February 18, 2019
A Form of Corporate Masturbation?
In a 15-count Indictment filed in the United States District Court for the Western District of New York, eHealth Global Technologies, Inc. former Chief Executive Officer Michael Margiotta was charged with wire fraud, money laundering, and filing a false tax return. The Indictment alleged that between May 2011 and January 2014, Margiotta entered into a contract with Healthcare Network Alliance, LLC (HCNA) for employment recruiting services by which HCNA received a fee totaling 20% of an eHealth employee's base salary for the first year. Allegedly, CEO Margiotta caused HCNA to issue fraudulent invoices to eHealth and then directed subordinate employees at eHealth to pay the invoices. Further, Margiotta caused an individual, identified as Consultant A, to submit fraudulent invoices to eHealth for services actually provided to Action Against Child Maltreatment, Inc., an unrelated entity controlled by Margiotta. The Indictment alleges that Margiotta caused eHealth to pay approximately $455,000 in false and fraudulent invoices, and a substantial portion of those funds were transferred into Margiotta's personal brokerage accounts. Fortax years 2011-2014, Margiotta allegedly falsely overstated his business expenses and/or understated his business income, among other misstatements, and as a result, evaded about $341,000 in federal taxes. Finally, Margiotta was charged with filing false tax returns for his charity, AACM, in order to conceal the improper transfer of $80,000 of AACM's assets to himself.
As set forth in part in the Notice's "Summary":
FINRA warns member firms to be on the lookout for a fraudulent phishing email that is currently circulating. Brokerage firms reported to FINRA that they have received suspicious emails targeting their compliance personnel. The email appears to be from a legitimate credit union attempting to notify the firm about potential money laundering involving a purported client of the firm. The email directs the recipient to open an attached document-which likely contains a malicious virus or malware designed to obtain unauthorized access to the recipient's computer network.
Let's play a game. I'm going to give you one paragraph of clues and I want you to try and guess the name of "Company-I." See if you can take a bite out of the fact pattern and get to the core of the answer:
Company-I was a global technology company headquartered in Cupertino, California that designed, developed, and sold consumer electronics, computer software, and online services. Company-I was a publicly traded company whose securities were listed on the NASDAQ Stock Market. In terms of market capitalization, Company-I was consistently among the most valuable companies in the world.
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC alleged in part that:
READ the SEC Complaint https://www.sec.gov/litigation/complaints/2019/comp24403.pdf
According to the SEC's complaint, from approximately December 2012 to June 2013, microcap stock financier Magna Group, which was founded and owned by Joshua Sason, engaged in a scheme to acquire fake convertible promissory notes supposedly issued by penny stock issuer Lustros Inc. and then to convert those notes into shares of Lustros common stock. The defendants then sold the shares to unsuspecting retail investors, who did not know that the shares were fraudulently acquired and were being sold illegally. The defendants' sales of the Lustros shares also had the effect of destroying the value of the Lustros shares held by the public. The complaint alleges that Marc Manuel, Magna Group's former head of research and due diligence, personally negotiated and executed the sham transactions.
The complaint also alleges that in November 2013, Magna Equities II, which was also wholly-owned by Sason, and Manuel, purchased another fake promissory note from Pallas Holdings. Magna Equities II and the note's issuer, NewLead Holdings, Ltd., later agreed to retire the fake debt in exchange for shares of the issuer through a court-approved settlement agreement. To obtain approval of the settlement, Sason and Magna Equities II falsely swore to the court that the fake promissory note was a bona fide debt of NewLead. Kautilya "Tony" Sharma and Perian Salviola, who controlled Pallas Holdings, are alleged to also have participated in the scheme.
In furtherance of those allegations, the SEC seeks permanent injunctions, disgorgement plus prejudgment interest, a civil money penalty, and penny stock bars. Pointedly, the Complaint alleges that :
- Joshua Sason, the founder/owner of Magna Group, violated Sections 5 and 17(a)(2) of the Securities Act of 1933 (the "Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5(b) thereunder, and that he is liable as a control person for the violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by Magna Group, Magna Equities II, and a third entity alleged to have been involved in the NewLead scheme, MG Partners, Ltd. ("MGP") (collectively, the "Magna Entities");
- Marc Manuel, former Head of Research and Due Diligence of Magna Group, violated Sections 5 and 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c) thereunder, and that he is liable for aiding and abetting the violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by Sason and the Magna Entities;
- Magna Group violated Sections 5 and 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c) thereunder;
- Magna Equities II violated Sections 5 and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;
- MGP Group violated Sections 5 and 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c) thereunder; and
- Sharma, Salviola, and Pallas Holdings each violated Sections 5 and 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c) thereunder, and that each aided and abetted the violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by Sason, Manuel, and the Magna Entities.
