Securities Industry Commentator by Bill Singer Esq

SEC Orders Credit Rating Agency to Pay $3.5 Million for Conflicts of Interest Violations (SEC Release)

Commissioner Peirce Sounds the Alarm About Feeding the SEC's CAT

(BrokeAndBroker.com Blog)

Head Of Investment Management Firm Pleads Guilty In Connection With $18 Million Pre-IPO Securities Fraud Scheme / Fred Elm, Who Fled to Canada in 2017 Prior to His Original Plea Date, Was Extradited Back to the U.S. Earlier This Year (DOJ Release)

Stockbroker Fined and Suspended for Emailing Confidential/Proprietary Information

In the Matter of Brandon Rolle, Respondent (FINRA AWC)

Stockbroker Fined and Suspended for Private Securities Transaction

In the Matter of Jason N. Dukas, Respondent (FINRA AWC)

Order Seeks to Lower Curtain on Nick Steele & TheCryptoFacts (TSSB Release)

Dallas Adviser Lorintine Fined $10,000 for Charging Performance-Based Fees (TSSB Release)

With TV ad commitments plummeting, the advertising business may never look the same (CNBC by Julia Boorstin)

[F]rom mid-2015 through September 2016, credit rating analysts in Morningstar's asset-backed securities (ABS) group engaged in sales and marketing to prospective clients. According to the order, Morningstar's head of business development instructed analysts to identify business targets and pursue them through marketing calls, meetings, and offers to provide indicative ratings.  For example, the order finds that one ABS analyst at Morningstar wrote a commentary specifically aimed at a potential client issuer and sent it to the issuer for the purpose of obtaining the business of the issuer, which eventually became a Morningstar client.  The order further finds that Morningstar issued and maintained ABS ratings for certain entities where an analyst who participated in determining or monitoring the credit rating also participated in the sales or marketing of a Morningstar product or service.  In addition, the order finds that between at least June 2015 and November 2016, Morningstar failed to maintain written policies and procedures reasonably designed to sufficiently separate the firm's analytical and business development functions. 

From at least June 2013 through December 2014, ELM and Naqvi engaged in a scheme to defraud investors in funds that ELM and Naqvi created and controlled at ETIA, where ELM was the founder and manager, and Naqvi was the chief operating officer.  ELM and Naqvi raised more than $18 million from over 50 investors in four limited partnerships for which ETIA acted as the fund manager:  Elm Tree Investment Fund, LP; Elm Tree Emerging Growth Fund, LP; Elm Tree 'e'Conomy Fund, LP; and Elm Tree Motion Opportunity, LP (collectively the "Elm Tree Funds"). 

ELM and Naqvi falsely represented that the Elm Tree Funds used investor capital to purchase shares in privately held technology companies before their IPOs.  These companies included Twitter, Inc., Alibaba Group Holding Limited, Uber Technologies, Inc., Square, Inc., Pinterest, Inc., and GoDaddy Group, Inc.  Moreover, ELM and Naqvi falsely represented that they had access to these pre-IPO shares because of their relationships with leading venture capital firms, such as Kleiner Perkins Caufield & Byers, Benchmark Capital, and Silver Lake Management, L.L.C.  In truth and in fact, ELM and Naqvi did not invest in the pre-IPO shares of these companies and did not have relationships with these venture capital firms.

ELM and Naqvi comingled the approximately $18 million that was invested in the Elm Tree Funds in a single investment account and then invested only a portion of the money, approximately $7.1 million.  At no point did any of the Elm Tree Funds return a profit.  Instead, for example, between January 2014 and November 2014, the Elm Tree Funds lost approximately $3.9 million in trading.

Moreover, of the investor funds that ELM and Naqvi did not lose in securities trading, ELM routinely converted investor funds to his own use in the form of cash withdrawals and to pay personal expenses, including to purchase a multimillion-dollar home, high-end furnishings, and other personal items, such as jewelry, daily living expenses, and luxury automobiles, including a Bentley, a Maserati, and a Range Rover.

The conversion of investors' funds was contrary to the representations that ELM and Naqvi made to investors concerning their and ETIA's fees.  ELM and Naqvi falsely represented that they and ETIA would take a two percent annual management fee plus a performance fee of 20 percent of any profits that the Elm Tree Funds earned.  In truth and in fact, ELM converted investor money that far exceeded the two percent management fee.  Moreover, because the Elm Tree Funds never returned a profit, ELM, Naqvi, and ETIA were not entitled to a percentage of any profits.

ELM and Naqvi also used approximately $5.2 million of new investor funds to make payments to earlier investors in a Ponzi-like fashion.  To prevent or forestall redemptions, and continue to raise money to fund their scheme, ELM and Naqvi also generated fictitious account statements and made oral and written misrepresentations that their trading strategies were generating consistently positive returns. 

For example, beginning in mid-2013, ELM and Naqvi began to solicit Victim-1 to invest with ETIA in the Elm Tree Funds.  On June 11, 2013, Naqvi sent Victim-1 a series of emails regarding the Elm Tree Emerging Growth Fund, in which he falsely represented, among other things, that the fund would invest in pre-IPO Twitter shares, and that ELM, Naqvi, and ETIA had "key contacts" with venture capital firms like Kleiner Perkins Caufield & Byers and Benchmark Capital.  ELM and Naqvi subsequently had in-person meetings and telephone calls with Victim-1 about this investment.  On October 9, 2013, Victim-1 invested approximately $52,500 in the Elm Tree Emerging Growth Fund.  Following Twitter's IPO on November 6, 2013, Twitter's stock price rose, and Naqvi subsequently told Victim-1 that ELM, Naqvi, and ETIA had used an options strategy to lock in Victim-1's profits in Twitter.  Because the fund had not invested in pre-IPO Twitter shares, there were no profits to lock in.  Thereafter, ELM and Naqvi sent fraudulent account statements to Victim-1, including one sent on March 7, 2014.  The statement falsely indicated that Victim-1's investment in the fund was valued at $274,550 (up from $52,500), and that the Elm Tree Emerging Growth Fund was valued at $68,115,855. 

