NEWARK, NJ—Federal agents arrested the alleged organizer of an international securities fraud ring employing hackers, botnet operators, and e-mail spam distributors today for conspiring to artificially inflate the value of stocks through the scheme, U.S. Attorney Paul J. Fishman announced.

Christopher Rad, 42, of Cedar Park, Texas, was arrested this afternoon by FBI special agents on a federal Indictment charging him with one count of conspiracy to commit securities fraud and transmit multiple commercial e-mail messages with fraudulent information. The defendant is scheduled for an initial appearance and bail hearing this afternoon before U.S. Magistrate Judge Robert L. Pitman in Austin, Texas federal court.

James Bragg, 42, of Chandler, Ariz., pleaded guilty on October 20, 2010, before U.S. District Judge Joel A. Pisano in Trenton, N.J., federal court for his role in hiring botnet operators and engaging in mass e-mail campaigns to pump up the value of stock prior to dumping shares.

According to the indictment unsealed today, other documents filed in this case, and statements made in Newark and Trenton federal court:

Rad conspired with stock promoters in a scheme to manipulate the price and volume of particular stocks, including stocks with ticker symbols RSUV and VSHE (the “Manipulated Stocks”), in order to later sell them at an artificially inflated price—a practice known as a “pump and dump” scheme. The scheme began as early as November 2007 and continued through February 2009. After conspiring with the stock promoters, Rad organized others to manipulate the stock price.

During his plea hearing, Bragg admitted that as part of his conspiracy with Rad he hired hackers and spammers, including an individual in Russia referred to in the information as “B.T.” The hackers distributed computer viruses to infect computers around the world and create a virtual army of computers, or “botnet.” The hackers then caused the botnets to distribute spam to promote the Manipulated Stocks. Some of the targeted victim-investors were residents of New Jersey.

In addition to relying on unsuspecting investors to buy into the spam promotions, the hackers also hacked into the brokerage accounts of third parties, liquidated the stocks in those accounts, and then used those accounts to purchase shares of the Manipulated Stocks. This created trading activity in the Manipulated Stocks and increased the volume of shares being traded, further creating an impression that the Manipulated Stocks were worth purchasing.

Rad also agreed with others to trade the Manipulated Stocks between themselves, creating the impression that the stocks were active. In some instances this was done prior to the spam campaigns so that recipients of the spam would perceive active trading in the promoted stocks.

A stock promoter who was also part of the conspiracy falsified documents submitted to attorneys in order to obtain opinion letters to secure millions of freely trading shares in those stocks. Those letters certified that trading restrictions on shares of the Manipulated Stocks could be lifted because certain conditions set forth in securities regulations were met.

The conspiracy count with which Rad was charged carries a maximum potential penalty of five years in prison and a $250,000 fine.

U.S. Attorney Fishman credited special agents of the FBI, under the direction of Special Agent in Charge Michael B. Ward in Newark, with the investigation leading to the charges. He also thanked the U.S. Securities and Exchange Commission’s Division of Enforcement.

The government is represented by Assistant U.S. Attorneys Christopher Kelly of the U.S. Attorney’s Office Economic Crimes Unit and Erez Liebermann, Deputy Chief of the Economic Crimes Unit and Chief of the Computer Hacking and Intellectual Property Section.

The charge and allegations contained in the indictment are merely accusations, and the defendant is considered innocent unless and until proven guilty.

This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

COLUMBIA, SC—United States Attorney Bill Nettles stated today that Jerry Francis Wells, Jr., age 48, of Columbia, was sentenced today in federal court as a result of charges brought against him for falsifying documents required to be filed with the United States Securities and Exchange Commission. United States District Judge Joseph F. Anderson, Jr. sentenced Wells to 78 months in prison to be followed by three years of supervised release. Wells will also be required to pay restitution in the amount of $2,967,355.

