The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

September 21, 2018

You ever wonder why you can never get a reservation at a restaurant during prime time? Former Employee of Restaurant Reservation Company Charged with Fraud for Intentionally Disrupting the Business of a Competitor (DOJ Press Release)
https://www.justice.gov/usao-ndil/pr/former-employee-restaurant-reservation-company-charged-fraud-intentionally-disrupting
In a criminal Information filed in the United States District Court for the Northern District of Illinois, federal prosecutors charged with one count of wire fraud Steven Addison, Enterprise Operations Specialist for a company that provides an online reservation system for restaurants, READ the Addison Information;https://www.justice.gov/usao-ndil/press-release/file/1095526/download
Feast your eyes on this explanation from the DOJ Release:

[F]rom November 2017 until February 2018, Addison booked more than 300 fraudulent reservations at Chicago restaurants that use Reserve, a competing reservation service, according to a criminal information filed in federal court in Chicago.  Many of the bogus reservations were made on busy days, including New Year's Eve and Valentine's Day, when Addison knew restaurants would suffer financial losses when no diners showed up to claim the reservation, the information states.  Addison's scheme intended to demonstrate to Chicago restaurants that Reserve had an inferior reservation system, the charge alleges.

Just tossing my two cents into the sentencing considerations for Addison, but, how about you never allow this idiot to make a restaurant reservation for himself before 9:15 p.m. (and when he arrives, he's told to wait at the bar for an hour); and he must always be charged for bottled water but served only  tap; and some unknown crap has to be lodged in the tines of his fork; and there has to be a lipstick stain on his wine glass; and the only available wine is a White Zinfandel; and whatever "Special" he wants, the last one was just sold; and no matter how many varieties of potato side dishes are on the menu, he's always served rice; and his coffee is served lukewarm in a cracked cup; and the only dessert left by the time he orders is the poached pear; and no matter how wildly he waves, no waiter will bring him back whatever change he is owed. Yeah, I know, I have the makings of an amazing judge. 

Division of Trading and Markets and Division of Corporation Finance (SEC Public Statement)
https://www.sec.gov/news/public-statement/suspension-trading-certain-bitcoinether-tracking-certificates It all seems fairly official and authorative until you come to that last paragraph, which admonishes that the "Statement" only reflects the views of the Divisions of Trading and Markets and Corporation Finance; and, pointedly, does not reflect the SEC's ultimate approval or disapproval. All of which makes the Statement just what exactly? A musing? A contemplation of Wall Street's regulatory navel? Make of it as you will:

On September 9, 2018, the Securities and Exchange Commission ("SEC") determined that the lack of current, consistent and accurate information concerning Bitcoin Tracker One (Ticker Symbol: CXBTF) and Ether Tracker One (Ticker Symbol: CETHF) (together, the "Certificates") issued by XBT Provider AB, a Swedish company headquartered in Stockholm, resulted in confusion amongst market participants regarding the Certificates.  For example, the broker-dealer application materials submitted to enable the offer and sale of the Certificates in the United States, as well as certain trading websites, characterize them as "Exchange Traded Funds." Other public sources characterize the Certificates as "Exchange Traded Notes." By contrast, the issuer characterizes them in its offering materials as "non-equity linked certificates." CXBTF and CETHF are listed and trade on the NASDAQ/OMX in Stockholm and have recently been quoted on OTC Link (previously "Pink Sheets") operated by OTC Markets Group, Inc.

Market participants seeking to quote, trade or facilitate transactions in the Certificates are cautioned to analyze the legal and regulatory implications and consequences of doing so, including under the federal securities laws and the Commodity Exchange Act ("CEA"). For example, before seeking to recommence quoting or trading in the Certificates, the staff would expect that a broker-dealer's legal analysis, including under Exchange Act Rule 15c2-11 would, at minimum, address the issues raised in the suspension order, including providing a reasonable basis for a conclusion that the Certificates can appropriately be quoted or traded in United States markets. The issuer's public disclosures specifically note that the Certificates are non-equity linked Certificates and note that the value of and any amounts payable under the Certificates will be strongly influenced by the performance of the referenced digital assets (Bitcoin or Ether). The disclosures state that the issuer is a special purpose vehicle that does not intend to engage in any other business activities. The publicly posted terms of the Certificates state that they do not bear interest, are not principal-protected and have no scheduled maturity date.  The posted terms use a notional amount of the Certificates for purposes of calculating payments. The payout of the Certificates is described as calculated with reference to Bitcoin/Ether prices in relation to USD, which "causes a so-called synthetic exposure" to Bitcoin/Ether and USD. SEC staff is consulting with Commodity Futures Trading Commission ("CFTC") staff with respect to the regulatory considerations applicable to the Certificates under the CEA. Under the comprehensive framework for regulating swaps and security-based swaps established in Title VII of the Dodd-Frank Act, the CFTC is given regulatory authority over swaps and the SEC is given regulatory authority over security-based swaps.

