securities fraud

Executives Charged with Securities Fraud

Austin, Texas: The Federal Bureau of Investigation (FBI) announced today that ArthroCare Corporation has agreed to pay $30 million in a monetary penalty to resolve charges that senior executives in the company engaged in securities fraud.

ArthoCare is a multi-business medical device company that manufactures, develops, and markets medical devices. However, members of the company’s executive staff have been charged with perpetrating securities fraud that resulted in more than $400 million in losses to investors. According to information released by the FBI ArthoCare perpetrated the fraud between December 2005 and 2008. ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock. On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share. The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.

“Truthful corporate earnings reports are critical to the soundness of our financial system. Today’s indictment alleges that those at the top of ArthroCare deceived investors and regulators by manipulating the company’s reports to inflate its stock, ultimately causing hundreds of millions in losses in shareholder value. The Criminal Division will continue to aggressively pursue corporate executives who undermine our financial markets for personal gain.” said Acting Assistant Attorney General Raman.

In a deferred prosecution agreement with prosecutors, ArthoCare admitted that senior executives inflated the company’s revenues by millions of dollars, artificially driving the shares higher. The company also admitted that its senior executives had conducted a number of sham transactions which were used to manipulate ArthoCare’s the earnings reports delivered to investors. Other revelations included a systematic “parking” of millions of dollars’ worth of medical devices at distribution facilities and then reporting these shipments as sales in its quarterly and annual filings, causing the company to appear to have met or exceeded external earnings forecasts

Two senior vice presidents John Raffle and David Applegate had previously plead guilty to conspiracy to commit securities and wire fraud in connection with the fraud scheme. David Applegate, 54, pleaded guilty before U.S. Magistrate Judge Mark Lane in Austin, Texas, to two counts of a superseding information which charges him with conspiracy to commit securities, mail and wire fraud, and with a false statements violation. Applegate admitted that he and other co-conspirators inflated falsely ArthroCare’s sales and revenue through a series of end-of-quarter transactions involving ArthroCare’s distributors and that he and other co-conspirators caused ArthroCare to file a Form 10-K for 2007 with the U.S. Securities and Exchange Commission that materially misrepresented ArthroCare’s quarterly and annual sales, revenues, expenses and earnings.  Other executives are also facing charges in 2014. ArthroCare’s former chief executive officer, Michael Baker, and chief financial officer, Michael Gluk, are scheduled to stand trial on related charges on May 5, 2014.

“These senior corporate executives participated in a scheme to artificially inflate their company’s stock prices, cheating shareholders and the investing public out of hundreds of millions of dollars,” Assistant U.S. Attorney General Lanny Breuer said in a statement.

Insider Trading in Miami

Miami, Florida: In a insider trading bust today, the Securities and Exchange Commission (SEC) charged a Miami based trader for trading in the stock of Chinese company and for conducting an illegal short sale in the securities of three other companies.

According to the allegations by the SEC, Charles Raymond Langston III had previously learned confidential information about AutoChina International’s stock. The new was obtained by Mr. Langston prior to a general announcement, which would subsequently significantly lower the stock of the Chinese firm. Later when Langston was approached by placement agents he promptly sold the 29,000 shares short. Collecting $198,108 from the illicit trading, Langston violated an agreement he had in place to keep the information which he had learned confidential and to not trade until after the company had made a public announcement.

“Langston agreed to keep confidential the information he learned from AutoChina’s placement agent and abstain from trading on it.  Yet he chose to place personal greed ahead of the integrity of the securities markets,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.

Fully aware of the duplicity and the illegal nature of his actions Langston attempted to hide the transactions. He made the trades through a separate entity, owned by himself, than the entity with which he had purchased the shares. He also use a different broker and a different account to help cover his tracks.

