Enforcement News: SEC Brings Actions Involving the Misappropriation of Client Funds, An Illegal Securities Offering and A Fraudulent Sports Betting SchemePrint Article
- Posted on: Sep 11 2019
In today’s post, this Blog looks at enforcements actions brought by the Securities and Exchange Commission (“SEC”) that involve fraudulent misconduct and the failure to comply with the registration requirements for the offering of securities.
Securities and Exchange Commission v. Toon Goggles Inc.
On September 6, 2019, the SEC announced (here) that it charged Toon Goggles Inc. (“Toon Goggles”), a Los Angeles-based company that offers on-demand entertainment content for children, and its founder, Ira Warkol (“Warkol”), for conducting a $19 million illegal securities offering. The SEC also charged Warkol for acting as an unregistered broker-dealer in connection with the offering.
In the complaint filed in the U.S. District Court for the Central District of California (here), the SEC alleged that from at least August 2012 through late 2016, Toon Goggles and Warkol raised over $19 million from approximately 400 retail investors. According to the SEC, Warkol, acting as an unregistered broker, set up boiler rooms inside Toon Goggles’ offices and hired sales agents to cold-call investors. Warkol allegedly provided the sales agents with scripts to induce investors into purchasing the offered securities. According to the complaint, Toon Goggles also failed to maintain accurate and complete records of its investors, the number of shares sold to each investor, and the amount of money raised from each investor.
The SEC charged Toon Goggles and Warkol with violating the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933, and Warkol with violating the broker-dealer registration provisions of Section 15(a) of the Securities Exchange Act of 1934. Without admitting or denying the allegations in the complaint, Warkol consented to the entry of a final judgment permanently enjoining him from violating the charged provisions, ordering disgorgement plus prejudgment interest of $2 million, and imposing an $189,427 penalty. The settlement is subject to court approval. The SEC’s litigation against Toon Goggles will proceed, with the SEC seeking a permanent injunction, disgorgement plus prejudgment interest, and a civil penalty.
In a separate administrative proceeding, the SEC also charged Toon Goggles’ director of operations, Brendan Pollitz, for facilitating broker-dealer registration violations. Pollitz consented to the entry of a cease-and-desist order (here), and agreed to pay disgorgement plus prejudgment interest of $34,117, and civil penalties of $9,472.
Securities and Exchange Commission v. John F. Thomas
On September 4, 2019, the SEC announced (here) that it brought charges against two individuals and six entities relating to an ongoing, Nevada-based $29 million sports betting investment scheme impacting over 600 investors from more than 40 states, as well as other charges against three individuals and a company who sold the investments.
In the complaint (here), the SEC alleged that John F. Thomas and Thomas Becker, both whom are convicted felons, and several entities controlled by them, promised investors 250% to 600% returns from pooled investments in sports betting, using what they claimed was a proprietary handicapping system. According to the SEC, however, the defendants used the majority of investor money to fund their lifestyles, pay commissions to brokers and agents, or make Ponzi-like payments to other investors. The SEC further alleged that the defendants misrepresented to investors the investment performance of the funds that were actually invested in sports betting. The SEC also alleged that Douglas Martin, Paul Hanson, Damian Ostertag, and a company owned by Martin sold unregistered securities without being registered as brokers or associated with a registered broker.
The complaint, which was filed in the United States District Court for the District of Nevada on August 30, 2019, charged Thomas, Becker, Einstein Sports Advisory, LLC, QSA, LLC, Vegas Basketball Club, LLC, Vegas Football Club, LLC, Wellington Sports Club, LLC, and Welscorp, Inc. with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and the registration provisions of Section 5(a) and 5(c) of the Securities Act. The complaint also charged Martin, Hanson, Ostertag, and Executive Financial Services, Inc. with violating the broker-dealer registration provisions of 15(a) of the Securities Act and the registration provisions of Section 5(a) and 5(c) of the Securities Act.
Securities and Exchange Commission v. E. Herbert Hafen
On September 4, 2019, the SEC announced (here) that it charged E. Herbert Hafen (“Hafen”) with defrauding multiple retail clients by misappropriating approximately $1.6 million of client assets.
According to the SEC’s complaint (here), from 2011 through 2018, Hafen, while employed as a New York City-based registered representative and investment adviser at large financial institutions, engaged in a scheme to defraud his retail clients. The SEC alleged that Hafen convinced his clients that he had access to an investment opportunity separate from those offered by the financial institution at which he worked, and this opportunity would pay an annual six percent return. According to the complaint, Hafen instructed his clients to withdraw their money from the financial institution, including liquidating stock holdings and personal retirement accounts; deposit that money into their personal bank accounts; and then transfer or wire the money to Hafen’s personal bank account. The SEC further alleged that, once Hafen received his clients’ money, he did not invest it as promised, but instead used it for his own personal purposes, including paying house, car, and credit card expenses for himself and family members.
The SEC alleged that Hafen violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC is seeking a permanent injunction, disgorgement plus prejudgment interest, and civil penalties.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Hafen (here).
Commenting on the charges, U.S. Attorney Geoffrey S. Berman said: “Elias Hafen promised his investment clients significant returns in a ‘special’ fund. With fake statements and guaranteed returns, Hafen was every investor’s worst nightmare. He never invested his clients’ money and instead used it to fund his own lavish lifestyle. Today, Hafen admitted his crimes and he will soon likely spend time in prison for his misdeeds.”