We have set out below summaries of some of the recent litigation files from the archives of the US Securities and Exchange Commission (SEC). Here you will get a flavour of the types of scams that we have discussed on our site. If you are interested in reading the full file just click on the decision number. This page is update regularly as SEC updates its files.

LR No. 16435/ February 14, 2000 and LR No. 15949/October 27, 1998

The Great White Tout and Scalp

In October of 1998, the SEC filed a complaint against Anita Carlisle d/b/a Carlisle Communications (Carlisle), Scott Sitra (Sitra), Sitra Enterprises, Inc. (Sitra Enterprises), JAFLC Capital Management Ltd. (JAFLC) and Jeffrey Brommer d/b/a Investments 101 Ltd. (Brommer) (collectively, the defendants). On February 14, 2000, the SEC announced that Sitra had a final judgement entered against him without admitting or denying liability.

This complaint is interesting because it illustrates the fraudulent practice of "scalping" and "illegally touting" securities contrary to federal securities laws.

It all started with a company called Great White Marine and Recreation, Inc. ("Great White"), whose stock was quoted on the OTC Bulletin Board Service. The defendants each had an agreement with Great White to deliver "investor relations" which included the defendants publishing and circulating favorable promotional information about Great White in exchange for Great White stock and/or money.

Now you would say what is wrong with that given that the reason most "investor relations" companies are hired is to provide such services. Unfortunately, the defendants are accused of failing to tell the public that they were selling their shares at the time when they were also telling the public to buy shares of Great White. This practice is called "scalping". The defendants were also accused of speaking glowingly about the company and recommending investors to purchase Great White with disclosing their compensation arrangement with the company. This is also forbidden and is known as illegally "touting" securities.

Most investor relations companies will disclose their compensation arrangements in a disclaimer at the end of newsletters or in the disclaimer section of their web site. Please read such disclaimers carefully and undestand that the glowing reports by the investor relations company might not be totally impartial.

Please read the case summaries for more detail.

LR No. 16436/ February 14, 2000

Why acting on a hot tip can get you into hot water.

Many people like to trade on so-called "hot tips". Here is a case where the hot tip was a true insider tip with the result that the insider and the person acting on the tip were both convicted.

John C. Larrabee (Larrabee) was the Director of Fiduciary Services for the Boston law firm of Bingham, Dana & Gould, and James L. D'Angelo (D'Angelo) was a stockbroker at PaineWebber, Inc. in Andover, Massachusetts. Larrabee, who was not a lawyer, was in charge of Bingham, Dana's department that administered trusts of the firm's clients. In that role, he chose the stockbrokers who would execute the securities trades in those trust accounts. For a number of years, Larrabee had been referring the majority of that business to D'Angelo.

In early December 1995, Bank of Boston retained Bingham, Dana to represent it in connection with its confidential proposed merger with BayBanks. The indictment alleged that Larrabee learned of the pending deal, and on the afternoon of December 12, 1995, tipped D'Angelo. D'Angelo promptly purchased $870,048 worth of Baybanks stock. Bank of Boston and BayBanks publicly announced the merger that evening. The next morning, D'Angelo sold all of the stock for an $86,750 profit.

The result: On February 11, 2000, D'Angelo and Larrabee were each sentenced one year and 9 months in prison on nine counts of securities fraud for insider trading. It goes without saying that most hot tips amount to hot air. But if the "hot tip" is in reality "insider information", then you might end up in hot water.

