announcement of the leveraged buyout, the illicit profits on the Sehgals' option contracts total approximately $270,000. On April 12, 2007, the Court approved a 60-day extension of the asset freeze as to the Sehgals. In its Third Amended Complaint, the Commission alleges that, in addition to timely purchases of TXU securities, Seema Sehgal also traded Hydril Company stock, and Sunil Sehgal traded Hydril Company, John Harland Co., and Caremark Rx, Inc. securities in advance of public merger announcements, realizing aggregate trading profits of approximately $292,900 in addition to the TXU profits.
The Commission wishes to thank the New York Stock Exchange, the Chicago Board Options Exchange, the Swiss Federal Banking Commission and the Financial Services Authority of the United Kingdom for their assistance in this matter.
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