Securities Law Blog

Over the course of 14 months and on 150 occasions, a Latvian trader broke into online brokerage accounts of customers at large U.S. broker-dealers and drove stock prices up or down by making unauthorized purchases or sales in the hijacked accounts. Igors Nagaicevs reportedly used the direct, anonymous market access provided to him by various unregistered firms to trade those same securities at artificial prices and reaped more than $850,000 in illegal profits.

According to the SEC’s complaint filed in federal court in San Francisco, Nagaicevs manipulated the prices of more than 100 NYSE and Nasdaq securities and caused more than $2 million in harm to customers of U.S. brokerage firms. The SEC alleges that Nagaicevs violated the antifraud provisions of the federal securities laws and seeks injunctive relief, disgorgement with prejudgment interest, and financial penalties.

The SEC also instituted administrative proceedings against the four electronic trading firms that allowed Nagaicevs to trade through their electronic platforms without first registering. The SEC alleged that the firms gave Nagaicevs a gateway to the U.S. securities markets while circumventing the protections of the federal securities laws, including requirements for brokers to maintain and follow adequate procedures to gather information about customers and their trading. The four firms include: Alchemy Ventures, Inc of San Mateo, California; KM Capital Management, LLC of Philadelphia; Zanshin Enterprises, LLC of Boise, Idaho; and Mercury Capital of La Jolla, California.

The SEC has charged First Resource Group LLC and its founder David H. Stern for recommending the purchase of securities in two penny stock companies while simultaneously selling their own shares.

The Fort Lauderdale-based firm and Stern allegedly solicited brokers to purchase stock in TrinityCare Senior Living Inc. and Cytta Corporation. Stern reportedly hired and trained First Resource’s salespeople and gave them information about TrinityCare to prepare sales scripts and pitch the stock to potential investors.

According to the SEC, “First Resource and Stern used a telephone sales boiler room to make inflated claims and defraud investors while simultaneously manipulating the price of the stocks and making profits for themselves.”

Some of the alleged false statements included that TrinityCare stock “is going to be a half-a-billion dollar company in five years or roughly a $40 stock.” Stern also reportedly distributed a research report on Cytta to investors stating that “Sales projections for 2010-2014 should exceed $500 million.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, Stern and First Resource violated federal securities laws by acting as unregistered broker-dealers. The SEC is seeking permanent injunctions, disgorgement plus prejudgment interest, and financial penalties as well as a penny stock bar against Stern.

Big 5 Asset Management LLC owner Drew “Bo” Brownstein has been sentenced to a year and a day in prison for insider trading. Brownstein admitted to buying shares of Mariner Energy Inc. in April 2010 after learning from a friend that the oil and gas company was going to be acquired by Apache Corp. for $3.9 billion.

Brownstein obtained the insider information from a friend, Drew Peterson, whose father was on the Board of Mariner. Based on the information, Brownstein bought Mariner stock and options for his hedge fund, his personal investment accounts, and his family, without their knowledge.

According to reports Brownstein was required to forfeit $2.4 million in illicit profits, even though he allegedly made more than $5 million. In addition to the prison sentence, the U.S. District Judge for the Federal District Court in Manhattan, also ordered Brownstein to serve six months home confinement, to perform 500 hours of community service, and pay a $7,500 fine on top of the forfeiture of illegal profits.

Three farmers and a cattle-raising operation in Montana have filed a lawsuit against former CEO, Jon Corzine, of the collapsed commodity brokerage MF Global Holdings Ltd. The lawsuit alleges the executives failed to disclose to customers that their money was used to finance MF Global’s bad bets on European sovereign debt. The group seeks to represent a nationwide group of commodities futures customers whose money went missing amid the multi-billion dollar bankruptcy of MF Global.

The lawsuit is one of many filed since the October 2011 bankruptcy filing that was reportedly the result of Mr. Corzine’s $6.3 billion bet on European bonds. Mr. Corzine began at MF Global in March 2010 when he was told he needed to rev up profits fast or face downgrades on the securities firm’s debt. He quickly cut hundreds of employees and hired 1,100 new traders and other employees, and encouraged traders to make larger bets. According to reports, his style included riskier businesses that bet the firm’s own money, increasing the emphasis on higher-risk products like mortgage-backed securities and stock-index derivatives.

Faced with the short-term pressures of increasing profits, he turned to an investment in high-yielding European sovereign bonds structured as a “repurchase to maturity.” Initially MF Global received a $39 million jolt in revenue from the trade. When FINRA learned of MF Global’s sovereign-debt trades in the company’s annual report in May 2011, the European bet had grown to $6 billion. FINRA told Mr. Corzine that MF’s brokerage unit would have to set aside $150 million in case the trade soured.

As Europe’s financial instability increased in August and September, MF Global shares fell more than 40%. In October the company started selling the bonds to raise cash as customers were fleeing and counterparties wanted more collateral.

According to the bankruptcy trustee of MF Global’s brokerage unit, an estimated $1.2 billion in customer funds remain missing. About 500 employees are left at the company to help wind down MF Global and look for the missing customer money.

The SEC stopped the sale of fraudulent securities before anyone had the misfortune of investing with Illinois-based investment advisor Anthony Fields. Using various social media sites, including LinkedIn, Fields allegedly offered more than $500 billion in fictitious securities. According to the SEC, he used LinkedIn discussions to promote fictitious “bank guarantees” and “medium-term notes.”

Fields is the CEO and Chief Compliance Officer of his companies Anthony Fields & Associates (AFA) and Platinum Securities Brokers. According to the SEC’s complaint, Fields provided false and misleading information concerning AFA’s assets under management, clients, and operational history to the public through its website and SEC filings. Fields also allegedly failed to maintain required books and records, did not implement adequate compliance policies and procedures, and promoted himself as a broker-dealer while he was not registered with the SEC or FINRA.

To combat the exploitation of potential investors through social media sites, the SEC has begun to issue investor alerts. The alerts aim to help investors be better aware of fraudulent investment schemes that use social media, and provide tips for checking the backgrounds of advisors and brokers.