Penny Stock Scam, Nasdaq’s Role, Audit Vote: Compliance

Seven people accused of taking part in a $140 million international penny stock fraud that U.S. prosecutors say is one of the largest in history were arrested.

Federal agents arrested six individuals in the U.S. accused of participating in a scheme to inflate the values of at least a dozen worthless stocks and market them to investors, Brooklyn U.S. Attorney Loretta E. Lynch said yesterday. A seventh defendant was arrested in Canada, she said.

The stocks were sold to victims in as many as 35 countries, prosecutors said. Some victims were swindled a second time through a separate scheme in which investors were told they would pay an “advance fee” to recoup their losses, according to prosecutors.

As many as nine individuals were involved in the conspiracy, according to a 24-count indictment filed Aug. 7. Two of the defendants, Canadian citizens Gregory Curry and Sandy Winick, who prosecutors said orchestrated the scheme, are still at large, said Zugiel Soto, a spokeswoman for Lynch.

The government said the scheme took place from 2008 to July 2013. Stocks included Winick’s holding company Blackout Media Corp. (BKMP), along with Resource Group International (RSGR), Imusic Worldwide Inc., WGI Holdings Inc. (WGIH), Talisman Holdings Inc. (TMHO), Nikron Technologies Inc., Tal-Cap Inc. (TALC), RainEarth Inc. (RNER), Sync2 Networks Corp., MASS Petroleum, Liquid Gold International and Foy Johnston Inc. (FOYJ), according to the indictment.

Known as “file cabinet businesses,” the companies had minimal assets, were thinly traded, and were owned or controlled by the defendants, according to prosecutors.

The scheme involved the creation of phony consulting businesses and law firms, the release of fake press releases in connection with the penny stocks, and operation of call centers in Vietnam, Thailand and Canada, according to the indictment.

Winick, believed to be in Thailand, was sued along with Blackout Media by the U.S. Securities and Exchange Commission in June 2009 over similar allegations. The SEC won a $4 million judgment in the case in September 2012.

Defendants are charged with crimes including securities fraud, conspiracy and wire fraud. They face sentences of as many as 20 years in prison.

The criminal case is U.S. v. Winick, 13-cr-00452, U.S. District Court, Eastern District of New York (Brooklyn).

Compliance Policy

U.S. Watchdog Proposes More Disclosure in Auditor Report

Auditors would be required to disclose the most difficult parts of their opinion of a public company’s books under a proposal that would trigger the first change in 70 years to the reports.

The Public Company Accounting Oversight Board voted unanimously yesterday to issue a plan meant to amplify the information investors receive from the auditor’s report. The PCAOB has studied ways to overhaul such reports since the 2008 credit crisis.

The PCAOB’s proposed standard would require auditors to tell investors about matters that proved the most difficult to judge. Auditors also would have to disclose how long they’ve worked for the company, data that could be useful in assessing the auditor’s independence.

The board’s vote opens a 120-day public comment period during which audit firms, public companies and investors will lobby to shape a final standard, which would have to be approved by the Securities and Exchange Commission. The PCAOB was created by the Sarbanes-Oxley Act of 2002 and sets standards for auditors of U.S.-registered firms.

Yesterday’s proposal doesn’t include a requirement for a separate auditor’s report that was considered in a discussion draft the PCAOB issued in 2011. The largest accounting firms, represented by the Center for Audit Quality, opposed a requirement to write a new report for each engagement.

Instead of a separate report, the PCAOB’s proposal calls for auditors to disclose “critical audit matters,” which are typically communicated to the public company’s audit committee.

CFTC Syncs Rules for SEC-Registered Investment Companies

The Commodity Futures Trading Commission said it will accept the U.S Securities and Exchange Commission’s disclosure, reporting and recordkeeping system as satisfying compliance for certain rules affecting commodity pool operators of investment companies registered with both CFTC and the SEC.