The SEC’s complaint filed in federal court in Miami further alleges that Langston and two of his companies, Guarantee Reinsurance and CRL Management, violated Rule 105 of Regulation M, which prohibits the short sale of an equity security during a restricted period. The restricted period is traditionally five business days before a public offering. The regulation further prohibits the purchase of that same security through the same offering. The rule has been put in place to prevent the reduction in proceeds received by a company through artificially decreasing its share value by illegally selling the shares short before the company places its public offering. Langston and his companies, Guarantee Reinsurance and CRL Management, made an unlawful gain of around $1.3 million.

“During restricted periods, Langston and his companies executed short sales that gamed the system and resulted in illegal profits. The SEC is resolutely committed to pursuing those who violate Rule 105.” said Glenn S. Gordon, associate director for enforcement in the SEC’s Miami Regional Office.

This case is likely to reach a swift conclusion as Langston has agreed to a settlement to the insider trading charges in the amount of $193,108, prejudgment interest of $22,204, and a penalty of $193,108.  Langston and the two companies also agreed to be enjoined for the short selling violations with monetary sanctions to be determined by the court at a later date. Langston, however, neither admits nor denies that he violated any SEC regulations.

Illicit behavior for profit is not uncommon in the share market world, which is why sharing information is a dangerous habit. Only giving information to trusted insiders, who cannot and will not benefit from the inside knowledge is a safety net that all companies must have when dealing with public offerings to avoid having their shares priced lower than they are worth due to the unscrupulous dealings of traders like Charles Langston.

Ponzi Scheme Targeting International Investors

Las Vegas, NV: The Securities and Exchange Commission (SEC) announced today, in Washington DC, the emergency freezing of the assets of a Las Vegas based company and the sole owner of the business, Edwin Fujinaga for allegedly perpetrating a multimillion dollar Ponzi scheme targeting Japanese investors.

According to the complaint, Fujinaga has been running a Ponzi scheme using his business MRI International to defraud investors since October 1998. Under the scheme MRI and Fujinaga convinced investors, mostly based in Japan, that they were investing in a company that purchased accounts from US medical providers with outstanding balances and collected from insurance companies. Fujinaga falsely represented that he would be purchasing these accounts at a discount, then collecting the entire amount and turning a profit for the company and hence the investors.

“Fujinaga deceived and exploited his Japanese investors into believing that they were buying safe investments with a steady return. Instead, Fujinaga operated a Ponzi scheme on an enormous scale that financed his own extravagant lifestyle.” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement.

Needless to say, the funds from the investors were never used to purchase past due accounts, rather they funded Fujinaga’s extravagant lifestyle and paid for everything from luxury vehicles to credit card debts and even child support and alimony. The investments were also used, in typical Ponzi fashion, to pay the principal and interest due on previous investments.

The complaint was filed under seal in the US District Court of Nevada two weeks ago naming Fujinaga, MCI International, and CSA Service Center LLC as defendants. CSA Service Center is named as a relief defendant for the purpose of recovering any ill-gotten assets stemming from the Ponzi scheme. Fujinaga controls CSA, which is the nominal owner of his three homes; one each in Las Vegas, Los Angeles, and Hawaii. At the SEC’s request,the Honorable James C. Mahan granted the SEC’s request for a temporary restraining order, asset freeze, and other emergency relief against MRI, Fujinaga, and CSA Service Center. The SEC investigation was closely coordinated with the Financial Services Agency of Japan (JFSA) and the Japanese Securities and Exchange Surveillance Commission (SESC). They investigators exchanged documents and other evidence crucial to investigating and building the case against Fujinaga and MCI.

“Cross-border cooperation can successfully halt fraudsters who attempt to use international boundaries to avoid prosecution. The close coordination between the SEC and Japanese regulators was crucial to freezing Fujinaga’s assets and foiling his scheme.” said Gerald W. Hodgkins, Associate Director in the SEC’s Division of Enforcement.