Wells’ crimes were discovered by the victim in December 2008, and he pleaded guilty on July 23, 2009. Facts during his plea hearing and sentencing showed that he was the former chief financial officer, executive vice-president of finance, and secretary of UCI Medical Affiliates, Inc., which manages Doctor’s Care and other medical facilities in South Carolina and Tennessee. From January 2003 through December 2008, Wells embezzled $2,967,382 from UCI by (1) using UCI’s corporate credit card to pay personal expenses; (2) preparing false expense reports and submitting them for reimbursement; and (3) submitting fraudulent check requests for non-business expenses, such as construction work on Wells’ personal residences and payments on personal credit card accounts.

UCI was a publicly traded company, and it was required to file periodic financial reports with the Securities and Exchange Commission. As the CFO, Wells was required to sign these filings on behalf of UCI. On each of eight reports that were submitted to the SEC, Wells falsely stated that he had disclosed to UCI “any fraud, whether or not material, that involves management or other employees who have a significant role in [UCI's] internal controls over financial reporting.” As a result of these false filings, Wells was charged with, and pleaded guilty to, eight counts of making false statements to a government agency, in violation of Title 18, United States Code, Section 1001.

After his guilty plea, Wells obtained a job working for another company. While working at this job, Wells stole an additional $40,000. As a result of this theft, Wells’ bond was revoked, and he was sent to jail pending his sentencing hearing. In addition, his new crimes were used as a basis to increase his sentence.

The case was investigated by agents of the Federal Bureau of Investigation. Assistant United States Attorney Dean A. Eichelberger of the Columbia office handled the case.

NEW YORK –In a 22-page complaint filed Friday, the Securities and Exchange Commission charged Goldman Sachs with defrauding investors on real estate securities likely to go bust.

The legal document reads less like a court filing, and more like a twisted story of how actions by Wall Street’s most notorious investment bank allegedly caused losses of $1 billion for investors.

Here’s what it said:

In late 2006 and early 2007, when the United States housing market is beginning to show signs of distress, hedge fund Paulson & Co. takes a “bearish view on subprime mortgage loans,” according to the SEC complaint.

The fund — run by John Paulson — identifies more than 100 bonds with the lowest credit ratings, which are likely to experience defaults. Paulson cherry-picks these bonds by favoring adjustable rate mortgages, borrowers with low credit scores, and mortgages in states like Arizona, California, Florida and Nevada, where the real estate bubble hit the hardest.

The strategy: create a product to bet against

In January 2007, Paulson meets with Goldman Sachs vice president Fabrice Tourre, and asks for help betting against these bonds through the use of credit default swaps — essentially, Paulson is asking to buy insurance on the weakest subprime-mortgage bonds.

Paulson and Goldman Sachs discuss creating — and then betting against — a package of the low-rated bonds.

Paulson would hand-pick the securities, but Goldman Sachs and Tourre also need other investors. And they know it would be a hard sell if they disclosed that Paulson had selected the securities, given that he wanted the value to go down.

So they seek out a reputable third party to, as internal Goldman memos state, put its “name at risk…on a weak quality portfolio.”

In January 2007, Goldman Sachs approaches ACA Management to act as that “portfolio selection agent.”

Goldman e-mail, March 12, 2007: “We expect to leverage ACA’s credibility and franchise to help distribute this Transaction.”

Selecting the portfolio

In February 2007, Tourre, Paulson and ACA meet to discuss the portfolio.

While both Goldman Sachs and Tourre are completely aware of Paulson’s intent to short the portfolio, ACA is unaware, according to the SEC.

On that same day, ACA e-mails Paulson, Tourre and others at Goldman Sachs a list of 82 real estate bonds on which they already agree, but adds 21 “replacement” bonds to the list and asks for Paulson’s approval. Paulson deletes eight of the bonds recommended by ACA, leaves the rest, and states that it agrees that the remaining 92 bonds make a sufficient portfolio.

An internal e-mail at ACA asks, “Did [Paulson] give a reason why they kicked out all the Wells [Fargo] deals?” Wells Fargo was generally perceived as one of the higher-quality subprime loan originators, the SEC said.

