The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq WEEK IN REVIEW

June 23, 2018



Testimony on "Oversight of the U.S. Securities and Exchange Commission" by SEC Chairman Jay Clayton (Before the Committee on Financial Services U.S. House of Representatives)  SEC Chair Clayton has surprised his earliest critics and disappointed those who expected a do-nothing regime under his watch. Clayton has brought a focused, sensible, and pragmatic agenda to the SEC. Clayton has refashioned the SEC into a forceful prosecutor of affinity fraud, elder fraud,  crypto fraud, Ponzi fraud, and other horrific frauds that devastate the most vulnerable among us. Quietly, Clayton has become one of Main Street's true champions. Under his guidance, the SEC is less about swinging for the fences than it is about fundamentals and small ball. Fewer strikeouts. More runs. Clayton is not without his imperfections but they pale in comparison to many of his predecessors'. Could there be a more robust regulation of so-called too-big-to-fail? Perhaps. On the other hand, in triaging the SEC's finite staff and funding, I would prefer to see the federal regulator aggressively pursue those who prey upon retirees, elderly, and the unsophisticated investors in contradistinction to allocating human and financial resources to file charges against multi-national financial services firms who pay fines out their shareholders' pockets and simply view their misconduct pursuant to a cost-benefits analysis. Our publisher Bill Singer urges all serious Wall Street participants to read -- thoroughly read -- Clayton's published testimony before the House Financial Services Committee. Notably missing from the SEC's upcoming agenda is a lot of crap and feel-good idiocy that wasted far too much time in recent decades. Exercise your right to disagree with whatever you wish; however, at least give Clayton credit for focusing his organization on issues that matter. READ FULL TEXT SPEECH

Daniel Burgess Imprisoned For Securities Fraud (DOJ Press Release) Daniel Burgess was indicted in the United States District Court for the District of Vermont on one-count of wire fraud . Prosecutors alleged that Burgess agreed to try to sell 520,000 shares of a penny stock for a woman, who was supposed to receive 80% of the gross proceeds. From between August and October 2011, Burgess sold all 520,000 shares for $619,000 but only paid the woman $246,000, and allegedly converted the remaining money to his own use that included a European wedding and honeymoon. Following his guilty plea to wire fraud, Burgess was sentenced to 24 months in prison plus three years of supervised release, and ordered to pay $248,900 restitution.

SEC Charges Operator of Ponzi Scheme Targeting Retail Investors (SEC Litigation Release No. 24173) In a Complaint filed in the United States District Court for the Middle District of Pennsylvania, the SEC alleges that insurance agent James E. Hocker engaged in a Ponzi scheme that targeted retail investors who lacked significant investment experience.The Complaint asserts that from at least 2010 through 2017, Hocker raised about $1.27 million from somet 25 investors with whom hehad developed relationships through his sales to them of insurance, and, thereafter, fraudulently promised them guaranteed returns of between 10% and 30% from investments he would make on their behalf in the S&P 500 and other unspecified investment vehicles.Allegedly, Hocker did not invest any of the investors' funds but converted same for personal living expenses such as credit card bills and to make payments to other investors. The Complaint asserts that the victims were largely elderly retirees or individuals nearing retirement, without significant investment experience. Some of Hocker's investors were purportedly widows who relied on Hocker to manage their money following the death of their husbands. READ the FULL TEXT COMPLAINT






SEC Charges New York Penny Stock Financier with Fraudulent Market Manipulation and Scalping Scheme (DOJ Litigation Release No. 24171) The SEC filed a Complaint in the United States District Court for the Southern District of New York charging Joseph A. Fiore, and two companies he purportedly owns, Berkshire Capital Management Company, Inc., and Eat at Joe's, Ltd. (n/k/a SPYR, Inc.) with market manipulation and scalping. The Complaint alleges in part that Fiore illegally sold the stock of microcap issuer, Plandai Biotechnology, Inc and he was involved in a fraudulent promotional campaign that recommended purchase of Planda without without disclosing his beneficial ownership. The SEC asserts that defendants generated over $11 million from unlawful stock sales.The SEC seeks permanent injunctions, disgorgement of ill-gotten gains along with prejudgment interest, and financial penalties against all of the defendants; penny stock bars against Fiore and Berkshire; and an officer and director bar against Fiore, READ THE FULL TEXT COMPLAINT.

