COURT DENIES MOTION TO VACATE DEFAULT JUDGEMENT IN SECURITIES FRAUD CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
District Court Denies Motion to Vacate Default Judgment Against Medical Software Company and Its CEO

The Securities and Exchange Commission announced today that on November 25, 2013, the U.S. District Court for the Eastern District of New York denied defendant Aurelio Vuono’s motion to vacate the default judgments previously entered against MedLink International, Inc., a medical software company, and its CEO, Aurelio Vuono, also known as Ray Vuono. The Commission had charged MedLink, Vuono, and MedLink’s CFO, James Rose, with filing an annual report falsely stating that MedLink’s audit had been completed and with defrauding a MedLink investor. In its ruling, the court found that Vuono’s default was wilful and that he had failed to present any meritorious defense to the Commission’s charges.

Previously, on May 23, 2013, the court had entered default judgments against the defendants and ordered permanent injunctions from violating Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(d) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 15d-1 and 15d-14. The court also ordered each defendant to disgorge, jointly and severally, $149,473/50, representing their illicit profits, together with pre-judgment interest of $8,942.48, for a total of $158,415.98. In addition, the court ordered civil penalties of $650,000 against MedLink, $130,000 against Vuono, and $130,000 against Rose. Finally, the court barred Vuono and Rose from penny stock offerings or severing as an officer or director of a public company.

Vuono, a resident of Huntington Station, New York, is a recidivist securities law violator. In SEC v. Hasho, et al, 784 F.Supp. 1059 (S.D.N.Y. 1992), Vuono was found liable for violating the anti-fraud provisions of the federal securities laws.

FORMER INVESTMENT BANKER AT LEVEL GLOBAL IS CHARGED WITH INSIDER TRADING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Former Level Global Investment Banker with Insider Trading

On November 14, the Securities and Exchange Commission filed a civil injunctive action in federal court in the Northern District of Georgia against Mark Megalli (“Megalli”), a former investment banker at Level Global Investors, L.P. (“Level Global”), then a New York based hedge fund. The Commission alleges that Megalli caused Level Global to trade in the securities of Carter’s Inc., the Atlanta-based clothing marketer, on the basis of material non-public information provided by a former Carter’s executive.

The Commission’s complaint alleges that, on several occasions from September 2009 through July 2010, Megalli, who was then working at Level Global, caused Level Global to trade in advance of market-moving news concerning Carter’s after Megalli was tipped concerning the information by a former Carter’s executive, who in turn was receiving tips from a current Carter’s executive. A number of these trades occurred while Megalli was on the phone with his source. The total profits and losses avoided on the trades placed or directed by Megalli are in excess of $3 million dollars.

The Commission’s complaint alleges that Megalli violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks a permanent injunction, disgorgement with prejudgment interest and civil monetary penalties pursuant to Section 21A of the Exchange Act.

This is the third case that the Commission has brought alleging insider trading in connection with its ongoing investigation of trading in the securities of Carter’s (see SEC v. Eric Martin, et al, .

SEC FILES FRAUD CHARGES AGAINST UNIVERSAL TRAVEL GROUP

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Files Fraud Charges Against Universal Travel Group, Its Former CEO and Chair, Jiangping Jiang, and Its Former Director, Secretary and Interim CFO, Jing Xie

The Securities and Exchange Commission today announced the filing of fraud and related charges against Universal Travel Group (UTG), a China-based travel services company, its former CEO and Chair, Jiangping Jiang (Jiang), and its former Director, Secretary and Interim CFO, Jing Xie (Xie). UTG, Jiang and Xie have agreed to settle the SEC's claims against them.

The Commission alleges that UTG, Jiang and Xie failed to disclose cash transfers of approximately $41 million to thirty-four unknown entities in Hong Kong and China between September 2008 and March 2011. The transferred cash derived from private and public stock offerings in the U.S., and UTG claims it was returned to Chinese accounts of its subsidiaries as part of a currency exchange. The complaint alleges that the undisclosed transfers rendered false and misleading the risk factor and liquidity discussions in UTG's public disclosure. The Commission alleges further that the defendants failed to disclose further risks arising from UTG's receipt and usages of cash revenues, and from its inadequate controls over cash and its failure properly to document cash transactions. Further, prior to June 2011 the Commission alleges that the defendants falsely described UTG's business organization, failing to disclose that UTG had transferred certain subsidiaries to third parties pursuant to agreements designed to give UTG the economic benefits of ownership, and UTG materially overstated its revenues and profits in its quarterly reports in 2010. In 2010, UTG is also alleged to have failed to obtain an auditor's attestation to its assessment of internal controls. Jiang and Xie are alleged to have knowingly failed to establish proper internal controls at UTG, caused documents to be falsified, and falsely certified to UTG's internal controls for 2010.