The rule allows dually registered firms to meet certain CFTC regulatory requirements for commodity pool operators, or CPOs, by complying with SEC rules, the CFTC said on its website.

Compliance Action

Nasdaq Asks SEC for Greater Role in Equity Exchange Supervision

Nasdaq OMX Group Inc. (NDAQ) asked federal regulators to approve a broader oversight role for the second-largest equity-exchange operator, expanding its supervision of potential market manipulation.

The request to take on some of the policing duties now handled by the Financial Industry Regulatory Authority, the brokerage industry watchdog organization, was made in an Aug. 12 filing with the Securities and Exchange Commission.

Nasdaq’s request to tweak its responsibilities as a self-regulatory organization comes the same month that Wall Street firms asked the SEC to consider stripping public exchanges of their SRO designation. The proposed change would give Nasdaq greater leeway to look for market manipulation, particularly at the open and close of the trading day.

Nasdaq said it will take on oversight for real-time monitoring of compliance by market makers who are also part of any underwriting syndicates. Finra will continue to watch for activities that take place across U.S. stock markets, said Nasdaq, and deal with suspected infractions.

“Nasdaq will continue to refer potentially violative conduct to Finra for further review,” the exchange wrote in the filing. “Moreover, Finra will continue to perform the vast majority of surveillance activity for Nasdaq’s equities markets.”

JPMorgan Trading-Loss Charges Said to Be Announced by U.S. Today

The U.S. may announce charges as early as today related to JPMorgan Chase & Co. (JPM)’s trading losses last year, a person familiar with the matter said.

Former bank employees in London have been investigated by the U.S. Justice Department for more than a year over whether they tried to conceal the losses at the largest U.S. bank, a person familiar with the matter previously said.

JPMorgan lost more than $6.2 billion last year on derivatives bets. The loss, first disclosed in May 2012, led to an earnings restatement, a Senate subcommittee hearing and probes by the U.S. Securities and Exchange Commission and U.K. Financial Conduct Authority.

The episode prompted JPMorgan’s board to cut Chief Executive Officer Jamie Dimon’s pay in half.

Bruno Iksil, the former JPMorgan trader who became known as the London Whale because of the size of his trading book and losses, has been cooperating with the Federal Bureau of Investigation and the Manhattan U.S. Attorney’s Office for months in their probe of the New York-based bank’s biggest trading debacle ever, said three people with direct knowledge with the matter.

Iksil won’t face charges as long as he cooperates and testifies, said the people, who asked not to be named because the matter wasn’t public. It still isn’t clear who may be charged, one of the people said. Those facing U.S. charges include Javier Martin-Artajo and Julien Grout, a trader who worked for him. Prosecutors also are weighing penalties for the bank.

Martin-Artajo said he has cooperated with inquiries into the debacle, according to a statement released by his attorneys.

“Mr. Martin-Artajo is currently on a long-planned vacation and will be returning to the U.K. as scheduled,” according to an e-mailed statement from Norton Rose Fulbright LLP, a London-based law firm.

“Mr. Martin-Artajo has cooperated with every internal and external inquiry which was required of him in the U.K.,” according to the statement. “He received no communication from any governmental regulators, including the Financial Conduct Authority in the U.K. with whom he has fully co-operated, which would indicate that he should not be on vacation at this time.”

“Mr. Martin-Artajo is confident that when a complete and fair reconstruction of these complex events is completed, he will be cleared of any wrongdoing,” according to the statement.

Police showed up at Grout’s home in London last week and his landlord gave them a forwarding address in the south of France, said a person with direct knowledge of the matter. A spokesman for London’s Metropolitan Police declined to comment on whether officers visited Grout’s home. A French citizen, Grout may be difficult to arrest if he’s charged because France has tougher extradition laws than the U.K., the person said.