On or around February 26, 2007: Paulson and ACA agree on the portfolio to be called ABACUS 2007-AC1.

Selling the portfolio

In trying to sell the new ABACUS portfolio to investors, Goldman Sachs uses false and misleading marketing materials, according to the SEC.

The materials, created by Tourre, boldly claim ACA as the “portfolio selection agent,” but make no mention of Paulson’s role in selecting the bonds.

The “flip book,” in particular, contains 28 pages about ACA’s expertise, track record and credit selection process, and assures investors that the party selecting the portfolio had an “alignment of economic interest” with investors.

While none of the marketing materials mentioned Paulson’s role in the transaction, internal Goldman Sachs communications clearly identified Paulson, its economic interests, and its role in the transaction, according to the SEC.

Investors buy in

Beginning in 2002, IKB Deutsche Industriebank AG, a commercial bank in Germany, had been involved in the purchase of assets backed by U.S. mid-and-subprime mortgages.

But in late 2006, IKB informed Goldman Sachs and Tourre that it was no longer comfortable investing in mortgage bonds that were not selected by an independent third-party with knowledge of the U.S. housing market.

In February, March and April 2007, Goldman Sachs sends IKB copies of the ABACUS marketing materials, all of which represented that the portfolio had been selected by ACA, and failed to mention Paulson.

On or about April 26, 2007: IKB buys a total of $150 million worth of ABACUS notes at face value.

Within months, as the U.S. housing market begins to crumble, the investment is nearly worthless. Most of this money was ultimately paid to Paulson in a series of transactions between Goldman Sachs and Paulson, said the SEC. In total, investors lose $1 billion, the SEC said.

The next steps

The SEC charges Goldman Sachs with fraud for failing to disclose Paulson’s conflicting interest and role in selecting the ABACUS portfolio. The civil suit asks for a jury trial, and for Goldman Sachs to be fined and forced to repay illegally-obtained profits.

In response to the SEC’s complaint, Goldman said Friday that “the SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.”

Paulson & Co. also issued a statement claiming no responsibility for Goldman’s misleading or fraudulent marketing.

“Paulson did not sponsor or initiate Goldman’s ABACUS program, which involved at least 20 transactions other than that described in the SEC’s complaint,” Paulson’s statement said.

-Annalyn Censky

San Diego – United States Attorney Karen P. Hewitt announced that Michael Alexander, the owner of several San Diego telemarketing companies involved in a real estate investment fraud scheme, was sentenced today in federal court in San Diego to serve 30 months in prison and three years of supervised release based on his previous convictions for mail and tax fraud. U.S. District Court Judge Roger T. Benitez also ordered Alexander to pay restitution in the amount of $1,799,580.78 to the victims of the fraud scheme and to the Internal Revenue Service (IRS) for unpaid taxes.

According to court records, Alexander pled guilty on April 24, 2008, to charges of mail fraud and filing a false tax return. In his plea, he admitted that he formed the Rose Fund, LLC, to solicit investor money to fund loans secured by real property and that he formed TRF Holdings, Inc., a related entity, to provide “seed money” to capitalize the Rose Fund. Alexander hired a convicted felon, William Wright, to be his lead salesman.

Alexander further admitted that, in order to make sales, they misrepresented to investors, among other things, that investor funds were safe and would be used to make loans secured by real estate; they would receive a 5 percent sales commission; and that the businesses were well-established, successful, and operated by experienced real estate professionals. They also intentionally misled TRF Holdings, Inc. investors into believing that their investments would be used to fund real estate loans rather than provide seed money for the Rose Fund. In addition, they concealed from investors that Wright had been previously convicted of mail and wire fraud and that the Securities and Exchange Commission (SEC) had begun an investigation of the Rose Fund in April 2003. After learning of the April 2003 SEC investigation, Alexander solicited more than $2 million from new and existing investors by concealing the existence of the SEC investigation.