In the settled complaint, the Commission alleges that UTG, Jiang and Xie violated the antifraud provisions of the securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. The Commission further alleges violations of, or aiding and abetting violations of, the reporting, recordkeeping and internal controls provisions of the federal securities laws, Sections 13(a), 13(b)(2)(A) & (B), and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13a-14 and 13b2-1 thereunder. Without admitting or denying the allegations, UTG, Jiang and Xie have consented to the entry of final judgments that: (i) permanently enjoins them from future violations of the federal securities laws; (ii) orders UTG, Jiang and Xie to pay civil penalties of $750,000, $125,000 and $60,000, respectively; and (iii) bars Jiang and Xie from serving as an officer or director of a public company for five years. The proposed settlement is subject to approval by the court.

The Commission also announced today the entry of an order revoking the registration of each class of registered securities of UTG for failure to make required periodic filings with the Commission. See Order Instituting Proceedings, Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934, In the Matter of Universal Travel Group, Administrative Proceeding File No. 3-15528, Exchange Act Release No. 34-70536 (September 27, 2013).

The SEC's investigation was conducted by Robert Wilson, Brad Mroski and Melissa Robertson.

INVESTMENT ADVISER CHARGED IN PONZI SCHEME FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Oklahoma Investment Adviser and Cohort with Fraud

On August 27, 2013, the Securities and Exchange Commission brought securities fraud charges against former investment adviser Larry J. Dearman, Sr. and his close friend, Marya Gray, in connection with fraudulent securities offerings that raised at least $4.7 million from more than 30 of Dearman's advisory clients.

The complaint, filed in the U.S. District Court in Tulsa, Oklahoma, alleges that Dearman invested his clients in various businesses that Gray owned in Bartlesville, Oklahoma. According to the Commission, Dearman and Gray misled investors about the safety of the investments and how their funds would be used, telling them, for instance, that investor funds would be used to purchase equipment for one of Gray's companies, Bartnet Wireless Internet, Inc. In truth, however, Gray and Dearman squandered the vast majority of investor funds on gambling, personal expenses, and Ponzi payments. The complaint also alleges that Dearman stole roughly $700,000 from some of his clients through various ruses.

The complaint alleges that Dearman and Gray violated or aided and abetted violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and (2) of the Investment Advisers Act of 1940. The Commission seeks permanent injunctive relief, disgorgement plus prejudgment interest, and civil monetary penalties from both Defendants. In addition, the Commission has named as Relief Defendants three of Gray's businesses, including Bartnet Wireless Internet, Inc., The Property Shoppe, Inc., and Quench Buds Holding Company, LLC, seeking to recover funds they derived from Defendants' fraud.

CFTC PERMANENTLY BARS CPA FROM PRACTICING BEFORE THE COMMISSION

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
CFTC Permanently Bars Accountant, Jeannie Veraja-Snelling, for Failing to Properly Audit Peregrine Financial Group, Inc.

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed and settled charges against Jeannie Veraja-Snelling, d/b/a Veraja-Snelling & Company (Veraja-Snelling), a certified public accountant and sole practitioner from Glendale Heights, Illinois, barring her from practicing before the Commission. The CFTC’s Order charges Veraja-Snelling with failing to audit Peregrine Financial Group, Inc. (Peregrine) in accordance with CFTC Regulation 1.16.

Veraja Snelling was the auditor for Peregrine, a registered Futures Commission Merchant (FCM). On July 10, 2012, the CFTC charged Peregrine and its sole owner and chief executive officer, Russell Wasendorf, Sr. (Wasendorf), with fraud, among other violations, within 24 hours after the discovery that Wasendorf had misappropriated millions of dollars in customer funds (see CFTC Press Release 6300-12). Among the violations that were discovered, Peregrine’s 2011 certified financial statements filed with the Commission were fraudulently overstated by more than $215 million. According to the CFTC’s Order entered today, Wasendorf deceived Veraja-Snelling and others by manufacturing bogus bank statements that overstated Peregrine’s bank balances and by forging documents sent to Veraja-Snelling that purported to provide bank confirmation of the overstated balances.