ELM and Naqvi made similar misrepresentations with respect to Victim-1's subsequent investments in the Elm Tree 'e'Conomy Fund and Elm Tree Motion Opportunity, falsely indicating that those funds invested in Alibaba, Uber, Square, Pinterest, and GoDaddy, and that Victim-1's investments were growing.  ELM and Naqvi also falsely represented that the value of the Elm Tree 'e'Conomy Fund as of December 12, 2014, was $125,484,750 and that the value of Elm Tree Motion Opportunity as of December 18, 2014, was $77,286,220 - falsely claiming that the total value of the Elm Tree Funds was more than $270 million.

ELM was initially arrested in April 2016 and released on bail.  In June 2017, approximately one week before his then-scheduled guilty plea, ELM fled to Canada.  ELM was subsequently arrested in Canada and extradited to the United States in January 2020.  Naqvi, who had been a fugitive since his indictment in 2016, was arrested in Canada and extradited to the United States in November 2019.

While associated with Longbow, Rolle was a research analyst who researched certain sectors and companies. Longbow would ultimately publish research reports to institutional customers who paid a fee for access to the reports. In February 2019, while associated with Longbow, Rolle sent himself five emails using a personal email account. Attached to those emails were thirty-one documents that contained confidential and/or proprietary information obtained from Longbow's computer system. The documents included financial models, industry channel contact information, research reports, and surveys for the companies that Rolle researched and analyzed at Longbow. 

Rolle's actions in emailing himself confidential and proprietary information violated provisions in Longbow's employee handbook and compliance manual. It was also in violation of a confidentiality agreement executed by Rolle when hired at Longbow. 

Rolle ended his association with Longbow shortly after emailing himself copies of Longbow's files. Rolle then associated with another member firm and used the information he had taken from Longbow to assist him in carrying out his duties as an analyst for his new firm.

[D]ukas participated in an investment by a Firm customer in a start-up motion-analytics company away from the Firm. Dukas solicited the transaction by recommending the investment to the customer, arranging for the customer to attend a promotional meeting about the company, and providing advertising materials about the company to the customer. He helped facilitate the transaction by, in November 2016, forwarding a promissory note and other investment-related documents to the customer. In December 2016, the customer, who was wealthy and sophisticated, invested in the company by wiring $1.5 million to the company. The customer has not complained about the investment and Dukas received no compensation in connection with same. 

Dukas did not provide written notice, or otherwise inform the Firm, of his participation in the transaction. 

Steele is soliciting investments of between $5,000 and $50,000, according to the order, and repeatedly promising potential investors that he can generate returns of at least 100%. Steele has been directing investors to TheCryptoFacts, a public group hosted by Facebook and the place where Steele touts his prowess in trading cryptocurrencies.

The pandemic-caused economic downturn and volatility in the markets is a boon for his trading business, Steele is allegedly telling potential investors.

Steele is claiming he earned "huge profits" on bitcoin trades in February and March 2020. According to TheCryptoFacts page, Steele is purportedly using cryptocurrency trading funds to benefit COVID-19 relief programs.

After the Enforcement Division of the State Securities Board warned Steele that he was violating the registration and disclosure provisions of the Texas Securities Act, Steele began describing himself as a "consultant." The new description is a way to avoid "scrutiny" by the "Texas SEC," according to the order.

According to the order, however, Steele continued to represent that he will trade cryptocurrencies on behalf of investors.

After being warned by the Enforcement Division, Steele allegedly told potential investors that they may "actually lose some money" due to the risks associated with trading cryptocurrencies.

According to the order, Steele is charging investors 20% of the "trade consulting profits" as a fee. He promises to pay investors at the end of a 12-month investment period.

Steele is directing investors to send their principal to a business account at PayPal held by a company called Nuvop Inc., which Steele controls.

Steele is telling potential investors that he does not mix business and personal funds, according to the order, but that is precisely what he is doing.

Steele is commingling funds to pay for expenses unrelated to the trading of cryptocurrencies and making payments to online dating services, ride-sharing services, and restaurants. He is also allegedly using a debit card associated with the PayPal account to withdraw cash from ATMs.

Lorintine Capital charged a performance-based fee to five clients who invested in LC Diversified Fund I LLC, a private fund. The fee was 1% of the value of a client's holdings in the fund and 10% on capital gains generated by the fund's returns.

State and federal securities laws generally allow investment advisers to charge fees based on performance only to "qualified clients." Federal law mandates that a qualified client must meet at least one of several requirements, such as a net worth of $2.1 million or $1 million invested with the adviser after making the private fund investment.

In contrast, to qualify as an "accredited investor" a person must have a $1 million net worth or an annual income of at least $200,000.

The investment agreement for the LC Diversified Fund did not contain any way for clients to represent that they were qualified investors - only that they were accredited.

Lorintine Capital received $2,845 in performance fees from five non-qualified clients from November 2015 through December 2017.

A new report from Advertiser Perceptions forecasts that Covid-19 will cut 33% from Upfront commitments as advertisers shy from long-term commitments and shift to short-term ad buying. Of the more than 150 advertisers surveyed in early May, half say they feel they can replace the reach of linear TV with ads within streaming services and digital video ads. And 41% of the surveyed advertisers say that networks will be forced to abandon the Upfront model of committing to a year's worth of ad buys in advance.

• Securities Industry Commentator
• Bill Singer