In pleading guilty, Alexander admitted that he fraudulently obtained more than four million dollars from more than 100 investors during the one year that the fraud scheme operated between October 2002 and October 2003. Although investors were promised that their investments would be used to make secured real estate loans, Alexander funded only 16 loans totaling $1.8 million. By contrast, Alexander fraudulently diverted more than $1.4 million of investor funds to himself and $665,000 to Wright.

In May 2008, Wright was indicted in San Diego on federal fraud charges stemming from his involvement in the Rose Fund/TRF fraud scheme. In February 2010, Wright pled guilty in a federal court in New York to conspiracy to commit mail and wire fraud and is scheduled to be sentenced on May 25, 2010.

This case was investigated by Special Agents of the Internal Revenue Service – Criminal Investigation, the United States Postal Inspection Service, and the Federal Bureau of Investigation.

DEFENDANT
Case Number: 07Cr1237BEN
Michael Alexander

SUMMARY OF THE CHARGES
Count 1 – Title 18, United States Code, Section 1341 – Mail Fraud
Count 2 – Title 26, United States Code, Sections 7206(1) – Filing a False Tax Return

PARTICIPATING AGENCIES
Internal Revenue Service – Criminal Investigation
United States Postal Inspection Service
Federal Bureau of Investigation

BALTIMORE, MD—David Wehrs, Sr., age 54, of Annapolis, Maryland, pleaded guilty today to wire fraud in connection with a scheme to defraud investors and financial institutions of more than $2.3 million.

The charge was announced by United States Attorney for the District of Maryland Rod J. Rosenstein and Special Agent in Charge Richard A. McFeely of the Federal Bureau of Investigation.

According to his plea agreement, Wehrs owned Maryland Title and Escrow Company, Inc., located in Annapolis, and operated a small home remodeling company called Show-Me. From 2007 to October 2009, Wehrs induced individuals to invest money through Maryland Title into a purported FDIC-insured money market fund that Wehrs “guaranteed” would pay monthly interest payments of 10.85%.

Instead of depositing the money into an “American Funds Fixed Rate Money Market” as promised, Wehrs deposited investor funds into one of two bank accounts he controlled in the name of his title company. Wehrs wire transferred a large portion of these investor funds to a brokerage account in the name of his title company, then used the money to “day trade.” Day trading is the rapid buying and selling of securities throughout the day in the hope that the stocks will continue climbing or falling in value for the seconds to minutes that they are owned, allowing a person to lock in quick profits.

During the scheme, Wehrs conducted millions of dollars of stock trades per month. From early 2008 until mid-2009, Wehrs lost approximately $1 million.

In addition to day trading, Wehrs used some of the investor funds to: pay “monthly interest” and “redemptions” to other investors; pay expenses of his other businesses, including Show-Me; make escrow payments for his title company; buy real estate and personal property; and pay other personal expenses.

Wehrs admitted that in June 2009, when he had no money left in his personal bank accounts or day trading accounts to pay interest due to investors, he used $630,611 earmarked to pay lending institutions for mortgage payoffs from his escrow account at Maryland Title to pay investors, causing that amount of loss to the title insurance company for Maryland Title. He also used $100,000 from the Maryland Title escrow account that was earmarked as earnest money for the purchase of an individual’s home to pay interest to investors, causing a loss of $100,000 to the home buyer.

The total loss as a result of Wehrs’ scheme is $2,371,061 to investors and the title insurance company. U.S. District Judge Benson Everett Legg has scheduled sentencing for May 19, 2010 at 3:00 p.m.

Wehrs faces a maximum sentence of 20 years in prison. As part of his plea agreement, Wehrs is required to pay restitution of $2,371,061 and to forfeit any assets derived from the scheme. Any forfeited assets will be applied to the restitution amount.

Mr. Rosenstein and Mr. McFeely gave special thanks to the Securities and Exchange Commission and the Maryland Insurance Administration for their work in the investigation and prosecution of this case.

United States Attorney Rod J. Rosenstein commended Assistant United States Attorney Tonya Kelly Kowitz, who is prosecuting the case.

