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Blotter: August 2012

Monk’s Deceit

In July, the SEC charged former Connecticut resident Jerry S. Williams, a stock promoter, and two companies that he controlled, Monk’s Den and First In Awareness, with civil fraud for a $2.4 million “scalping” scheme.

According to the SEC complaint, Williams, known to his followers as “Monk,” used his internet-based message board (a.k.a. “Monk’s Den”) and in-person seminars (a.k.a. “Monkinars”), among other things, to encourage investors to buy, hold, and accumulate stock in Cascadia Investments and Green Oasis Environmental from at least early 2009 through at least the end of 2010.

Williams allegedly told potential investors that if they bought up the outstanding shares in these companies they could collectively trigger a “short squeeze,” allowing them to sell their stock to desperate “market makers” who had shorted it. He also told them he had used this strategy before to make himself and others rich. In fact, Williams had been hired by Cascadia and Green Oasis to promote the stock and had been compensated with millions of free and discounted shares of these stocks. According to the Complaint, Williams secretly sold millions of shares in both companies while he was encouraging investors to buy, raking in over $2.4 million.

Dummy Assets

This should, by now, sound familiar. The SEC on July 18 charged Mizuho Securities USA, the U.S. investment banking subsidiary of Japan-based Mizuho Financial Group and three former employees with misleading investors in a collateralized debt obligation (CDO) by using “dummy assets” to inflate the deal’s credit ratings. The SEC also charged the firm that served as the deal’s collateral manager and the person who was its portfolio manager.

According to the SEC’s complaint, Mizuho USA made approximately $10 million in structuring and marketing fees in the deal. Mizuho agreed to pay $127.5 million to settle the SEC’s charges; the others charged also agreed to settle the SEC’s actions against them.

The SEC alleges that Mizuho structured and marketed Delphinus CDO 2007-1, a CDO that was backed by subprime bonds at a time when the housing market was showing signs of severe distress. When Mizuho employees realized that Delphinus could not meet one rating agency’s criteria, it submitted to the rating firm a portfolio containing millions of dollars in dummy assets instead.

“This case demonstrates once again that bankers and market participants who embrace a ‘get the deal done at all costs’ strategy will be identified, charged, and punished,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. —Kristen French

TAGS: Industry
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