The SEC alleges that Fujinaga hosted Japanese investors at the MCI offices in Las Vegas, where they were given a tour of the facilities and offered the opportunity to invest in either US dollars or Japanese yen. Investors were promised returns on investment ranging from 6% to 10.32% based on the size and length of the investment. Using these tactics MCI, which also has a sale’s office in Tokyo, was able to raise more than $800 million in investments. As an assurance Fujinaga and MCI falsely represented to investors that the funds would be solely used for the purpose of investing in the medical accounts receivable space. In reality Fujinaga illicitly transferred investor funds to MRI’s operating accounts, where it was used to pay for general operating expenses instead of medical accounts.  He also transferred funds to other entities he owned that were not in the business of collecting medical account receivables.  Investor funds also were siphoned to another company owned by Fujinaga called The Factoring Company, which bought Fujinaga’s cars and paid his bills.

The investigation is still ongoing with the further assistance of the JFSA. Meanwhile,the SEC has charged Fujinaga with violations of the anti-fraud provisions of the Federal Securities Laws and is seeking the disgorgement of all ill-gotten gains, financial penalties, and permanent injunctions.

Fraud can occur in any number of ways when savvy con men work hard to create plausible stories that seem to stand the muster of due diligence. Fraudsters are also not afraid to create fake companies to hide their intentions and reach across international borders to carry out their schemes. While the SEC and other international agencies are working hard to prevent these kinds of activities, a wise investor can avoid such situations by only working with qualified leads, ensuring proper due diligence, and being diligent about whom they are doing business with.

AIC Capital Group Charged with Fraud

The Securities and Exchange Commission (SEC) charged the founder of New York based AIC Capital Group, Fredrick D. Scott, with defrauding his investors while simultaneously grossly misrepresenting the amount of assets under his control.

According to the complaint filed by the SEC Scott registered his company AIC Capital Group as an investment advisor. Once registered Scott then repeatedly touted the firm’s registration under the Securities laws and proceeded from one scheme to another to defraud both small businesses and individual investors. One variation of Scott’s scheme was the so-called advanced money scheme. Under this scheme Scott promised investors that AIC would provide multimillion dollar loans to people seeking capital. Investors were told that in order to make that happen they needed to advance a small portion of the loan to AIC, which was supposed to turn around and send the entire amount back to the investors. However, Scott would simply keep the money and had no intention of refunding it or making good on the loan proposed.

Another scheme perpetrated by Scott involved offering investors the opportunity to make a bridge loan. Under this plan investors would fund a portion of a loan to a third party entity, while Scott through AIC was supposed to fund the balance. In exchange the investors were told that they would receive a substantial return on their initial investment. As with all his schemes, Scott, would simply keep the money and no investments were actually made.

“Scott told brazen lies about the value of ACI’s assets under management and its ability to deliver huge returns on various investments. Our examination and enforcement staff aggressively pursue investment advisers who flout the registration provisions of the securities laws for their personal gain, especially those who attempt to cover up their misdeeds by flat-out lying to our examiners.” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The US Attorney’s Office for the Eastern District of New York announced, in a parallel action that Scott had plead guilty to criminal charges. Included in those charges were an admission of making false statements to the SEC. Scott confessed to misleading investigators from the SEC who were investigating whether Scott and AIC had accepted loans from investors. The investigators soon referred the matter to criminal authorities.

Scott falsely told investors that AIC had over $3.7 billion in assets under management to bolster the firm’s credibility. Offering investors once in a life time opportunites for return on investment, Scott solicited funds from a variety of investors with the lure of high rates of returns. He has made no returns on investment and stole the money invested.  Much of the money was illegally spent on Scott’s personal lifestyle which included private school tuition for his children, travel and hotels, and several thousand dollars in dental bills.

The SEC’s complaint charges Scott with violating Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5, Section 207 of the Investment Advisers Act for filing a false Form ADV, and aiding and abetting ACI’s improper registration in violation of Section 203A of the Advisers Act.

There is an old adage, if it is too good to be true it probably is. When investment advisors or companies offer the ability to receive huge returns with very little to substantiate what they are offering, it should be a red flag to any investor. Doing the right amount of diligence and knowing where your money is going is paramount in protecting your interests and ensuring that your hard earned money doesn’t become somebodies root canal.