Securities and Exchange Commission v. PlexCorps, et al., Civil Action No. 17-cv-07007 (E.D.N.Y., filed Dec. 1, 2017) (SEC Litigation Release No. 24170 ) In a Complaint filed in the United States District Court for the Eastern District of New York the SEC had charged Dominc Lacroix (characterized as a "recidivist"), as well as his alleged partner, Sabrina Paradis-Royer, and PlexCorps, with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933 (Securities Act). The complaint also alleges that Lacroix and PlexCorps violated Sections 5(a) and 5(c) of the Securities Act.  The Complaint sought permanent injunctions, disgorgement plus interest, and penalties.  The SEC sought an officer-and-director bar for Lacroiz; and a bar from offering digital securities against Lacroix and Paradis-Royer. The Court froze the assets of Lacroix in response to the SEC's allegations that since the original freeze in December, Lacroix had been using secret accounts, including an account in his brother's name but which he controlled, to improperly dissipate for personal use digital assets obtained from investors during the PlexCoin Initial Coin Offering (ICO).

Zipper Plays Sisyphus To FINRA's Zeus (BrokeAndBroker.com Blog) For the intrepid few among you who still give a crap about this farce masquerading as Wall Street regulation, Polonius died of his wounds, Rosencranz and Guildenstern were hung out to dry, Ophelia got all wet and did not respond to CPR, Laertes got stuck on a point and bled out, Hamlet took a stab at setting things right and died of his wounds, Gertrude had one drink too many, Claudius had another drink too many, and, well, you know, there's this guy Fortinbras who seems to be taking over but, wow, who the hell names their kid Fortinbras? As such, enter stage right Zipper and Dakota. Enter stage left Horatio (remember him?) and FINRA. The curtain rises on Act XXXIV: In the Matter of FINRA Department of Enforcement, Complainant, v. Bruce Martin Zipper and Dakota Securities International, Inc. Respondents (FINRA Office of Hearing Officers Hearing Panel Decision,  Disciplinary Proceeding No. 2016047565702 / June 18, 2018)

Two Colorado Financial Services Executives Sentenced in Multimillion-Dollar Fraud Scheme (DOJ Press Release) Former Compass Financial Solutions Ltd. ("CFS") Chief Executive Officer Brian G. Elrod and former CFS Corporate Counsel William E. Dawn each pled guilty in the United States District Court for the District of Colorado to one count of conspiracy to commit mail fraud and wire fraud in connection with allegations that the defendants had defrauded investors from 2005 to 2011 through promises of access to substantial financing, including hundreds of millions in cash in an overseas bank account, in exchange for up-front fees.After diverting investors' funds, in part, for Ponzi-like payments to other investors and himself, Elrod defaulted on promissory notes and then conspired with Kenneth Brewington, who purported to be a wealthy financier, and told investors that he would assume CFS's obligations on these notes. Dawn, who served as CFS in-house counsel from 2002 to 2010, drafted promissory notes sold by Elrod and Brewington despite knowing that the proceeds would not be used as promised.  After a two-week jury trial, Brewington was convicted on multiple counts of fraud and money laundering. Elrod was sentenced to 38 months in prison plus three years of supervised release, and ordered to pay $2,440,051.29 restitution. Dawn was sentenced to time served and ordered to pay $366,752.01 restitution.

Maine Man Sentenced to 48 Months in Prison for Investment Fraud Scheme and Failing to File Federal Tax Returns (DOJ Press Release) Federal prosecutors alleged that from 2009 through September 2017,William Bischoff defrauded over two dozen clients of his financial advisory business out of  $5,647,446.33 by falsely promising to invest their money in real estate, structured legal settlements, high yield notes, and a start-up recycling business. Bischoff engaged in Ponzi-like fraud by using investors' funds to make payments to other victim investors. Additionally, Bischoff allegedly failed to file individual federal tax returns for the four-year period from 2011 to 2015, causing a $568,845 tax revenue loss. Bischoff pled guilty in the United States District Court for the District of New Hampshire to one count of wire fraud and one count of willfully failing to file federal tax returns. 



SEC Shuts Down $102 Million Ponzi Scheme (SEC Press Release 2018-110)
Perry Santillo. Christopher Parris, Paul LaRocco, John Piccarreto, and Thomas Brenner, and three companies that they controlled: First Nationle Solution LLC, United RL Capital Services, and Percipience Global Corp. were charged in a Complaint filed by the SEC in the United States District Court for the Southern District of New York with violating the antifraud provisions of the federal securities laws. The Court imposed an asset freeze and a temporary restraining order. The Complaint alleges that the defendants had engaged in a $102 million Ponzi scheme in which defendants spent at least $20 million to enrich themselves, paid $38.5 million in Ponzi-like payments, and transferred much of the remainder in transactions that appear unrelated to the issuers' purported businesses. READ the FULL TEXT Complaint.