In a Complaint filed in the United States District Court for the District of New Jersey, the SEC alleged that in response to a demand for a $2 million bribe by an Indian government official of the state of Tamil Nadu from the construction firm responsible for building Cognizant Technology Solutions Corporation's 2.7 million square foot campus in Chennai, India, Cognizant's President Gordon Coburn and Chief Legal Officer Steven E. Schwartz authorized the contractor to pay the bribe, and, thereafter, directed their subordinates to conceal the payment via change orders. Further, the Complaint alleges that Cognizant authorized the construction firm to make two additional bribes totaling over $1.6 million. The Complaint asserts that the cited conduct was in violation of the Foreign Corrupt Practices Act ("FCPA"). The Complaint charges Coburn and Schwartz with violating anti-bribery, books and records, and internal accounting controls provisions of the federal securities laws. The SEC is seeking permanent injunctions, monetary penalties, and officer-and-director bars against Coburn and Schwartz. In a parallel proceeding, Without admitting or denying the allegations in an SEC Order, Cognizant agreed to pay disgorgement and prejudgment interest of approximately $19 million and a penalty of $6 million.The Order found Cognizant in violation of Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.
Coburn and Schwartz were charged in an Indictment with one count of conspiracy to violate the FCPA, three counts of violating the FCPA, seven counts of falsifying books and records, and one count of circumventing and failing to implement internal accounting controls. Prosecution of Cognizant was declined after considering the factors set forth in the Department of Justice's Principles of Prosecution of Business Organizations and the Corporate Enforcement Policy, including the firm's prompt voluntary self-disclosure, cooperation and remediation, as well as its disgorgement.
Indictment (Coburn/Schwartz) https://www.justice.gov/opa/press-release/file/1132691/download
In a Complaint filed in the United States District Court for the District of New Jersey, the SEC alleged that while employed on the wealth syndicate desk of two different brokerage firms, Brian Hirsch entered into undisclosed arrangements with certain customers in violation of the firms' initial pand other public offering allocation policies and procedures. Online FINRA BrokerCheck records disclose the two firms as Stifel, Nicolaus & Co. and Barclays Capital. The SEC Complaint that Hirsch provided customers with preferential access to and larger allocations of public offerings; and, pursuant to such access, the customers made cash payments to him of up to 25% of the profits realized in secondary-market sales. Accordingly, the SEC also charged two of Hirsch's customers, and they entered into partial settlements. On December 19, 2017, in a parallel criminal action, Hirsch pled guilty to one count of violating the Travel Act. On February 13, 2019, a final judgment was entered by consent against Hirsch
permanently enjoining him from future violations of Section 10(b) of the Exchange Act and Rule
10b-5 thereunder, and imposes a total of $783,600 in disgorgement plus prejudgment interest. The judgment provides that the disgorgement is deemed satisfied by $800,000 in forfeiture that was ordered against Hirsch in the criminal proceeding. The SEC has also issued an administrative order barring Hirsch from any association with any broker-dealer, investment advisor, or other securities industry participants.
SEC Complaint https://www.sec.gov/litigation/complaints/2017/comp-pr2017-234.pdf SEC Order https://www.sec.gov/litigation/admin/2019/34-85161.pdf
2Cir Vacates Broker Scott Valente's Prison Sentence As Based On Incorrect Criminal History
United States of America, Appellee, v. Scott Valente, Defendant/Appellant (Opinion, United States Court of Appeals for the Second Circuit, 15-CR-00124 / February 15, 2019)
http://brokeandbroker.com/PDF/Valente2Cir.pdf Former registered investment broker Valente perpetrated frauds on clients of The ELIV Group, LLC, an unregistered investment and consulting groupt owned and operated by Valente. After Valente was barred by FINRA in 2009 pursuant to findings of unauthorized trading and generating false account information, he established ELIV in 2010 by arranging for his wife to serve as the firm's nominal owner. As set forth in part in the 2Cir Opinion:
The SEC moved for a preliminary injunction against Valente and ELIV, which the United States District Court for the Southern District of New York granted in June 2014, ordering Valente and ELIV to cease operations and freezing their assets. The SEC's analysis of ELIV's financial records revealed that, between November 2010 and June 2014, Valente, through ELIV, had obtained approximately $10.5 million from more than 100 investors. The SEC investigation revealed that, as of the date of the asset freeze, ELIV had suffered significant losses, as ELIV's investments were worth approximately $4.7 million less than what investors had provided in principal. It also revealed that these losses were not attributable solely to poor investment strategy, as Valente had appropriated approximately $2.2 million of the funds invested for personal expenses, which was well in excess of the 1% management fee that he had promised investors.
On May 11, 2015, Valente waived indictment and pleaded guilty in the
6 Northern District of New York. He was sentenced on November 20, 2015, and resentenced on July 20, 2017, as mentioned above. This appeal revisits certain criminal history issues discussed in the initial appeal and addresses the amended restitution order.
Pages 6 - 7 of the 2Cir Opinion
At resentencing, Valente was found subject to a Criminal History Category IV Guidelines range of 210 to 262 months based upon multiple state convictions related to driving while intoxicated. 2Cir found that Valente should have been deemed a Category III subject to 188 to 235 months. As set forth in the Syllabus:
Appeal from an amended judgment of conviction of the United States District Court for the Northern District of New York entered on July 21, 2017 (Sharpe, J.). The defendant contends that his sentence was procedurally and substantively unreasonable and that the district court lacked authority to impose the amended restitution order that it imposed on resentencing. We VACATE in part the district court's sentence of incarceration as procedurally unreasonable because of an incorrect criminal history finding and REMAND on that issue, but we AFFIRM the district court's imposition of the amended restitution order.