According to the Order, Wasendorf was able to perpetrate and conceal his fraud in part because Peregrine lacked proper internal accounting controls and was not subject to audits performed in accordance with CFTC Regulations. The Order finds that Veraja-Snelling’s audits of Peregrine’s financial statements were not performed in accordance with generally accepted auditing standards (GAAS) and did not include appropriate review and tests of internal accounting controls and procedures for safeguarding customer assets, as required by CFTC Regulation 1.16.

David Meister, the CFTC’s Director of Enforcement, stated, “As the Peregrine debacle shows, the importance of the independent accountant’s gatekeeper function cannot be overstated. FCMs and, most importantly, their customers, rely on auditors to approach each and every auditing assignment professionally and with due care. There is no place in the CFTC-regulated world for below-standard audits or auditors who do not have a sufficient understanding of the futures industry.”

The Order finds that Veraja-Snelling lacked the necessary technical expertise needed to audit an FCM, failed to adequately staff and plan the Peregrine audits, and failed to exercise due care in performing the Peregrine audits. Among other failures, Veraja-Snelling’s review and testing of Peregrine’s internal controls during the Peregrine audits did not identify that Wasendorf had exclusive control over the customer segregated account and its financial reporting, which reflected a material inadequacy in Peregrine’s internal controls, according to the Order.

In addition, the Order finds that Veraja-Snelling improperly conducted the process to confirm bank account balances, which generally entails an auditor sending a confirmation form to a bank for a bank officer to sign and return to the auditor. Here, Veraja-Snelling relied on Peregrine’s accounting staff to prepare the confirmation request and identify the proper recipient. After Peregrine’s accounting staff provided the confirmation request and envelope to Veraja-Snelling for mailing, she sent the confirmation request to a post office box that was secretly controlled by Wasendorf. Wasendorf responded to the request by forging the signature of a bank employee on the form, confirming the false balance amounts.

The Order concludes that Veraja-Snelling’s failure to conduct the Peregrine audits in accordance with Regulation 1.16 constituted improper, unprofessional conduct, and the Order permanently bars her from appearing or practicing as an accountant before the Commission. In addition, the Order requires her to relinquish her right to receive payment for performing the 2011 audit.

In related actions, the CFTC filed a Complaint on June 5, 2013 against U.S. Bank National Association for unlawfully using and holding Peregrine’s customer segregated funds (see CFTC Press Release 6601-13).  Wasendorf was also criminally charged by the United States Attorney’s Office for the Northern District of Iowa, pled guilty, and on January 23, 2013 was sentenced to 50 years in prison and ordered to pay more than $215 million in restitution. United States v. Russell Wasendorf, Sr., 12-cr-2021-LRR.

The CFTC Division of Enforcement appreciates the assistance of the CFTC Division of Swap Dealer and Intermediary Oversight in this matter.

The CFTC Division of Enforcement staff members responsible for this matter are Lindsey Evans, Heather Johnson, Mary Beth Spear, Ava Gould, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

CHINA-BASED CEO AND COMPANY CHARGED WITH FRAUD IN CROSS-BORDER WORKING GROUP CASE

FROM:  U.S. SECURITIES AND EXCHANGE  COMMISSION 
SEC Charges China-Based Company and CEO in Latest Cross-Border Working Group Case

The Securities and Exchange Commission today charged a China-based company and the CEO with fraudulently misleading investors about its financial condition by touting cash balances that were millions of dollars higher than actual amounts.  The case is the latest from the SEC’s Cross-Border Working Group that focuses on companies with substantial foreign operations that are publicly traded in the U.S.  The Working Group has enabled the SEC to file fraud cases against more than 65 foreign issuers or executives and deregister the securities of more than 50 companies.

The SEC alleges that China MediaExpress, which purports to operate a television advertising network on inter-city and airport express buses in the People’s Republic of China, began falsely reporting significant increases in its business operations, financial condition, and profits almost immediately upon becoming a publicly-traded company through a reverse merger.  In addition to grossly overstating its cash balances, China MediaExpress also falsely stated in public filings and press releases that two multi-national corporations were its advertising clients when, in fact, they were not.  The company’s chairman and CEO Zheng Cheng signed the public filings and attested to their accuracy.  After suspicions of fraud were raised by the company’s external auditor and an internal investigation ensued, Zheng attempted to pay off a senior accountant assigned to the case.

