Risk Management

FBI-SEC Action Leads to Kickback Cases

After five separate sting operations involving penny stocks, SEC files civil actions against 7 individuals and 3 firms, while 6 people are hit with...
Roy Harris and Stephen TaubDecember 10, 2007

Federal regulators, targeting five separate schemes that involved penny stocks and alleged kickbacks to a fictitious hedge fund, have criminally indicted six individuals and filed civil charges against 10 individuals or companies they controlled.

The Securities and Exchange Commission said the schemes were uncovered in a Federal Bureau of Investigation sting operation that is part of a recent cooperation agreement between the FBI and the SEC. The criminal prosecutions were conducted by the U.S. attorney’s office for the Southern District of Florida.

According to the commission, the individuals charged are insiders or promoters of publicly traded companies, and live in Florida, New York, California, or Nevada. The individuals made stock sales to a person they believed to be the manager of a West Palm Beach, Calif., hedge fund, Fillmore Capital, paying the manager illegal kickbacks. In reality, however, Fillmore Capital was not a hedge fund, and the manager was an undercover FBI agent.

“This case illustrates the commission’s ability to work together with criminal authorities in creative ways to uncover fraudulent schemes and to protect our markets,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement.

The SEC charged the following with securities fraud: Rex A. Morden of Henderson, Nev.; William L. Haynes of Palm City, Fla.; Efrim Gjonbalaj of Boynton Beach, Fla.; Mark Foglia of Hypoluxo, Fla.; Virgil G. Williams of Escondido, Calif.; and Vincent Cammarata of New York,and Sean P. Sheehan of Juno Beach, Calif., along with corporate entities Affinity Financial Group Inc. of Henderson, Nev., Real Asset Management LLC of Palm City, and Western Financial Services Inc. of Lantana, Fla.

The individuals charged criminally were Foglia, Williams, Morden, Gjonbalaj, and Haynes, according to a joint announcement by U.S. attorney R. Alexander Acosta and Jonathan I. Solomon, the FBI’s special agent in charge for the Miami Field Division. The sixth individual criminally charged was Ron Williams of Miami.

CFO.com’s efforts to reach the individuals and companies were unsuccessful.

According to the indictments, an FBI agent played the role of a corrupt manager of an unregulated hedge fund that had been dubbed Fillmore Capital. The six individuals agreed to pay an undisclosed kickback to the fund’s supposed manager if the manager got Fillmore to purchase certain specified securities.

The individuals charged also agreed to hide the kickbacks to the manager “through a sham consulting contract,” according to the U.S. attorney. The SEC said that all the defendants agreed to pay a kickback, and that with one exception the defendants actually did pay the promised kickback after the hedge fund bought the stock defendants were promoting.

If convicted of all counts, Ron Williams faces a maximum of 20 years in prison and a $250,000 fine on each count. Foglia, Virgil Williams, Morden, Gjonbalaj, and Haynes each face a maximum of 20 years in prison and a fine of $500,000 on each securities fraud count. In addition, Gjonbalaj and Haynes face a maximum of five years in prison and a $250,000 fine on the conspiracy count, and up to 20 years and a $250,000 fine on each wire/mail fraud count.

The SEC is seeking permanent injunctions in the case; an order that Cammarata and Haynes disgorge illegally received gains, with prejudgment interest; and an order imposing civil monetary penalties on all the defendants.

The commission also is seeking an officer and director bar against Virgil Williams and penny stock bars against all the individual defendants.

This is not Haynes’s first brush with federal regulators. The SEC pointed out that Haynes previously was enjoined from further violations of the antifraud and registration provisions of the federal securities laws after he participated in a $7 million offering fraud. In addition, Haynes was previously barred from associating with a broker-dealer based on the entry of the permanent injunction.