Colorado Man Indicted for Securities Fraud


Colorado Man Indicted for Securities Fraud

In Colorado Springs Robert Allen Zickefoose, 48, was indicted by a grand jury on seven counts of securities fraud and theft, for allegedly perpetrating a scheme by which he defrauded investors of over $3.2 million. The investors were defrauded into purchasing investments in the two oil and natural gas wells.

According to the Attorney General’s press release Zickefoose never actually owned any part of the two wells, called Ruby #1 and Ruby #2. This did not, however, dissuade him from bringing in a large amount of investment dollars, to the tune of $3.2 million, by selling interests in his companies Zickefoose Reserves LLC., and Choice Energy Group LLC. Using cold calling as his primary way of luring investors in Zickefoose was able to convince people in Colorado Springs and other areas that they were purchasing the rights to 45 percent of the profits generated by the two wells. With Oil and Natural Gas being in the news frequently and seemingly a hot commodity, Zickefoose was able to craft a pitch that sounded legitimate. At least 14 investors were convinced until it came to light that the wells were actually owned by Star Ryder Energy LLC, a Sedalia based company, and that neither Zickefoose Reserves nor Choice Energy, had anything to do with them. Further facts about documents provided and other due diligence will, most likely, emerge as the investigation continues. Thus far Zickefoose has not cooperated with investigators.

Zickefoose Reserves LLC was set up by Robert Zickefoose in 2009, and voluntarily dissolved in December 2012. Choice Energy Group LLC was set up in 2011.

Zickefoose, meanwhile spent the majority of the money on personal expenses, cash withdrawals, and payments to employees at his company. He also used some of the money to pay off past investors, according to the statement released by the Colorado Attorney General’s Office. More details are sure to emerge as the investigation and case continues to unravel.

Zickefoose Reserves LLC and Choice Energy Group LLC came under scrutiny from the Colorado Division of Securities in 2011 based on a call made to a Colorado investor by a Choice Energy representative. Zickefoose then failed to show up for a number of appointments with division investigators, ultimately prompting Judge Herbert Stern III to order Zickefoose to provide sworn testimony in connection with the investigation.

On June 17th, Zickefoose was arrested and incarcerated at El Paso County Criminal Justice Center on $500,000 bond from where he is scheduled to enter a plea before Judge Thomas Kennedy this week.

There are many legitimate companies out raising money, however, there are also a large number of individuals who will readily defraud an investor of their money. Mr. Zickefoose’s actions came to light because of an alert investor that informed authorities. In today’s economy it always behooves an investor to perform the right level of due diligence and have a good knowledge of the investment opportunities before signing over any money.



Miami Charged With Civil Securities Fraud

SEC Charges the City of Miami With Civil Securities Fraud

The Securities and Exchange Commission accused the city of Miami of civil securities fraud on Friday, charging that the city and its former budget director were playing “shell games” with city bank accounts. As part of the complaint, the SEC accused the city of Miami of deliberately misrepresenting the city’s finances to bond investors.

In a complaint filed in Federal Court in Miami on Friday, the SEC alleged that the city and its former budget director, Michael Boudreaux, were making material omissions and misrepresentations about internal funds transferred in the run up to the offering of three 2009 bond offerings totaling $153.5 million.

The complaint alleges that Boudreaux orchestrated transfers of funds to mask mounting deficits and falsely inflate reserves in the cities financial statements for 2007 and 2008. The SEC is seeking to prohibit the city from violating securities laws, while imposing financial penalties of hundreds of thousands of dollars on both Miami and Boudreaux.

The director of the SEC’s Miami office, Eric Bustillo said in a statement that “Miami cannot continue to play shell games with its finances”, and added that both investigators and the markets deserve complete transparency when considering the city’s municipal bond offerings.

Ironically the City of Miami is already under a cease and desist order from 2003 for similar misconduct, making it the first time the SEC has had to investigate a city already under an existing court order. As a result the federal complaint also seeks to require the city to comply with the existing cease and desist order.