According to the SEC’s complaint filed in Washington D.C., China MediaExpress became a publicly-traded company in October 2009 and began materially overstating its cash balances in press releases and SEC filings. For example, its 2009 annual report filed on March 31, 2010, reported $57 million in cash on hand when it actually had a cash balance of merely $141,000.  Later that year on November 9, 2010, China MediaExpress issued a press release boasting a cash balance of $170 million at the end of the third quarter of its fiscal year.  The actual cash balance was just $10 million.

According to the SEC’s complaint, after China Media materially misrepresented its financial condition, its stock price tripled to more than $20 per share.  At the same time, China Media received $53 million from a hedge fund pursuant to a sale of the company’s preferred and common stock to that fund.  Zheng was financially incentivized to misrepresent China MediaExpress’ financial condition, as he had agreements to receive stock if the company met certain net income targets.  For instance, when China Media met net income targets for fiscal year 2009, Zheng personally received 600,000 shares of China MediaExpress stock that were worth approximately $6 million at the time.

According to the SEC’s complaint, China MediaExpress’ external auditor resigned in March 2011 due to suspicions about fraudulent bank confirmations and statements.  The company’s audit committee then retained a law firm to conduct an internal investigation.  The law firm hired a Hong-Kong forensic accounting firm to assist in obtaining bank statements from China MediaExpress’ banks to verify the publicly reported cash balances.  The evening before a planned visit to the banks by the accounting firm’s team, Zheng called a senior accountant assigned to the team and told him that he had the authorization letters necessary to obtain China MediaExpress’ bank statements.  He asked the accountant to meet him alone to obtain the authorization letters.  During the meeting, Zheng admitted that there would be discrepancies dating back one to two years between China MediaExpress’ reported and actual cash balances. Zheng offered the accountant approximately $1.5 million to “assist with the investigation.”  The accountant refused the offer.  Approximately one month later, the bank statements were obtained, and they showed substantial discrepancies between publicly reported and actual cash balances.

The SEC’s complaint charges Zheng and China MediaExpress with violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Section 17(a) of the Securities Act of 1933.  The complaint also charges China MediaExpress with violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and charges Zheng with violating Exchange Act Rules 13b2-2 and 13a-14, and also with aiding and abetting China Media’s violations of Exchange Act Section 13(a).  The complaint seeks financial penalties, permanent injunctions, disgorgement, and an officer and director bar against Zheng.

A NEARLY $2 MILLION FINE SETTLES CHARGES OF OPTIONS FRAUDN AND UNAUTHORIZED TRADING

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC Orders Illinois Resident Joshua T.J. Russo to Pay More than $1.8 Million in Restitution and Penalties for Futures and Options Fraud and Unauthorized Trading

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an order filing and settling charges against Joshua T.J. Russo of Chicago, Ill., for fraudulently soliciting at least one customer to participate in a fictitious commodity futures and options pool, engaging in unauthorized trading, and issuing false account statements.

The CFTC order requires Russo to pay restitution of $960,000, a $645,000 civil monetary penalty, and disgorgement of $215,000. The order permanently prohibits Russo from engaging in any commodity-related activity, including trading, and from registering or seeking exemption from registration with the CFTC. The order also permanently prohibits Russo from further violations of the Commodity Exchange Act and CFTC regulations, as charged.

The CFTC order finds that, from around March 2007 through April 2011, Russo, as a registered Associated Person of an independent Introducing Broker (IB), fraudulently solicited at least one of the IB’s customers by telling the customer that he would be a general partner in a fictitious pool called Peak Performance Fund, LP (PPF). According to the order, Russo issued false statements to the PPF customer in the form of purported PPF audited financial statements and in the form of weekly spreadsheets that Russo represented were summaries of the customer’s account values. In fact, however, the statements grossly overinflated the value of the customer’s accounts, the order finds.

In addition, the order finds that Russo provided at least five other customers with similar spreadsheets that grossly inflated the value of the customers’ accounts. Russo also engaged in a significant amount of unauthorized trading in these customers’ accounts, and in the accounts of three other customers, the order finds. Russo engaged in speculative trading for at least one customer, contrary to the hedging strategy that Russo represented he would utilize, according to the order.

According to the order, Russo’s eight customers deposited at least $3 million into trading accounts to trade commodity futures and options in managed and self-directed accounts. Russo, through his false statements to the eight customers, concealed his unauthorized trading and overall trading losses of approximately $1.7 million, the order finds.