For the policy wonks among my readers: U.S. Securities and Exchange Commission / STRATEGIC

Merrill Lynch Admits to Misleading Customers about Trading Venues / Will Pay $42 Million Penalty to Settle Charges (SEC Press Release 2018-108) The SEC charged Merrill Lynch, Pierce, Fenner & Smith with falsely informing customers that it had executed millions of orders internally when it actually had routed them to other broker-dealers, including proprietary trading firms and wholesale market makers. Merrill Lynch called this practice "masking," which required the firm to reprogram its systems to falsely report execution venues, altering records and reports, and providing misleading responses to customer inquiries.  Merrill Lynch's use of masking fostered the false appearance that the firm was a more active trading center, which reduced access fees it typically paid to exchanges. In response to the allegations, Merrill Lynch agreed to settle the charges, admit wrongdoing, and pay a $42 million penalty.

Is FINRA Sleepwalking Through Member Firm Examinations? (BrokeAndBroker.com Blog) In today's BrokeAndBroker.com Blog we consider a compelling FINRA regulatory settlement involving a member firm's deficient written supervisory procedures. The self-regulatory-organization provides its members with something amounting to a primer on how to debug various policies and procedures. Those of us who are veterans to the industry's compliance scene know all too well the many written procedures that are littered with such useless terms as "[INSERT NAME]" or "TBD". Imagine there's a fire in your building and you come upon a fire box that says "In the event of fire pull handle" but there's no handle. Not a great time to be thinking up a Plan B. Notwithstanding FINRA's strong case, the regulator still has some explaining to do. Sort of like the fire department inspector who should have noticed during each and every inspection over the last five years that there was no handle attached to the fire box that was supposed to have one.  

Arizona Man Sentenced to Prison for Distributed Denial of Service Attacks against Emergency Communications System and Other Municipal Websites (DOJ Press Release) Federal prosecutors alleged that Between March 9 and March 14, 2015, Tucker executed a series of distributed denial of service (DDoS) attacks against various city websites. In addition to disabling the City of Madison's website, Tucker crippled the city's Internet-connected emergency communication system, causing delays and outages in the ability of emergency responders to connect to the 911 center and degrading the system used to automatically dispatch the closest unit to a medical, fire, or other emergency. After pleading guilty to one count of intentional damage to a protected computer, Randall Charles Tucker, a/k/a "Bitcoin Baron," was sentenced in the United States District Court for the District of Arizona to 20 months in prison and ordered to pay $69,300 restitution. 

Dallas Oil-And-Gas Company, CEO Settle $8 Million SEC Fraud Suit (SEC Litigation Release No. 24169) In a Complaint filed in the United Sttates District Court for the Northern District of Texase, the SEC Texas Coastal Energy Company, LLC (TCEC) and chief executive officer Jefferey Gordon with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC also charged Gordon with violating Section 15(a) of the Exchange Act based on his alleged role as an unregistered broker. The Complaint alleged that Gordon and TCEC deceived at least 80 investors into investing over $8 million by lying about TCEC's experience and track record, the advice and success rate of its geologists, the potential reserves on its prospects, the potential return on investments therein, and the manner in which TCEC would use investor funds. TCEC and Gordon purportedly misappropriated over $2.6 million of investor funds for their own use. Without admitting or denying the SEC's allegations, TCEC and Gordon consented to the entry of a final judgment that permanently restrains and enjoins them from violating these provisions. TCEC and Gordon also agreed to be restrained and enjoined from certain activities in connection with the purchase, offer and sale of securities in the future. Additionally, TCEC and Gordon will be ordered to pay disgorgement, prejudgment interest and civil penalties totaling $7.2 million. Finally, Gordon has offered to consent to associational and penny stock bars.



Pastor Indicted for Scheme to Defraud Investors (SEC Litigation Release No. 24168) Abundant Life Ministries pastor Larry A. Holley and Patricia Enright, a.k.a. Patricia Gray were indicted in the United States District Court for the Eastern District of Michigan on charges of conspiracy to commit wire and mail fraud, wire fraud, mail fraud, and money laundering. Prosecutors allege that the the defendants operated Treasure Enterprise, LLC, which fraudulently purported to provide financial planning and asset management services. Victim's funds were allegedly not invested as promised but diverted into Treasure's bank accounts and used the money for their personal benefit, for the benefit of Abundant Life Ministries, to make interest and principal payments to earlier investors, and to pay other Treasure employees. Holley and Gray are also defendants in a parallel SEC enforcement action.

Becoming Yourself On Wall Street: Josh Brown And Alexander Palumbo (BrokeAndBroker.com Blog) Josh Brown remembers where he came from and not with particular fondness. Josh's broker-dealer experience propelled him to leave the whole FINRA-member-firm platform and build his future via a registered investment advisor or RIA as we call it in the biz. Long ago, I abandoned much faith in the future of the FINRA-regulated broker-dealer model and see it as a wasting asset doomed for obsolescence. Suffice it to say that I am an ardent proponent of creative destruction. As a disciple of the great Yoda, I have embraced his wisdom: "The greatest teacher, failure is."  Today, however, I come not to bury FINRA or its member firms but to praise Josh Brown's recent video "Being a Younger Advisor," which features Josh Brown, 41 (the older but debonair guy on the left of the screen) and Alexander Palumbo, 26 (the too-goddamn-young-and-handsome bearded guy on the right of the screen). Sadly, I have underwear older than both of them!

