Florida Securities Fraud Lawyer Blog

The SEC has charged two South Floridians, posing as money managers, with an illegal scheme of selling shares of stock before the shares had been paid for. According to allegations filed in federal court in New Jersey, the SEC has charged Scott Kupersmith of Boca Raton and Frederick Chelly of Miami Beach of opening accounts with broker-dealers, on behalf of several purported "investment funds," and ultimately causing millions in losses.

Kupersmith and Chelly would open "Delivery Versus Payment/Receipt Versus Payment" ("DVP") brokerage accounts in the name of their purported investment funds. Chelly opened a DVP in the name of Antibe Arbitrage Group, Inc., while Kupersmith opened DVP's in the name of Atlantic Southern Capital Group, Fullerton Capital Group, Inc., and Northbrea Capital Group, Inc. Kupersmith and Chelly opened these accounts by convincing broker-dealers that they held sufficient cash and securities with a third-party bank to cover their trades. Of course, Kupersmith and Chelly held no such funds or assets to cover their trades.

Then, the two would engage in illegal "free-riding," where they would buy and sell the same quantity of the same stock in different accounts with the intent of profiting from swings in the price of the stock. In most instances, Kupersmith and Chelly used the proceeds from their stock trades to purchase the same shares over again. When their trades were profitable, Kupersmith and Chelly kept the profits. When the trades resulted in loss, however, Kupersmith and Chelly did not cover the sales they had ordered and left the broker-dealers to settle the trades at a significant loss.

The scheme fell apart when Kupersmith and Chelly started failing to deliver the shares necessary to settle sales in their various DVP's. This forced broker-dealers to purchase replacement shares to cover the sales transaction. Because the broker-dealers had to purchase replacement shares at higher prices than those at which the shares were sold, the broker-dealers suffered losses equivalent to the difference between the replacement purchase price and the proceeds from the sale.

By the end, Kupersmith and Chelly had caused over $2 million in losses to broker-dealers. The two men reaped over $600,000 in illicit profits. The SEC has charged both men with violations of section 17(a) of the Securities Act and section 10(b) of the Exchange Act, seeking an injunction against further violations, disgorgement of "ill-gotten gains," and civil penalties. Kupersmith also faces charges in New York, including first and second-degree grand larceny, scheming to defraud, and violating New York's General Business Law.

WEST PALM BEACH - The law firms of McCabe Rabin, P.A. and Bruce E. Reinhart, P.A. announce the payment of a $3.1 Million qui tam settlement, including attorney's fees, that they and Department of Justice attorneys reached with Midtown Imaging, LLC ("Midtown") and its former owners for claims alleged by two radiologists (the "Relators"). Midtown owns several diagnostic imaging centers in Palm Beach County, Florida. The Relators worked for a radiology group that provided medical services to Midtown. The Relators filed their claims under the Federal False Claims Act (31 U.S.C. S 3729), known as the federal whistleblower statute.

On November 12, 2009, the Relators filed their qui tam action in the United States District Court for the Southern District of Florida (Case No. 09-82209). The complaint alleged that Midtown submitted false claims to Medicare between 2000 and 2008 by entering into certain leasing and professional services agreements with referring physicians and physician groups that violated the federal Anti-Kickback Statute and Stark Law.

The Anti-Kickback Statute prohibits offering, paying, soliciting or receiving remuneration to induce referrals of items or services covered by Medicare, Medicaid or other federally-funded programs. The Stark Law prohibits a medical center from profiting from patient referrals made by a physician with whom the center has an improper financial arrangement.

A copy of the settlement agreement may be found in the court file at https://ecf.flsd.uscourts.gov/cgi-bin/login.pl. The Relators' share from the $3.1 million settlement is $700,000, inclusive of attorney's fees.

In addressing the settlement, the Relators' qui tam lawyer and co-counsel, Adam Rabin, said "We are very pleased with the settlement after several years of hard work and analysis of the complex referral schemes. We are happy that our firm was able to work so well with the Department of Justice and the United States Attorney's Office in bringing this case to a favorable resolution." The Relators' qui tam attorney and co-counsel, Bruce Reinhart, added, "I believe my prior experience as a federal prosecutor was extremely valuable to our clients' case. It expedited our review of the schemes, it helped us focus our presentation of the claims to the Department of Justice, and it facilitated our cooperation with them."

