Securities Law Blog

In a May 14, 2010 press release, Great American Financial Resources, Inc. (GAFRI) announced that they will exit the independent broker-dealer business operated through its subsidiary Great American Advisors, Inc. (GAA).

GAFRI says its decision is part of its “strategy to focus on its core insurance and annuity operations.”

While GAA will no longer provide retail brokerage services to independent registered representatives, GAFRI will continue to sell variable annuities through unaffiliated broker-dealers. It will operate GAA as a Securities and Exchange Commission (SEC) registered broker-dealer and registered investment advisor to service its variable annuity and retirement plans businesses.

According to the release, GAFRI has made an agreement with Philadelphia based Lincoln Investment Planning, Inc. to transfer the registered representatives and customer accounts of GAA to Lincoln. The transition is expected to be completed by July 12, 2010, pending regulatory approval.

GAA is the third broker-dealer to shut down its operations in the past three months. The GAA close follows GunnAllen Financial Inc. which closed in March, and the AFA Financial Group LLC in April.

Steven Mandala pleaded guilty to grand larceny and identity theft in New York State Supreme Court in Manhattan May 19, 2010. The former Merrill Lynch & Co. broker was charged with stealing $780,000 from the firm when he left less than two months after receiving the money in the form of a promissory note.

Mandala was hired by Merrill Lynch in April 2009 and took the $780,000 in the form of a loan to be paid back over eight years while employed at the firm. Upon receiving the money, Mandala deposited it into his father’s bank account and purchased a red 2006 Ferrari F430 Spider in his father’s name, according to prosecutors.

According to Mandala’s attorney, the Ferrari, which cost $245,000, has been sold to help pay restitution. Mandala will be sentenced June 6, and faces a two to six year prison sentence. After his release he will be required to make monthly payments to repay the remaining $378,000.

The identity theft charge stemmed from Mandala’s stealing the identity of his ex-girlfriend’s father to take out a line of credit.

The Securities and Exchange Commission (SEC) brought its first enforcement actions against individuals with no securities industry background under Rule 105 of Regulation M on May 11, 2010. Two Boca Raton, Florida residents, Peter G. Grabler and Leonard Adams, were charged with illegal short selling of securities in advance of participating in numerous secondary offerings to make illicit profits.

According to the SEC complaint, Rule 105 is designed to prevent abusive short selling and market manipulation by prohibiting the purchase of offering shares by any person who sold short the same securities within five business days before the pricing of the offering.

Grabler was charged with repeatedly violating Rule 105 between February 2006 and November 2008 on at least 119 occasions, involving secondary offerings by at least 102 issuers, and generating gains of $636,123. Adams was charged with violating the Rule between March 2006 and November 2008 on at least 94 occasions, involving secondary offerings by at least 86 issuers, and generating gains of $331,387.

According to the orders issued by the SEC, “Grabler and Adams engaged in a strategy of participating in numerous secondary offerings of stock in public companies in order to improve their access to initial public offerings underwritten by the same broker-dealers through which they participated in the secondary offerings.”

The pair has agreed to settle the SEC’s claims without admitting or denying the findings. Grabler and Adams will pay more than $988,000 and $514,000 respectively, to settle the SEC’s charges.

Spongetech Delivery Systems Inc.’s two top executives were arrested May 5, 2010 for their alleged involvement in a conspiracy to commit securities fraud and obstruction of justice. According to the criminal complaint, filed by the U.S. Attorney’s office in Brooklyn, New York, Spongetech’s president and CEO Michael Metter, and chief operating officer Steven Moskowitz allegedly defrauded investors by reporting exaggerated sales figures in an effort to boost interest in the company’s stock.

The Securities and Exchange Commission (SEC) also charged the pair, along with Spongetech, its affiliate, RM Enterprises International, Inc., two of the company’s former attorneys, Jack Halperin and Joel Pensley, and stock promoter George Speranza.

The SEC alleges Metter and Moskowitz ran a typical pump-and-dump scheme in which they deceived investors into believing they were buying stock in a highly successful company that sells soap-filled sponges. Beginning in 2007, Spongetech issued dozens of phony press releases and fraudulent SEC filings boasting larger sales orders and revenue. The company claimed there were five primary customers who made up 99% of sales adding up to millions of dollars in business. The SEC claims, that Speranza even went so far as to create websites and rent office space, in an attempt to legitimize the customers.

According to the SEC complaint, Metter, Moskowitz, Spongetech and RM Enterprises used “false and baseless” attorney opinion letters by Pensley and Halperin to distribute shares of Spongetech to the public. False and misleading attorney letters were also forged in Pensley’s name and in the name of a fictitious lawyer, and then distributed to Spongetech’s transfer agents.

After flooding the market with the false information, in order to inflate the stock prices and pump up demand, Metter, Moskowitz, and Spongetech allegedly dumped approximately 2.5 billion shares by illegally selling them to the public through affiliated entities in unregistered transactions, according to the SEC claims.

Trading in Spongetech was suspended by the SEC on October 5, 2009, when questions began to arise regarding the accuracy of the company’s press releases and SEC filings.

A Colorado investment manager has been found guilty of four counts of securities fraud and sentenced to 32 years in prison for his role in a multistate Ponzi scheme on April 27, 2010. According to Colorado Attorney General John Suthers, Jason T. Brooks founded, owned and operated the company Genius Inc., also known as Genius Deals, Inc. through which he accepted $10 million from investors.

Brooks was indicted by a grand jury in June 2009 for his Ponzi scheme that operated from June 2005 through April 2008. During that time Brooks solicited clients from 15 different states including Colorado, New York, Florida and Massachusetts. According to Stephanie Stout, deputy state public defender and attorney for Brooks, “the victims were not brought in by cold calls, but were known to the defendant.”

According to the indictment, Brooks told investors that he had a master purchase agreement with Japanese appliance and electronics manufacturer Matsushita Electrical Industrial Co. Ltd. He claimed the agreement allowed him to purchase electronics and appliances as a distributor at cheaper prices. Investors were told their money would be used to purchase the products and then be sold to U.S. homebuilders for profit, resulting in a high rate of return for investors.

“The severity of Mr. Brooks’ scheme also should serve as a warning sign for Colorado consumers who might find themselves faced with unusual or strange-sounding investments. If an investment sounds too good to be true, it probably is,” said Suthers.

In reality less than 5% of investor money went towards purchasing the products. Brooks allegedly used the money for personal expenses, gambling, and to make “interest payments” to earlier investors.

Brooks lived and worked out of various homes in Larimer, Boulder and Weld counties, and at no time had any sort of distribution agreement, according to the indictment.