Securities Law Blog

Three company executives of Massachusetts-based subprime auto loan provider Inofin, Inc. were charged with violating the antifraud and registration provisions of the federal securities laws by the Securities and Exchange Commission (SEC). Michael Cuomo, Kevin Mann and Melissa George allegedly misled investors about their lending activities and diverting millions of dollars in investor funds for personal benefit.

According to the SEC’s complaint filed in federal court in Boston, the executives illegally raised at least $110 million from hundreds of investors in 25 states and the District of Columbia through the sale of unregistered notes. Investors were reportedly told that Inofin would use the money for the sole purpose of funding subprime auto loans and to expect to receive returns of 9 to 15 percent. Money was instead being used for personal gain and by Cuomo and Mann to open four car dealerships and begin multiple real estate property developments, according to the complaint.

Inofin and executives allegedly misrepresented Inofin’s financial performance beginning as early as 2006 until 2011. Despite a negative net worth and a progressively deteriorating financial condition, the SEC found that Inofin and its principal officers continued to offer and sell Inofin’s unregistered securities while “knowingly or recklessly misrepresenting to investors that Inofin was a profitable business and sound investment.”

Inofin reportedly maintained its license to do business as a motor vehicle sales finance company by preparing and submitting materially false financial statements to its licensing authority, the Massachusetts Division of Banks.

Also charged in the complaint are two sales agents, David Affeldt and Thomas K. (Kevin) Keough. The duo allegedly promoted the offering and sale of Inofin’s unregistered securities and failed to register with the SEC as a broker-dealer. The SEC is seeking civil injunctions against all parties involved, as well as the return of ill-gotten gains and financial penalties.

As a summer associate, attorney Matthew Kluger allegedly began what turned into the longest running insider trading scheme ever uncovered. He continued to share confidential information he obtained during his employment at some of the top mergers-and-acquisitions law firms in the country, with Wall Street trader Garrett Bauer.

According to the criminal complaint filed in the United States District Court in Newark, New Jersey, Kluger provided Bauer with insider tips on roughly 15 mergers and acquisitions over the course of 17 years, netting the men more than $34 million. Kluger allegedly used middle man Kenneth T. Robinson to pass money and the private information to Bauer who would then buy and sell shares in the companies based on Kluger’s tips. The men reportedly went to great lengths to conceal their scheme through the use of prepaid cellphones to avoid wire taps which were often discarded once a deal was complete, burning money and destroying computers.

Unlike some criminals who know how to vary their m.o., this operation remained the same every time. Once the money and information was passed to Bauer and the trades complete, Bauer would pull tens, sometimes hundreds, of thousands of dollars from many ATM’s across Manhattan and hand the cash over to Robinson. Kluger would then allegedly meet with Robinson to collect his share. According to prosecutors, most of the illicit profits were pocketed by Bauer, who bought a $6.7 million home on the Upper East Side of Manhattan and an $875,000 home in Boca Raton, Florida.

After authorities searched Robinson’s home in March 2011, he started secretly recording conversations with Kluger and Bauer. Robinson has pleaded guilty to one count of conspiracy to commit securities fraud and two counts of securities fraud. His signed plea agreement could send him to prison for up to seven years.

The criminal charges against Kluger and Bauer include conspiracy to commit securities fraud, conspiracy to commit money laundering and multiple counts of securities fraud and obstruction of justice.

Along with facing criminal charges, Kluger and Bauer have been charged by the Securities and Exchange Commission, which is seeking permanent injunctions, disgorgement of ill-gotten gains with pre-judgment interest, and financial penalties.

Bauer’s assets have been seized and he remains on electronic monitoring in his Manhattan home after being released on a $4 million bond into the custody of his mother.

AIS Financial, Inc. has been expelled by a Financial Industry Regulatory Authority (FINRA) hearing panel for failing to implement and enforce an anti-money laundering (AML) program. The Westlake Village, California broker-dealer reportedly turned a blind eye to suspicious activity and concealed the activity from regulators, and in return received large commissions.

The FINRA panel found that AIS failed to identify, investigate and report suspicious penny stock activity in three instances from November 2005 to December 2007. In one instance, the firm permitted two accounts controlled by a money management firm based in Costa Rica to deposit and liquidate billions of shares of penny stocks of numerous issuers, generating more than $53,000 in commissions for the firm. The owner of the Costa Rican firm had previously been the subject of regulatory actions by the Securities and Exchange Commission (SEC) for securities fraud.

In another occurrence, AID permitted five accounts to deposit and liquidate penny stocks just two months after the SEC had charged them with securities fraud. The customer and his nephew both had disciplinary histories and criminal indictments for engaging in organized criminal activity and money laundering prior to opening accounts at AIS.

The hearing panel also found that approximately 20 customers were permitted by AIS to deposit and liquidate 65 million shares of Asia Global Holdings Corp. stock (AAGH). Among the red flags on these transactions were suspicious new account forms for customers. The sales generated commissions of $234,304 for the firm.

The Justice Department and the Securities and Exchange Commission (SEC) have charged Cheng Yi Liang with trading on confidential information he obtained while an employee of the U.S. Food and Drug Administration (FDA). Liang, a chemist at the FDA since 1996, allegedly traded in advance of at least 27 different FDA announcements involving 19 different publicly traded companies.

Liang reportedly began trading shares in 2006 while working in the FDA’s Center for Drug Evaluation and Research; the division in charge of approving new drugs. Due to Liang’s position at the FDA, he had access to the agency’s password-protected tracking system used to manage drug applications and drug-safety issues. Liang was reportedly able to review documents as they passed through the FDA approval process.

According to the SEC’s complaint, Liang bought stocks for profit before positive announcements, bet on shares falling after negative ones and sold shares to avoid losses, generating more than $3.6 million in illicit profits and avoided losses.

Liang allegedly financed his trading with a home-equity line of credit and used seven brokerage accounts that weren’t in his name to help conceal his insider trading scheme.

What do a 1963 Corvette Stingray, a home theater and bronze statues have in common? They were just a few of the extravagant purchases bought with proceeds from a $47 million offering fraud and Ponzi scheme allegedly operated by John Scott Clark and his two online payday loan companies.

According to the complaint filed by the Securities and Exchange Commission (SEC) in the U.S. District Court for the District of Utah, Clark and his two companies, Impact Cash LLC and Impact Payment Systems LLC, raised funds from investors for the stated purposes of funding payday loans and other aspects of the companies’ operations. Investors were reportedly told to expect annual returns of 80 percent on their investments and that their money would be kept in separate bank accounts.

Between March 2006 to September 2010, Clark allegedly lured more than 120 investors into his Ponzi scheme through word-of-mouth referrals, by attending trade shows, attending payday loan conferences and paying salespeople to locate potential investors. According to the SEC’s complaint, Impact never distributed a private placement memorandum or any other document disclosing the nature of the investment or the risks involved to investors. Clark allegedly altered account statements provided to him by Impact’s accounting department to create artificially high annual rates of return varying from 30 percent to more than 200 percent.

Clark and Impact are being charged with fraudulently selling unregistered securities. The SEC obtained a court order freezing the assets of Impact and their owner, and a receiver has been appointed to preserve assets for the benefit of investors