Litigation Release No. 16428 / February 7, 2000

Primed for Fraud - Prime Bank Fraud

Here is an example of a Prime Bank fraud which resulted on February 7, 2000, with the SEC filing a civil injunctive action against TAC International Ltd., a Bahamas corporation, and its senior officers. The defendants have been accused of selling fraudulent prime bank securities from the summer of 1996 until August of 1997. The complaint alleges that the defendants represented to US investors that by buying a Bahamian International Business Corporation ("IBC"), investors could participate in high yield debentures between and among banks not available in the United States. These debentures purported to give investors, at no risk to principal, $20,000 from the original $1,500 investment - an annual return of 1,300%. No wonder investors would be anxious to invest.. The complaint alleges that the money was not used for trading these debentures but used to pay for lifestyles and and personal expenses. The alleged end result: $12 million taken from US residents with each investor having to ante up a minimum of $1,500 to access these debentures. Advice: Nothing is risk free and don't believe promises to make such incredible gains.

For more information, please read the case summary.

Litigation Release No. 16417 / January 24, 2000

Knowledge of Financials didn't help

We had previous summarized this case a few months back and decided to give an update as a result of the SEC announcing that it accepted settlement offers made by 2 defendants in the civil action brought by the SEC on September 28, 1999, against seven former executives of KnowledgeWare, Inc. ("KnowledgeWare"), a computer software company. This case illustrates that you can't believe everything you read in the financial statements of the public company that you following. The defendants were accused of carrying out a multi-million dollar financial fraud scheme that materially inflated KnowledgeWare's reported earnings during KnowledgeWare's fiscal year ended June 30, 1994 ("Fiscal Year 1994"). Apparently, the defendants had inflated the financial results by parking inventory with software resellers and other supposed customers and giving such resellers and customers the right not to pay for the software, either orally or in "side letters" that were kept separate from the other sales documents. The complaint also accused the defendents of using side letters to create sham software sales to receive excess incentive compensation as a result of the sham sales. Keep this case in mind when you are looking at a microcap stock trading over the counter.

For more information, please read the case summary.

Litigation Release No. 16399 / January 5, 2000

Where not to Park your money - at Tokyo Joe's.

On January 5, 2000, the SEC filed an action charging that Yun Soo Oh Park a/k/a Tokyo Joe (Park), and Tokyo Joe's Societe Anonyme Corp. (Societe Anonyme), a corporation under Park's control, for essentially front trading all of his recommendations without disclosing this fact to this subscribers. Park provided investment advice through his web site, known as "Tokyo Joe's", through his e-mail to his subscribers and through his real time chat room within his web site. Clients apparently paid $100 to $200 per month to Societe Anonyme for the privilege of receiving his advice. According to the SEC, Park would purchase shares of the companies before the recommendations to his clients. He then would pump up his client's interest in the stocks and represent that his picks were sure things or close to it and then he would sell the same stock at higher prices while his clients were buying. The only problem was that he never told his clients any of this. He is further accused of posting false and misleading performance data on his web site of winning trades that he did not actually make. This case makes good reading of the type of practices some promoters have engaged in. I highly recommend your reading the full case summary.

LR No. 16412/ January 19, 2000

SEC Charges hedge fund and its adviser with fraud

On January 18, the SEC filed an emergency enforcement action charging Michael W. Berger, a hedge fund adviser, with securities fraud. Charged as well were Manhattan Investment Fund Ltd., a hedge fund organized and managed by Berger, and Manhattan Capital Management Inc., an investment adviser owned by Berger. The SEC alleges that starting in September 1996, Manhattan Investment Fund began to sustain market losses that ultimately totaled more than $300 million while at the same time Berger was reporting to investors that the fund had returns of between 12 and 27 percent annually. The SEC claims that Berger’s investment strategy was that the stock market generally, and stocks of internet related companies particularly, were overvalued, and that there would be a market correction in which the prices of many internet related stocks would decline sharply. Berger sold these securities short, in order to profit from the anticipated decline. Unfortunately for Berger, the market and internet stocks have enjoyed dramatic increases over the last couple of years. The SEC alleges that the Berger sent out false accounts to his clients overstating the Fund’s performance. The fund had approximately 280 investors. Berger had raised over $350 million for the fund which by August 1999 was reduced to less than $28 million.

For actual details please read the actual SEC case summary.