This statement represents the views of the Divisions of Trading and Markets and Corporation Finance.  It is not a rule, regulation or statement of the Securities and Exchange Commission (the "Commission").  Further, the Commission has neither approved nor disapproved its content.

In Securities and Exchange Commission v. Homero Joshua Garza, GAW Miners, LLC, and ZenMiner, LLC, No. 15-cv-01760 (D. Conn. filed Dec. 1, 2015), the United States District Court for the District of Connecticut entered final judgments were entered against GAW Miners and ZenMiner and their principal, Homero Joshua Garza, for their roles in selling shares in a purported bitcoin mining operation. In fact, neither GAW or ZenMiner had the computing power to engage in large-scale mining and any returns paid to investors were down so a la Ponzi using funds from other investors. In the parallel federal criminal case, United States v. Homero Joshua Garza, No. 17-CR-158 Garza was sentenced to 21 months in prison for wire fraud plus three years of supervised release, the first six months of which Garza must spend in home confinement. 

CFTC Finds that Proprietary Trading Firm Geneva Trading USA, LLC Engaged in Spoofing (CFTC Release 7797-18)
https://www.cftc.gov/PressRoom/PressReleases/7797-18?utm_source=govdelivery
The CFTC issued an Order filing and settling charges against proprietary trading firm Geneva Trading USA, LLC for engaging in the disruptive trading practice of "spoofing" through three of its employees identified in the Order as Trader A, Trader B, and Trader C. Without admitting or denying the charges, Geneva agreed to pay a $1.5 million civil monetary penalty and to cease and desist from violating the Commodity Exchange Act's prohibition against spoofing. In the Order, the CFTC recognizes Geneva's early resolution of this matter in the form of a reduced civil monetary penalty. The Order also finds that Geneva cooperated in the investigation and remediated and enhanced its compliance systems and polices related to manipulative trading and spoofing. READ the FULL TEXT Order https://www.cftc.gov/sites/default/files/2018-09/enfgenevaorder092018.pdf

http://www.brokeandbroker.com/4198/elgart-tax-liens/
Today's BrokeAndBroker.com Blog covers the saga of David Adam Elgart. who had become the President and Chief Compliance Officer of FINRA member firm Sequoia Investments, Inc. Elgart ran into some financial difficulties in the form of tax liens, which were required to be timely disclosed on his Form U4. After a contested hearing, FINRA found, in part, that Elgart had willfully failed to timely disclose the liens and hit him with thousands of dollars in fines and months of suspension. Willfully? Fuggedaboutit, the office know-it-all tells you while holding court at the water cooler. Just pay the fine, do the time, and, no big deal, who gives a crap about that willfully thing, another fancy word, when the suspension is over, you go back to work. Except you can't go back to work! As with so much legal advice dispensed by non-lawyers around the office water cooler, it turns out that after Elgart pays the dollars and sits out the months, he's statutorily disqualified from further participation in the industry. 

SEC Charges Investment Adviser and Senior Officers with Defrauding Clients (SEC Litigation Release No. 24278)
https://www.sec.gov/litigation/litreleases/2018/lr24278.htm / September 20, 2018
In the SEC's sixth action arising out of an enforcement initiative to combat cherry-picking, the federal regulator filed a Complaint  in the United States District Court for the Western District of Louisiana, charging World Tree Financial, LLC and its majority-owner and co-founder, Wesley Kyle Perkins with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Sections 17(a)(1) and 17(a)(2) of the Securities Act of 1933, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Also, the Complaint charges that Priscilla Gilmore Perkins, Wesley Perkins' wife and World Tree's co-founder and co-owner with violating the antifraud provisions Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, Section 17(a)(2) of the Securities Act, and with aiding and abetting World Tree's and Perkins' violations of Sections 206(1) and 206(2) of the Advisers Act. The Complaint alleges that Wesley Perkins traded securities in World Tree's omnibus account and cherry-picked profitable trades to favored accounts, like his own, while allocating unprofitable trades to two accounts with substantial assets controlled by one person. READ the FULL TEXT Complaint https://www.sec.gov/litigation/complaints/2018/comp24278.pdf