“He is not a fugitive,” said Edward Little, a partner at Hughes Hubbard & Reed LLP in New York who represents Grout. “He visited the U.S. last month with confidence he was not being indicted and moved to France to save money and look for a job. We did not expect a decision on the investigation one way or another until the fall.”

Jerika Richardson, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, declined to comment yesterday on the investigation. Jim Margolin, a spokesman for the FBI in New York, didn’t immediately respond to a phone message yesterday seeking comment on it.

For more, click here.

Marathon Liquidated PPIP Fund After Earning Treasury 25% Return

Marathon Asset Management LP, one of nine firms selected in the credit crisis to manage a government-subsidized program to revive the mortgage-bond market, liquidated the fund after handing the U.S. Treasury a 25 percent return.

The alternative asset manager sold the last of the fund’s $1.5 billion of residential and commercial mortgage-backed securities holdings in June, the New York-based firm said in a letter dated Aug. 12. Of the managers chosen for the government’s Public-Private Investment Program, Marathon had the highest return on capital with a net multiple of 1.76 times.

Marathon co-founders Bruce Richards and Andrew Rabinowitz, and money managers Andrew Springer and Stuart Goldberg, described the program in a letter to investors obtained by Bloomberg News as “a resounding success for the U.S. Treasury.”

Rabinowitz declined to comment on the letter.

PPIP was started in March 2009 to encourage purchases of devalued real-estate loans and mortgage bonds that helped cause the financial crisis and weighed on banks’ balance sheets.

For more, click here.

KanAm Starts First German Property Fund After New Rule, FAZ Says

KanAm Grund (HZBB) will market a 1 billion-euro ($1.33 billion) to 2.5 billion-euro open-ended real estate fund in the fourth quarter, Frankfurter Allgemeine Zeitung reported, without saying where it obtained the information.

KanAm’s fund is the first to open since new rules limiting investor redemptions were passed, FAZ said. It expects to target a yield slightly above 3 percent, FAZ reported.

German real estate funds dissolved after struggling to meet redemptions.

Credit Immobilier’s French Aid Wins Temporary Extension From EU

The European Union approved today the extension of a state aid guarantee to Credit Immobilier de France of as much as 19 billion euros ($25 billion). In exchange, the bank will have to complete its resolution plan before Nov. 28, the European Commission said in a statement.

Credit Immobilier provides real estate-related lending and operates a network of agencies in France.

Courts

Texas Fruitcake Bakery Executive Looted $16.7 Million, U.S Says

A 117-year-old Texas bakery that ships fruitcakes all over the world had a finance chief with a taste for lavish living, according to federal prosecutors.

Sandy Jenkins, 64, who worked as controller for Corsicana, Texas-based Collin Street Bakery for 15 years, was charged yesterday with embezzling about $16.7 million -- equal to the proceeds of half a million fruitcakes at $32.95 apiece. He used the money to support a lifestyle that included 43 luxury automobiles, a $3 million watch and jewelry collection, a house in Santa Fe, New Mexico, and frequent trips on private planes, the U.S. Attorney’s Office in Dallas said in a statement.

Jenkins was fired in June after the alleged fraud was discovered, according to the statement. He is charged with mail fraud, which carries a maximum prison term of 20 years. He waived a detention hearing and was remanded into custody, according to the statement.

A lawyer for Jenkins, Brett Stalcup, didn’t immediately return a call to his office after regular business hours yesterday seeking comment on the allegations.

The case is U.S. v. Jenkins, 13-mj-00503, U.S. District Court, Northern District of Texas (Dallas).

Interviews

Telekom Austria CEO Says Industry Needs Consolidation

Telekom Austria AG (TKA) Chief Executive Officer Hannes Ametsreiter discussed telecommunications industry regulation and consolidation, and relations with Carlos Slim’s America Movil SAB (AMX), a shareholder in the company.

He spoke with Francine Lacqua on Bloomberg Television’s “On the Move.”

For the video, click here.

To contact the reporter on this story: Carla Main in New York at cmain2@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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