For more information, contact the following:

Adam T. Rabin, Esq.
arabin@mccaberabin.com
Ryon M. McCabe, Esq.
rmccabe@mccaberabin.com
McCabe Rabin, P.A.
1601 Forum Place, Suite 505
West Palm Beach, FL 33401
877-915-4040
Web: www.mccaberabin.com/lawyer-attorney-1408674.html

Bruce E. Reinhart, Esq.
breinhart@brucereinhartlaw.com
Bruce E. Reinhart, P.A.
250 South Australian Avenue, Suite 1400
West Palm Beach, FL 33401
561-202-6360
Web: www.brucereinhartlaw.com/practice.php

This week, FINRA announced that it has charged Merrill Lynch with failing to supervise one of its employees who successfully ran a Ponzi scheme using Merrill Lynch accounts. According to FINRA's findings, Bruce Hammonds misrepresented to investors that his company, B&J Partnership, invested in oil contracts, S&P index futures, and international hedge funds. Hammonds promised investors returns from 30 to 100 percent and told them that B&J was affiliated with Merrill Lynch. Instead, Hammonds invested less than 10% of the funds and pocketed the rest. Hammonds engaged in these fraudulent transactions undetected, attracting over $1 million in investments from eleven individuals, for over ten months. Hammonds was permanently barred from the securities industry in 2009.

Merrill Lynch never approved of Hammonds's activities, but the company approved his request to open an account in B&J's name. Hammonds told his employers that he was funding the account with proceeds from his house-flipping business. This representation was belied by B&J's partnership agreement, which stated that the firm was formed to conduct a securities business with Hammonds as president. Merrill Lynch never reviewed B&J's partnership agreement as part of the account approval process.

Until last year, Merrill Lynch used its Employee Activity Review System ("EARS") to monitor employee account activities. The flaw with EARS was that it monitored accounts opened using the employee's social security number or accounts that employees self-reported as "employee-interested." Hammonds opened B&J's account using its own tax identification number, not his social security number, and never indicated that B&J's accounts should be monitored by EARS.

FINRA found that EARS was inadequate to monitor and supervise employee accounts for compliance with NASD and FINRA rules. Specifically, FINRA concluded that Merrill Lynch should not have relied on employees to self-report their interests in accounts. Because the firm did not have a system in place to ensure that all employee-interested accounts were reviewed by EARS, Merrill Lynch failed to monitor roughly 40,000 employee and employee-interested accounts from 2006 to 2010. After the Bank of America takeover, Merrill Lynch transitioned to a new system to monitor employee accounts.

After Hammonds's fraud was discovered, Merrill Lynch reimbursed investors for their losses. FINRA levied a fine of $1 million. The firm neither admitted nor denied the charges but consented to the entry of FINRA's findings and conclusions.

On October, 6, 2011, the SEC received an emergency court order to stop a Ponzi scheme that promised investors high returns on water-filtering natural stone pavers, but defrauded them of over $26 million during a four-year period. The SEC's complaint states that, among others, convicted felon Eric Aronson bilked investors in PermaPave Companies, a web of companies based in Long Island, N.Y., and controlled by Aronson.

The scheme involved over 140 investors during 2006-2010, many of whom worked in the construction or landscaping business. Representations were made to investors that PermaPave Companies had a high volume of orders for the pavers, which would yield monthly returns to investors of 7.8% to 33%. In reality, there was not much demand for the pavers, and its cost far exceeded sales revenue.

Without the promised returns, Aronson and two other PermaPave Companies executives, Vincent Buonauro Jr., and Robert Kondratick, had to pay earlier investors with funds from new investors and then took a large portion of the funds for themselves. In doing so, they bought luxury cars, gambling trips to Las Vegas, and jewelry. Aronson also used investors' funds to satisfy court-ordered restitution payments to victims of an earlier scheme that he operated in 2000.

According to the SEC New York Regional Office's Director, George S. Canellos, "Aronson and his associates operated the PermaPave Companies as a classic Ponzi scheme. They created the façade of a profitable business, promised investors extraordinary rates of return, and used much of their investors' money to fund their own lavish lifestyle."