Securities Law Blog

The United States Attorney’s Office of the Southern District of New York and The Federal Bureau of Investigation (FBI) announced the unsealing of an indictment charging Steven Kimmel and twelve others for their alleged roles in a $12 million securities and wire fraud scheme that is being deemed a “stock-promoting boiler room operation.”

On June 9, 2010 the indictment was unsealed in Manhattan federal court. Ten of the defendants were arrested, two are expected to surrender at a later date, and one remains at large.

According to the indictment, Kimmel was the owner and chief executive officer of the Miami-based company Realcast. Organized in 1999, Realcast provided live broadcasting and video on demand over the internet. In 2000, Kimmel began publicly selling shares in Realcast. Kimmel employed a New York-based office known as Powercom Energy Services Corp. and Empire Energy Services Corp. (Powercom/Empire) to solicit investors. The defendants employed by Powercom/Empire allegedly aimed at attracting investments from out-of-state and elderly investors who would not be able to personally check up on its operations.

From 2000 until 2010, Realcast allegedly brought in $12 million through use of fraudulent statements and omissions of material facts via Powercom/Empire. During this time, Realcast generated minimal revenue from its business and allocated 40% - 50% of investments to Powercom/Empire to continue to secure outside investments, according to the indictment.

Among its false representations, Realcast allegedly did not disclose to investors that it was siphoning almost half of their money to Powercom/Empire. Nor did they admit to paying commissions to or using broker-dealers after 2004.

In a press release issued by the FBI, FBI Acting Assistant Director-In-Charge George Venizelos stated, “As long as there are prospective victims and a fast buck to be made, the bottom-feeders of the securities industry will try to capitalize…Any investment strategy bears risk, but it ought not to include the risk that the person selling you on it is lying to you.”

If convicted of securities fraud or conspiracy to commit wire fraud, the defendants face as much as 20 years in prison.

Less than two months after GunnAllen Financial was shut down, another independent-contractor broker-dealer has closed its doors. AFA Financial Group LLC, with about 100 advisers on staff, made the decision to cease its operation based in Calabasas, California on April 30, 2010.

The firm’s president, Morrie Reiff, said, “Our reps were not producing what they needed to produce to keep the doors open.”

According to Mr. Reiff, the firm took a devastating hit by the downturn of the stock market in 2008 and 2009, and was not able to continue making its errors-and-omission-insurance payments.

In its seven years of operation, AFA had only seen one arbitration claim filed against it until the dramatic increase it suffered in 2010. In 2010 investors have sued the firm seven times, mostly over the sale of Provident Royalties LLC private placements, which was charged with being part of a massive Ponzi scheme in 2009 by the Securities and Exchange Commission (SEC).

On Thursday April 29, 2010 the Financial Industry Regulatory Authority (FINRA) permanently barred Tom Bretton from the securities industry for his alleged involvement in a $1.3 million fraud. The former Chief Compliance Officer and Head Trader in the Garden City, NY office of Prestige Financial, Inc. was accused of running a fraudulent trading scheme that imposed improper charges on his clients’ trades, according to the FINRA report.

Allegedly from September 2006 through June 2009, Bretton placed large customer orders, typically of 1,000 shares or more, through a firm proprietary account instead of effecting the trades through the customers’ accounts. For securities being purchased, Bretton allegedly increased the price per share by $.02 to $.05 before allocating the shares to the customers’ accounts. For securities being sold, Bretton allegedly decreased the price by $.02 to $.05 before allocating proceeds to customer accounts. FINRA found that these findings were never authorized by or disclosed to the customers.

According to FINRA, Bretton allegedly concealed his fraud by entering false information on the corresponding order tickets regarding the share price and the time the customer order ticket was received, entered and executed.

The scheme generated $1.3 million in profits for the proprietary accounts, of which Bretton received 33% interest, equaling a payday of $429,000.

On April 27, 2010 the Financial Industry Regulatory Authority (FINRA) fined five broker-dealers for the illegal sale of more than 8 billion shares of penny stocks on behalf of their customers. Fagenson & Co., Inc., RBC Capital Markets Corp., Equity Station, Inc., Olympus Securities, LLC and Alpine Securities Corp. have been fined a combined total of $385,000.

The majority of the illegal sales involved Universal Express Inc. More than 7.5 billion shares of the company’s unregistered stock were sold by the five firms, generating proceeds of roughly $8.4 million.

Regulators allege that despite indications that the sale of the stock was potentially illegal, the firms failed to take appropriates measures to determine whether the sale of the securities followed federal registration requirements.

In 2004 the Securities and Exchange Commission (SEC) filed a complaint alleging that Universal had issued more than 500 million shares of unregistered stock for distribution to the public. In 2007, a federal court ordered Universal to pay an estimated $22 million in fines and disgorgement. Despite the actions taken against Universal, the five firms carried out most of the illegal sales after the SEC’s complaint or after its enforcement action.

All of the firms, except Equity Station Inc., were found to have failed to establish and enforce a reasonable supervisory system to prevent the sale of unregistered stock.

“Brokerage firms are the first line of defense when it comes to preventing the illegal distribution of unregistered securities into the public markets. The failure to detect and prevent these sales creates serious risks to the unsuspecting customers who purchased these unregistered securities,” said James Shorris, FINRA Executive Vice President and Executive Director of Enforcement.

FINRA found that each of the five firms allowed their customers to deposit large blocks of thinly traded securities in certificate form and then immediately liquidate those positions.

According to the FINRA report, Fagenson reported earning $44,000 in commissions and was fined $165,000; RBC earned $68,000 in commissions and was fined $135,000; Alpine earned $47,000 and was fined $40,000; Equity earned $13,575 and was fined $25,000; and Olympus earned $5,200 and was fined $20,000.

A temporary restraining order and asset freeze has been issued against Minnesota-based investment advisor Renee Marie Brown, and Investors Income Fund X, LLC. On April 8, 2010 the Securities and Exchange Commission (SEC) alleged that Ms. Brown, the president of the Real Estate Investment Securities Association (REISA), misappropriated advisory clients’ money to the tune of $1.1 million.

According to the SEC complaint, from July 2009 until March 2010, Ms. Brown raised the $1.1 million by allegedly scamming six investors into transferring their money into Fund X. Ms. Brown allegedly told investors that Fund X was a legitimate and successful investment opportunity, and promised clients a fixed annual return of 8% or 9%. She allegedly would distribute bogus returns to investors to further facilitate the fund’s illusion of success.

The misappropriated funds allegedly went towards Ms. Brown’s purchase of a condominium for herself and to build-out office space for her new business.

According to the SEC, Ms. Brown has several investment adviser affiliations. Until about a month ago, Ms. Brown was a registered representative affiliated with Capital Quest Securities Inc. She had recently started her own investment adviser business, Aaria Capital Inc. and was one of the founders of due-diligence firm FactRight LLC.

Ms. Brown was also a founder and registered investment advisor with Wildwood Wealth Management LLC. It was during her time at Wildwood that Ms. Brown allegedly opened the unregistered Fund X and began competing for clients with her employer. According to the SEC complaint, Ms. Brown “either discreetly convinced Wildwood clients to withdraw their money from Wildwood and invest with the fund or forged a client’s signature to facilitate the fund’s transfer.”