Observations on Culture at Financial Institutions and the SEC by SEC Chairman Jay Clayton (Speech, June 18, 2018) SEC Chair Clayton offers some interesting observations about regulators and those they regulate. In part, Clayton considers whether the industry's culture makes it clear that lying is unacceptable and whether offending parties are meaningfully sanctioned. 

CFTC Orders JPMorgan Chase Bank, N.A. to Pay $65 Million Penalty for Attempted Manipulation of U.S. Dollar ISDAFIX Benchmark Swap Rates (CFTC Release 7742-18) The CFTC issued an Order finding that from at least January 2007 through January 2012, JPMorgan Chase Bank, N.A. (JPMC) made false reports and attempted to manipulate the U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX), a leading global benchmark referenced in a range of interest rate products, to benefit its derivatives positions, including positions involving cash-settled options on interest rate swaps. In settlement of the allegations, JPMC agreed to pay a $65 million civil monetary penalty. READ the FULL TEXT CFTC ORDER.



The antifraud provisions of the federal securities laws prohibit two well-defined categories of misconduct. One category is the use of fraudulent statements in connection with the offer and sale of securities. The other category is employing fraudulent schemes in connection with the offer and sale of securities. In Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), this Court considered the elements of a fraudulent statement claim and held that only the "maker" of a fraudulent statement may be held liable for that misstatement under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5(b). 

The question presented is whether a misstatement claim that does not meet the elements set forth in Janus can be repackaged and pursued as a fraudulent scheme claim. The Circuits have split 3-2 on this question. The Second, Eighth and Ninth Circuits have held that a misstatement alone cannot be the basis of a fraudulent scheme claim, while the DC Circuit and the Eleventh Circuit have held that a misstatement standing alone can be the basis of a fraudulent scheme claim. 



Theranos Founder and Former Chief Operating Officer Charged In Alleged Wire Fraud Schemes / Elizabeth Holmes and Ramesh "Sunny" Balwani Are Alleged To Have Perpetrated Multi-million Dollar Schemes To Defraud Investors, Doctors, and Patients (DOJ Press Release) A federal grand jury in the United States District Court for the Northern District of Californian indicted Theranos, Inc. founder  Elizabeth A. Holmes and former Director/President/Chief Operating Officer Ramesh "Sunny" Balwani each on two counts of conspiracy to commit wire fraud and nine counts of wire fraud. Theranos was purportedly a private health care and life sciences company seeking to revolutionize medical laboratory testing through innovative blood-drawing and blood testing. Holmes and Balwani allegedly engaged in a multi-million dollar scheme to defraud investors, and a separate scheme to defraud doctors and patients.  READ THE FULL TEXT INDICTMENT 

Power Play Short Circuits Broker's Career (BrokeAndBroker.com Blog) To be a grand thief is often the stuff of legend. We seem to idolize crooks who think big, even when they get caught. We quote Willie Sutton. Al Capone, Jordan Belfort, and Bernie Madoff are the subjects of books and movies. The petty thief, on the other hand, is often viewed with little more than scorn: as if the turnstile jumper and pickpocket should have aspired to more. Master thieves are champs. Petty thieves are chumps. You ask me, they're all losers but, then again, that's just me. In a recent FINRA regulatory settlement we got a stockbroker who threw it all away for a few hundred bucks. At some point in time, he said it was all a mistake. Yeah, sure -- that's an original explanation. Mistake or not, it all comes off as both sad and pathetic. 

Former Stockbroker Sentenced for Microcap Stock Manipulation Scheme (DOJ Press Release)
According to federal prosecutors brothers,Jehu, Learned, and Adam Hand engaged in a pump-and-dump scheme involving the Crown Marketing microcap company, which purportedly owned a patented drug delivery technology. Jehu Hand incorporated Crown in 2010 and issued stock to front companies that he secretly controlled. In 2012, Jehu enlisted his brothers Adam and Learned, with Learned becoming Crown's Chief Executive Officer. Learned put out misleading press releases about Crown; and Adam traded and sold the company's. Federal prosecutors alleged that the brothers sold over 23 million shares of Crown stock, causing over $1.5 million in investors' losses.Adam Hand and Learned Hand pled guilty to Informations charging each with conspiracy to commit securities fraud. In May 2018, Jehu Hand was convicted after a 13-day trial of conspiracy, securities fraud and wire fraud. Adam Hand was sentenced in the United States District Court for the District of Massachusetts  to 30 months in prison and three years of supervised release. 

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