Legal

China RTO Maven Siris Accused of Fraud

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Peter Siris and  Guerrilla Capital Management stand accused of fraudulent involvement in reverse mergers involving China-based companies, according to a Securities and Exchange Commission order that requires Siris to respond to the allegations this month. PlacementTracker data indicate that Guerrilla invested $52 million in 66 PIPEs, secondaries and Regulation S deals since 2000. The most recent of those investments was a 2010 CMPO offering from SmartHeat (HEAT), which is currently the defendant in at least two class action suits. One of those suits "alleges that, throughout the Class Period, SmartHeat's Chief Executive Officer, James Jun Wang, sold $23 million of his shares in violation of several SEC rules" according to a news release from the plaintiffs' law firm. "This rapid sale of SmartHeat's stock onto the market caused its stock price to plummet."

Legal

SEC, FINRA Bust Algo Busters

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While computerized and algorithmic trading specialists have often been eyed as trading troublemakers, the tables were turned in a FINRA settlement with market manipulators accused of using illegal tactics to take advantage of buy and sell algorithms. FINRA teamed up with several exchanges to levy a $3.4 million penalty on Hold Brothers On-Line Investment Services, which also reached a $2.5 million settlement with the Securities and Exchange Commission. FINRA and the SEC both alleged that two entities controlled by Hold principals engaged in illegal trading and lacked money laundering controls from 2009 through 2011. Hold did not dispute accusations that some of the traders associated with the two entities, Demostrate and Trade Alpha, indulged in trading activity that was illegal in itself and at the same time directed at using misinformation to thwart trading algorithms used by other firms.

The allegedly illegal trading involved layering and spoofing, which occur when bogus trades are placed and then canceled. Spoofing involves bogus orders placed inside the legitimate national best bid or offer and then canceled after spread or market depth has changed to suit the spoofer’s plans. Layering takes place when numerous trades are placed on one side of the market to distort supply and demand and, resulting in what FINRA calls “artificially moving the price of the security.” The layering trader takes the other side of the manipulated bid or offer, and the layering trades are canceled after they have caused a change in the bid/ask spread or triggered trades.

Legal

SpongeTech Inquiry Leads to Another Sanction

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Former SpongeTech Delivery Systems CFO Steven Moskowitz has been sanctioned by the Securities and Exchange Commission, which barred him from practicing before the commission as an accountant. The bar came as a result of a stock manipulation scam in which Moskowitz earlier pleaded guilty to a criminal charge of securities fraud. Another associate, Myron Weiner previously agreed to disgorge $1.3 million in a civil suit. The commission alleged “that from at least April 2007, Moskowitz and others engaged in a scheme to increase demand illegally for, and profit from, the unregistered sale of publicly-traded stock in SpongeTech by, among other things, ‘pumping’ up demand for SpongeTech stock through false public statements about non-existent SpongeTech customers, fictitious sales orders, and phony revenue.”

The SEC halted trading of SpongeTech shares in October 2009, at which time regulators cited a variety of issues with the company’s financials. It had not filed anything with the commission since February 2009.

Legal

Hedge Fund Complication at Heart of Western Pacific Action

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Western Pacific Capital Management failed to disclose hefty 10% commissions for marketers of its products, according to a settlement with regulators. But the agreement with the Securities and Exchange Commission goes beyond the fee issue to illustrate how investing in hedge funds and other private entities can involve liquidity issues and complex conflict of interest dilemmas. The ruckus with regulators started with Western Pacific’s placement agent activities for unregistered offerings of Ameranth Inc. stock in 2005 and 2006, according to the settlement. (Ameranth is unrelated to the defunct hedge fund Amaranth Advisors.)

The company and its principal Kevin James O’Rourke, who were not registered brokers, were to receive 10% “success fees” for placing sales of the stock. Ultimately, Western earned about $482,000 in such fees.