Three former New Century Financial executives were charged with fraud by the Securities and Exchange Commission on Monday, December 7, 2009: former New Century CEO Brad Morrice; former CFO Patti Dodge and ex-controller David Kenneally.

The charges against the New Century trio were filed in U.S. district court in Los Angeles, which like the thousands of foreclosures that have roiled Southern California, has become the epicenter of litigation against former executives from mortgage originators.

An investigative report by bankruptcy examiner Michael Missal of K&L Gates criticized New Century’s auditors and outside counsel at KPMG and O’Melveny & Myers for certain accounting practices and discovery delays. But Missal came down even harder on New Century executives, whom he claimed were responsible for improper loan evaluations and inflated profits by the real estate investment trust.

New Century was once the nation’s second-largest subprime mortgage loans provider and was valued at more than $1 billion before the company filed for bankruptcy in April 2007 after the mortgage market collapsed.  A trial date has not yet been set.

The Securities and Exchange Commission (SEC) has charged three people who targeted military families in a multi-million dollar real estate fraud scheme that forced victims into personal bankruptcy and their homes into foreclosure. The scam also targeted other affinity groups, including members of Southern California’s Filipino community and the accused’ fellow church members. James Duncan, Hendrix Montecastro, and Maurice McLeod stand accused of soliciting investors investors in Southern California, Arizona, and elsewhere using sham investment seminars and “referral partners” including a member of the Air Force who solicited his fellow servicemen.

The SEC’s complaint alleges the three men gained control over investors’ finances by offering them securities in the form of real estate investment contracts, and purporting that the money investors earned would help make mortgage payments on investment homes purchased on their behalf. Instead of investing client funds as promised, Duncan, Montecastro, and McLeod operated a Ponzi scheme by using money from new investors to make mortgage payments on previously purchased investment homes. When the scheme unraveled, it cost more than 75 investors an estimated $10 million.

With the type of fraud Duncan, Montecastro, and McLeod operated (commonly referred to as “affinity frauds”), con artists infiltrate tight-knit groups by showcasing a respected member of that community as one of their successful investors, giving the false illusion of a safe and secure investment opportunity and conning new investors into their Ponzi-like schemes.

Between October 2004 and June 2006, Duncan, Montecastro, and McLeod operated through Murrieta, Calif.-based Pacific Wealth Management, LLC (PWM) and Stonewood Consulting, Inc., to defraud investors from several affinity groups. The SEC’s complaint alleges that all three falsely promised investors that their funds would be invested in real estate and various other investments that would subsidize their investment homes. The SEC’s complaint further alleges that Duncan, a recidivist, raised $1.2 million in a separate offering of preferred membership units in Total Return Fund, LLC, to approximately 20 investors. The complaint alleges that the proceeds raised in both offerings were commingled and used to run a Ponzi-like scheme that fell apart and left investors with homes in foreclosure and forced some investors to declare bankruptcy.

According to the SEC’s complaint, Duncan, Montecastro, and McLeod failed to disclose several key facts about the purchase of the investment homes. They charged exorbitant real estate transaction fees financed by the investors, and submitted false mortgage loan applications on behalf of investors. The complaint also alleges that Duncan, who was touted as a financial genius, failed to disclose his prior securities laws violations.

The SEC’s complaint further alleges that Duncan and Total Return Fund misrepresented how investor money would be used. Specifically, while the Total Return Fund offering documents stated that 95 percent of investor funds would go towards the purchase of real estate, business assets, or accounts receivable, in fact, investor funds were used to pay returns to prior investors, and were used as part of the PWM fraud.

The SEC’s complaint charges Duncan, Montecastro, and McLeod with violating the antifraud and registration provisions of the federal securities laws, and seeks permanent injunctions, disgorgement of ill-gotten gains, and civil penalties. The complaint also names Christopher Oetting, Anthony M. Contreras and Biocybernaut Institute, Inc., as relief defendants, alleging that they received ill-gotten gains from the defendants’ fraudulent conduct.