Florida Securities Fraud Lawyer Blog

FINRA says that a brokerage firm it recently expelled committed securities fraud. MICG Investment Management LLC of Newport News, Virginia, committed fraud in the management of a proprietary hedge fund. FINRA is also suing the firm for misusing investors' funds and causing false account statements to be issued to investors.

FINRA had shut down MICG when the firm failed to meet its net capital requirement. The hedge fund -- MICG Venture Strategies LLC -- was organized and managed by MICG. FINRA's complaint charges that MICG and its owner, Mr. Martinovich, improperly assigned excessive asset values to two non-public securities owned by the hedge fund, and then used the excessive asset values as the basis for paying unjustified management and incentive performance fees.

Mr. Martinovich was also charged with fraudulently inducing an elderly, non-accredited MICG client to invest $75,000 in the hedge fund.

Mr. Martinovich and MICG received a management fee of $337,000 from the hedge fund. FINRA says the other overvalued investment was a stake in a soccer club, Derby County FC, which plays in the second tier of England's professional league.

Mr. Martinovich allegedly sent an e-mail to staff members in December 2008 instructing them to change the value of the hedge fund's interest in the shares of the club to $7.6 million. FINRA claims MICG had purchased the shares about a year earlier for $5 million.

While this was a Virginia broker dealer, FINRA appears to be doing an increasingly more vigilant job in enforcing the net capital requirement against firms, including those in Florida. This likely can be attributed to the scathing criticism regulators have taken since the Madoff crisis broker in December 2008.

A New Jersey family is suing Donald Rowe and The Wall Street Digest newsletter, based out of Sarasota, Florida. The Formica family alleges Rowe accepted large fees from promoting Art Nadel's hedge funds, along with several other investment funds. The family estimates their losses to exceed $6 million and their attorney also moved to have Rowe's wife added to the lawsuit, alleging she received in excess of $2 million from distributions of the Nadel funds.

In addition to this being the second lawsuit brought against Rowe and the Wall Street Digest, the court-appointed receiver in the Art Nadel case has sued Rowe for $8.6 million. Furthermore, Rowe's relationship with Nadel and his partners has spawned a lawsuit against the national law firm Holland & Knight.

The Formica family says they trusted and indeed relied heavily on Rowe and the advice provided in his newsletter for their investments. The family became so close with Rowe that they spoke frequently on the phone.

The lawsuit claims false statements were made through the Digest from 2000 through 2004, and the Nadel funds became worthless in 2009. The family goes on to say that Rowe failed to perform any due diligence related to these funds, as any meaningful due diligence would have revealed the fraudulent money pyramid.

This is yet another example of a Ponzi Scheme or other investment fraud originating out of Florida. The sad part is that most investors who lose their investments in a Ponzi Scheme recover less than 20 cents on the dollar of their losses. If you know an investor who has lost money in a Ponzi Scheme, he or she should seek out competent counsel with experience in this area.

The SEC has charged two Boca Raton, Florida residents for illegal short selling of securities in secondary offerings. These charges mark the initial enforcement claims that the SEC has brought pursuant to Rule 105 of Regulation M against defendants with no securities industry background.

In separate orders issued by the SEC, the SEC charged Peter Grabler with repeatedly violating Rule 105 over two years for profits of $636,123. The SEC charged Leonard Adams with violating Rule 105 for profits of $331,387.

Both Grabler and Adams engaged in a strategy of participating in numerous secondary offerings of stock in public companies to improve their access to initial public offerings underwritten by the same broker-dealers through which they participated in the secondary offerings.

Grabler and Adams agreed to pay a combined total of more than $1.5 million to settle the SEC's charges.

Short selling before offerings can reduce the proceeds received by public companies by artificially depressing the market price shortly before the company prices its offering. The SEC amended Rule 105 prevents this trading practice known as "shorting into the deal." The revised rule generally prohibits the purchase of offering shares by any person who sold short the same securities within five business days before the pricing of the offering.

In settling the SEC's charges without admitting or denying the SEC's findings, Grabler and Adams separately consented to cease and desist from violating Rule 105.

On April 22, 2010, Florida authorities arrested insurance agent Steven M. Brasner, who worked with Infinity Financial Group LLC in Davie, Fla., on charges that he falsified information on elderly clients' life insurance applications to sell the applications on the secondary market.

Axa Equitable Life Insurance Co. initially notified Florida's state regulators of the questionable insurance policies, as its clients directly suffered from Brasner's fraud. In doing so, Axa was adhering to Florida law that requires insurance carriers to report suspected fraud activity. According to Axa's spokesman Michael Arcaro, "We have a longstanding policy of not knowingly selling a life insurance policy to anyone whose reason for buying it is to sell it to an investor." The insurer has since rescinded all of the policies.

Florida's Finance Chief and Attorney General claim that Brasner created a scheme to sell policies taken out on the lives of senior citizens on the secondary market, and then induced elderly investors into buying a policy. As part of the scheme, he falsified the clients' net worth on the policy applications.

Brasner also misrepresented to these investors that he would pay them 3% to 5% of the face value of the life insurance policies - following the two-year contestability period - when the contracts were sold over the secondary market. He also allegedly told the elderly Axa clients that they wouldn't have to pay for the premiums out of pocket.

Though it's legal to sell insurance policies on the secondary market, one cannot purchase insurance with the primary purpose of selling it later, as it violates state insurable interest laws. Axa said it has documented five cases where Brasner filled out life insurance applications for senior citizens and submitted them, accompanied by certifications indicating that the policies would not be sold or transferred on the secondary market.

Brasner made over $1.6 million in commissions on the policies at issue, based on some $78 million in total death benefits. He faces 22 counts of grand theft, insurance fraud and aggravated white collar crime.

On April 21, 2010, the Securities and Exchange Commission filed an action in the U.S. District Court for the Southern District of Florida, against a prominent Miami Beach-based businessman, Nevin K. Shapiro, alleging that he conducted a $900 million offering fraud and Ponzi scheme targeting more than 60 investors nationwide.

The SEC claims that from February 2003 through November 2009, Shapiro, the founder and president of Capitol Investments USA Inc., (Capitol), a Miami Beach-based grocery diverter, sold promissory notes that offered annual returns ranging from 10% to 26%. These promissory notes were allegedly backed by purchase orders and receivables generated by Capitol's food brokerage business. Capitol operated at a loss since late 2004, however, and essentially had zero operations by 2005, when, in a classic Ponzi scheme fashion, Shapiro began using funds from new investors to pay principal and interest to earlier investors.

Capitol's business as a grocery diverter involved purchasing lower-priced groceries in one region and re-selling them for a profit to another region with higher prices. According to the SEC's complaint, Shapiro used his business relationships and word-of-mouth to solicit investors and sell them short term promissory notes. In doing so, Shapiro made numerous misrepresentations to the investors, including that: (1) he would use their funds as short term financing to purchase and resell groceries for Capitol's business; (2) Capitol was financially successful; and (3) Capitol would pay the principal and interest from the profits it received when it resold the goods. Moreover, Shapiro showed investors fabricated invoices and purchase orders for sales that did not exist whenever the investors questioned Capitol's business.

The SEC further claims that Shapiro misappropriated at least $38 million of investor funds to support his lavish lifestyle and finance outside business ventures unrelated to the grocery business, including a sport representation business and real estate ventures. He also used approximately $13 million of investor funds to pay large undisclosed commissions to individuals who attracted other investors.

The SEC has charged Shapiro with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.