On October 25, 2012, Russo was charged with a single count of commodities fraud in a related criminal action (USA v. Russo, 1: 12-cr-00836). His arraignment is currently scheduled for November 1, 2012.

The CFTC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Illinois and the National Futures Association.

CFTC Division of Enforcement staff members responsible for this case are Katherine S. Driscoll, Michael Solinsky, Michelle Bougas, Kassra Goudarzi, Melanie Bates, Gretchen L. Lowe, and Vincent A. McGonagle

SOLAR PANEL MANUFACTURER CHARGED WITH DEFRAUDING INVESTORS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
On September 6, 2012 the Securities and Exchange Commission charged a solar panel manufacturer headquartered in South San Francisco and three of its former executives with defrauding investors by concealing the transfer of nearly half of the ownership stake in its Chinese subsidiary to three individuals in China who manage the subsidiary.

The SEC alleges that Worldwide Energy and Manufacturing USA Inc. (WEMU) raised nearly $9 million from U.S. investors in early 2010 in order to expand its solar subsidiary based in Rugao City, China. The Chinese subsidiary represented the bulk of WEMU's operations and generated 77 percent of the company's revenue the previous year. In a power point presentation at road shows and in other communications with investors, the company's founder and chairman of the board Jimmy Wang and the company's president Jeffrey Watson touted the solar subsidiary's success as the primary growth area for the company and represented that the company fully owned its Chinese subsidiary. They neglected to tell investors that WEMU actually was set to transfer 49 percent of the equity in the Chinese subsidiary to its three managers. This critical ownership deal was not disclosed in the company's filings or offering documents. Later, Wang and his wife Mindy Wang, who served as the company's vice president, secretary and treasurer, went so far as to sign additional agreements to effectuate the transfer that were concealed from WEMU's board and auditors.

WEMU, the Wangs, and Watson agreed to settle the SEC's charges.

According to the SEC's complaint filed in federal court in San Francisco, because the company's future success depended on the technical expertise and sales connections of the three Chinese solar managers, WEMU entered into a stock option agreement with them in January 2008 that included consideration for a future change in organizational structure. The Chinese subsidiary grew dramatically over the next year and quickly became WEMU's most profitable subsidiary. In February 2009, Jimmy Wang signed two key agreements on behalf of WEMU to share 49 percent of the Chinese subsidiary's net profits with the solar managers and to transfer 49 percent of the subsidiary's equity to them in February 2010. Failure to disclose these agreements resulted in WEMU filing false and misleading quarterly reports for the first three quarters of 2009 and first quarter of 2010.

According to the SEC's complaint, WEMU management began planning a capital raise in the fall of 2009 so it could expand its solar operations by building a factory in China to manufacture solar panels. When Jimmy Wang and Watson went out to raise money from investors in early 2010, there was no mention of the agreement to transfer an ownership stake. Instead, in order to avoid informing investors about the profit sharing arrangement and contractual obligation to transfer equity to the Chinese subsidiary's managers, Jimmy and Mindy Wang traveled to China in March 2010 to secretly sign a set of side agreements that allowed the solar managers to begin the registration process with the Chinese government to effectuate the transfer. Both Jimmy and Mindy Wang concealed these side agreements from WEMU's auditors, other executives, and its board of directors. The company's failure to report the transfer of the solar subsidiary resulted in a material overstatement of net income to WEMU's reported financial statements.

The SEC's complaint charges all defendants with violating Sections 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The SEC further charges WEMU with violating Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The SEC charges the individual defendants with falsifying books and records and making false or misleading statements to auditors in violation of Exchange Act Rules 13b2-1 and 13b2-2, and with aiding and abetting WEMU's violations of Sections 13(a), 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13. The SEC further charges Jimmy Wang and Watson with filing false certifications in violation of Rule 13a-14 of the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002.

Without admitting or denying the SEC's allegations, WEMU agreed to pay a $100,000 penalty and be permanently enjoined from future violations of antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The Wangs and Watson consented to permanent bars from serving as officers or directors of a public company and agreed to be permanently enjoined from future violations of the antifraud and other provisions of the federal securities laws. Mindy Wang and Watson each agreed to pay penalties of $50,000. The terms of the settlement with Jimmy Wang reflect credit given to him by the Commission for his substantial assistance in the investigation and the fact that he has entered into a cooperation agreement to assist in the ongoing investigation.