SEC Charges Purported Hedge Fund and Manager with Fraudulent and Unregistered Sale of Securities (SEC Litigation Release No. 24279)
https://www.sec.gov/litigation/litreleases/2018/lr24279.htm
In a Complaint filed in the United States District Court for the Southern District of California, the SEC alleges that Leroy "Lee" Young and his firm, Young Capital Management LLC (YCM) illegally raised at least $362,000 from at least 32 investors by falsely representing that investors' money would be used for fees associated with selling bonds or, alternately, for fees associated with launching a hedge fund. Investors were promised returns of ten times their principal investment in sixty days; however, the Complaint alleges that Young spent the investors' money on personal expenses, and has not paid returns to investors or repaid their principal investments. Young and YCM admitted the allegations in the Complaint and have consented to the entry of final judgments permanently enjoining them from future violations of the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5, and the registration provisions of Section 5(a) and 5(c) of the Securities Act of 1933, and ordering Young to pay disgorgement of $336,450, prejudgment interest of $18,923, and a civil penalty of $336,450. Young has agreed to the issuance of an SEC order that permanently bars him from association with any broker, dealer, investment adviser, municipal securities dealer, transfer agent, or nationally recognized statistical rating organization, and from participating in an offering of a penny stock. 

Separately, without admitting or denying the SEC's findings, Michael L. LaPenna, who allegedly recruited investors, agreed the issuance of an order finding that he violated the antifraud provisions of the federal securities laws; imposing a cease-and-desist order; and requiring the payment of disgorgement of $22,500, prejudgment interest of $583, and a $22,500 civil penalty. Similarly, without admitting or denying the SEC's findings, attorney Phillip R. Grogan, who allegedly facilitated the transfer of investors' frunds, agreed to the issuance of an order finding that he caused Young's antifraud violations; imposing a cease-and-desist order; and requiring the payment of disgorgement of $3,050, prejudgment interest of $248, and a $3,050 civil penalty.
READ the FULL TEXT:
Securities and Exchange Commission v. Leroy "Lee" Young and Young Capital Management LLC, 18-CV-2170 (SD Cal. 2018) https://www.sec.gov/litigation/complaints/2018/comp24279.pdf
In the Matter of Michael L. LaPenna, Release No. 33-10553 Admin. Proc. File No. 3-18787 (September 19, 2018) https://www.sec.gov/litigation/admin/2018/33-10553.pdf
In the Matter of Phillip R. Grogan, Esq., Release No. 33-10554; Admin. Proc. File No. 3-18788 (September 19, 2018) https://www.sec.gov/litigation/admin/2018/33-10554.pdf

Business Services Company and Former CFO Charged With Accounting Fraud (SEC Release 2018-205)
https://www.sec.gov/news/press-release/2018-205
Without admitting or denying the SEC's findings, Barrett Business Services Inc.("BBSI") agreed to pay a $1.5 million civil penalty and its former Controller Mark Cannon agreed to pay a $20,000 civil penalty and to be suspended from appearing and practicing before the Commission as an accountant, which includes not participating in the financial reporting or audits of public companies. The SEC's order permits Cannon to apply for reinstatement after one year.  The SEC's administrative proceeding alleged that BBSI had engaged in violation of the antifraud, books and records, internal accounting controls, and reporting provisions of the federal securities laws, and that Cannon had engaged in books and records violations in connection with an accounting fraud involving the company's workers' compensation expenses. BBSI CEO Michael Elich, who was not charged, reimbursed the company for $20,800 in cash bonuses he received during the period of the alleged accounting violations. Separately, in a Complaint filed in the United States District Court for the Western District of Washington, the SEC alleged that BBSI's former Chief Financial Offocer James D. Miller manipulated accounting records to hide the increasing workers' compensation expense, which ultimately requred the restatement of financial results. In a parallel action, the U.S. Attorney's Office for the Western District of Washington today announced criminal charges against Miller. READ the 
SEC Miller Complaint http://www.sec.gov/litigation/complaints/2018/comp-pr2018-205.pdf
SEC BBSI and Cannon Order http://www.sec.gov/litigation/admin/2018/33-10557.pdf

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