The SEC investigation began in 2009 after an expose in the Miami Herald revealed that Boudreaux had transferred $37.5 million of the city budget from construction projects he claimed no longer needed the funding. However, SEC investigators found that the projects were still in need of those funds or the funds had already been spent. The transfers allowed Boudreaux and the city to plug large holes in their budget and meet the requirements for a general fund reserve, which Boudreaux tried to inflate to $100 million. The end result of all the financial maneuvering was that the city of Miami was able to receive a favorable credit rating from the rating bureaus.

SEC investigators are calling Boudreaux   “the architect of the scheme”, a charge vigorously denied by his attorney who insists that his client is being made a scapegoat.

The city itself has vowed to fight the charges and Major Tomas Regalado denounced the charges as making the city pay for sins of the past. In a statement released on Friday, vowing to fight the SEC, the city said “The SEC’s lawsuit contains baseless allegations that the City misled the credit rating agencies about the transfers in advance of certain bond offerings conducted by the City in May 2009. In truth, the City discussed the transfers with the rating agencies …’’

The SEC has uncovered at least one smoking gun email where then Finance Director Diana Gomez commented to Boudreaux “As originally stated at the [Feb. 26, 2009] meeting, I do not believe it is fiscally prudent or financially responsible to mask the loss in the General Fund for FY 2008 with these journals”

In 2010, after being fired by then City Manager Carlos Mogoyo, Boudreaux filed a whistleblowers lawsuit alleging that he was fired for refusing to mislead SEC investigators. Another whistleblower lawsuit was filed by Victor Igwe, the city auditor at the time of the budget transfers who in a series of audits questioned the actions, calling them “illegal” after commissioners let his contract expire in June 2011.

Separately SEC investigators are also probing the public financing of the Miami Marlins $634 million ball park in Little Havana, honing in on whether city officials mislead those who voted for the plan.

Both investigations are still ongoing.

For investors this is a classic story of requiring due diligence to be thorough and conducted independently, regardless of who the issuer is and what their alleged reputation is. Few would expect a city to go to such lengths to defraud the public, unfortunately as we can see here it happens.


Accredited Investors and Blue Sky Laws is a leading seller of accredited investor lead lists. Marketers who use our lists to offer private placements should always be aware of the state regulations governing offerings that have been exempted from registration by the Securities and Exchange Commission, since these offerings may also require exemption from state regulations. If an offering is exempt under the Federal securities laws, it does not necessarily imply exemption from state regulations. These state regulations are dubbed blue sky laws because they are aimed at defending potential investors from being duped into purchasing securities with “as much value as a patch of blue sky”.

Thus, state blue sky laws have been established to protect the public from fraud. Each state has its own unique set of laws, but they all lay out regulations for the registration and exemption of securities sold within the state. Also, each state has its own regulatory body to enforce its laws and specify the legal basis for civil law suits. Forty states have adopted model uniform securities statutes, arising from the Uniform Securities Act of 1956, upon which they base their blue sky laws.

In recent years, Federal laws were passed which circumscribed the power of the states to critique, confine or otherwise limit the sale of most securities. The law’s purpose was to remove redundancies occurring among Federal and state securities laws. Currently, the abilities of most states to prohibit registration or exemption from registration of securities offerings that are made on a national or regional basis have been substantially limited. Nonetheless, there are still notice and filing requirements in each state that must be observed. Additionally, Federal legislation did not remove the authority of the state regulators to lead investigations and to pursue legal actions for fraud.

Fortuitously, many kinds of securities, and many security transactions, are exempt from state registration rules. Exemptions under Rule 506  of Regulation D are not subject to state review, with the exception of New York State. Many states provide exemptions for Regulation D private placements, as long as there is complete observance of SEC Rules 501-503. However, though particular kinds of offerings or transactions may not necessitate registration, many states demand filings or place extra conditions on exemptions. An issuer, before offering an exempt security for sale in any state, should retain experienced blue sky counsel to assess the pertinent state regulations and take whatever steps are needed to allow the offering to be made in any given state.

Eric Bank