MADOFF FORMER EMPLOYEE CHARGED BY SEC FOR ROLE IN PONZI SCHEME

The following excerpt is from the SEC website:

“Washington, D.C., Nov. 21, 2011 – The Securities and Exchange Commission today charged a longtime Bernie Madoff employee with fraud for his role in creating fake trades to facilitate the massive Ponzi scheme.

The SEC alleges that David Kugel, who worked at Bernard L. Madoff Investment Securities LLC (BMIS) for nearly four decades, was asked by Madoff to provide the firm’s investment advisory operations with backdated arbitrage trade information to be formulated into fictitious trading on investors’ account statements. Kugel’s own account at BMIS was among those in which backdated trades were entered, and he withdrew nearly $10 million in “profits” from the fictitious trading over several years.
"Kugel helped Madoff maintain the elaborate and enduring facade that his clients were engaged in actual trading when in fact no such trading occurred," said George S. Canellos, Director of the SEC's New York Regional Office. "Kugel withdrew millions of dollars of phony profits that he knew weren't from actual trading activity."
The SEC previously charged two other longtime Madoff employees Annette Bongiorno and JoAnn Crupi for their roles in producing phony account statements that were sent to Madoff investors. According to the SEC’s complaint against Kugel filed in U.S. District Court for the Southern District of New York, Bongiorno and Crupi and other staff in Madoff’s investment advisory (IA) operations used the information provided by Kugel to formulate fictitious trades to appear on investor account statements.
The SEC alleges that sometime in the early 1970s after Kugel began his career with Madoff as an arbitrage trader in the firm’s proprietary trading business, Madoff informed Kugel that BMIS managed money for outside clients. He asked Kugel to provide the firm’s IA operations with backdated convertible arbitrage trades for inclusion on investor account statements. Some of these trades replicated successful trades that Kugel had actually made for BMIS proprietary trading operations. Other trades were based on historical information that Kugel obtained from old newspapers.
According to the SEC’s complaint, Bongiorno and Crupi regularly asked Kugel for backdated information about trades amounting to millions of dollars. After Kugel provided the information, Crupi and Bongiorno would then design trades that totaled that amount. These fictitious trades were highly profitable on an annualized basis, and appeared on account statements and trade confirmations sent to investors. Kugel, who opened his own BMIS account, received these account statements and trade confirmations as well.
The SEC alleges that Kugel provided backdated trade information for IA accounts, including his own. He withdrew the purported “profits” of these trades even though he knew they weren’t proceeds of actual trading activity. One trade in S&P index options in 2007 earned Kugel a profit of more than $375,000 in just a few weeks. Kugel withdrew almost $10 million from his BMIS IA accounts from 2001 to 2008.
The U.S. Attorney’s Office for the Southern District of New York has filed parallel criminal charges against Kugel, who has pled guilty and also agreed to settle the SEC’s civil charges. Subject to court approval, the civil case will result in a permanent injunction against Kugel, who must forfeit his ill-gotten monetary gains upon entry of a criminal forfeiture order in the criminal case.
The SEC’s complaint against Kugel alleges that by engaging in this conduct, Kugel violated and aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; aided and abetted violations of Sections 204, 206(1) and 206(2) of the Investment Advisers Act of 1940 and Rule 204-2 thereunder, and Sections 15(c) and 17(a) of the Exchange Act and Rules 10b-3 and 17a-3 thereunder.
The SEC’s investigation was conducted by Kristine M. Zaleskas and Aaron P. Arnzen of the New York Regional Office. The Commission thanks the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation for its coordination and assistance. The SEC’s investigation is continuing.”

SECURITY AND INVESSTIGATION COMPANY ALLEGEDLY SOLD ILLEGAL SECURITIES

The following is an excerpt from the SEC website:

“On October 7, 2011, United States District Judge John G. Koeltl entered an order, consistent with a stipulated agreement between the Commission and Defendants, preliminarily enjoining Murdoch Security & Investigations, Inc. (“Murdoch”) and its two principal officers, Robert Goldstein and William Vassell from continuing an allegedly illegal, unregistered offering and sale of securities that the Commission alleges raised more than $1 million from noteholders, who were promised 22% annual interest on their investments. Judge Koeltl’s order also preliminarily enjoined Defendants Murdoch and Goldstein from further violations of certain anti-fraud provisions of the federal securities laws and froze certain of Defendants’ assets pending final disposition of the case.
The Commission’s complaint, filed in the U.S. District Court for the Southern District of New York, alleges that Defendants, beginning in approximately October 2010, offered and sold notes to investors by placing advertisements in the Wall Street Journal and other financial press. The Commission further alleges that Murdoch, through Goldstein, misrepresented material facts to investors about the security company, including boasts of highly lucrative overseas operations when, in fact, Murdoch lacked any international business whatsoever.
According to the Commission’s complaint, Murdoch told investors that capital was needed to finance acquisitions of additional security companies that would enhance Murdoch’s overall revenues and fund 22% interest payments to noteholders. In reality, the Commission alleges, money from new investors has been used primarily to fund interest payments to earlier investors and to pay the salaries of Defendants Goldstein and Vassell.
The Commission’s complaint charges each Defendant with violations of Sections 5(a) and 5(c) of the Securities Act of 1933, and Defendants Murdoch and Goldstein with violations of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The Commission is seeking permanent injunctions against the defendants, and to have them return their allegedly ill-gotten gains with prejudgment interest, and pay civil monetary penalties.
The Commission acknowledges the assistance of the New York District Attorney’s Office in connection with this matter.”