FORMER "WELLCARE" EXECUTIVES FACE MYRIAD OF SEC ALLEGATIONS

The following excerpt is from the SEC website:

“On January 9, 2012, the Securities and Exchange Commission (“Commission”) filed a civil injunctive action against three former executives of WellCare Health Plans, Inc. (“WellCare”), a managed care services company that administers federal government-sponsored health care programs. According to the Commission’s complaint, from 2003 to 2007, Todd Farha, former Chief Executive Officer, Paul Behrens, former Chief Financial Officer, and Thaddeus Bereday, former General Counsel, (collectively, “the Defendants”), devised and carried out a fraudulent scheme that deceived the Florida Agency for Health Care Administration (“AHCA”) and the Florida Healthy Kids Corporation (“Healthy Kids”) by improperly retaining over $40 million in health care premiums the company was statutorily and contractually obligated to spend on certain health care services or reimburse to the state agencies. As a result of the scheme, WellCare recorded the retained amount as revenue, which materially inflated its net income and diluted earnings per share (“EPS”) in its public financial statements.

As alleged in the complaint, WellCare received premiums from AHCA and Healthy Kids that WellCare was required, by contract and by statute, to spend on certain eligible health care services for low-income plan participants. If WellCare spent less than a certain percentage of the premiums on eligible health care services, it was required to refund some or all of the difference to the State of Florida. According to the complaint, the Defendants devised a scheme to evade the state’s regulatory framework and fraudulently retain the premiums by, among other methods, funneling the premiums through an internal subsidiary and by applying administrative and other non-allowable expenses in their calculation of money spent on health care services. In total, through their fraudulent conduct, the complaint alleges that WellCare reduced the refunds it paid to AHCA by approximately $35 million and to Healthy Kids by approximately $6 million.
The excess premiums retained by the Defendants went straight to WellCare’s bottom line. WellCare materially misstated its net income and EPS in filings with the Commission and in quarterly and annual earnings releases from 2004-2006 and the first two quarters of 2007. On January 26, 2009, WellCare filed its Form 10-K for 2007 and restated its financial results for those time periods. The Restatement reduced WellCare’s reported net income and EPS by approximately 14% for fiscal year (“FY”) 2004, 9% for FY 2005, 13% for FY 2006, and 9% for the first quarter of FY 2007.

The Commission’s complaint also alleges that, after setting their fraudulent scheme in motion, the Defendants sold approximately 1.6 million WellCare shares into the public market for gross proceeds of approximately $91 million. The Commission alleges that the Defendants sold these shares on the basis of the material, nonpublic information that they were conducting a fraudulent scheme that impacted WellCare’s financial results, caused false and misleading statements, and imperiled the Company’s business relationship with the State of Florida. According to the complaint, the Defendants sold the shares pursuant to 10b5-1 trading plans that were created and amended in bad faith, and through three public stock offerings conducted while the scheme was ongoing.

Based on the conduct alleged in the complaint, the Commission charges that each of the Defendants violated antifraud provisions Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Exchange Act Rule 10b-5, and also violated Exchange Act Section 13(b)(5) and Exchange Act Rule 13b2-1. All of the Defendants are also charged with aiding and abetting WellCare’s violations of reporting, books and records, and internal controls provisions, namely, Sections (13)(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13. Bereday is charged with aiding and abetting Farha’s and Behrens’ violations of antifraud provisions Section 10(b) and Rule 10b-5(b) of the Exchange Act. Finally, Farha and Behrens are charged with violating Exchange Act Rules 13b2-2 and 13a-14, and Section 304(a) of Sarbanes-Oxley, which requires that the CEO or CFO of a company that restates its financial results to reimburse the company any incentive-based or equity-based compensation received and any profits realized from the sale of the company’s stock during the 12-month period following initial issuance of the misleading financial statements.

As to each Defendant, the Commission is seeking a judgment permanently enjoining them from violating the provisions of the securities laws specified above, civil penalties, disgorgement of ill-gotten gains with prejudgment interest, and officer and director bars. As to Farha and Behrens, the Commission seeks reimbursement of incentive-based and equity-based compensation pursuant to Section 304(a) of Sarbanes-Oxley.

In conducting its investigation, the Commission acknowledges assistance from the U.S. Attorney’s Office for the Middle District of Florida, the Office of Inspector General for the Department of Health and Human Services and the Federal Bureau of Investigation.”