Securities Industry Commentator by Bill Singer Esq

CARTON and another individual ("CC-1") worked together to induce investors to provide them with millions of dollars, based on representations that the investor funds would be used to purchase blocks of tickets to concerts, which would then be re-sold on the secondary market.  CARTON and CC-1 purportedly had access to those blocks of tickets based on agreements that CC-1 had with a company that promotes live music and entertainment events (the "Concert Promotion Company") and that CARTON had with a company that operates two arenas in the New York metropolitan area (the "Sports and Entertainment Company").  In fact, neither the Concert Promotion Company nor the Sports and Entertainment Company had any such agreement with CARTON, Wright, CC-1, or any entity associated with them.  After receiving the investor funds, CARTON, Wright, and CC-1 misappropriated those funds, using them to, among other things, pay personal debts and repay prior investors as part of a Ponzi-like scheme.   

In the fall of 2016, CARTON, Wright, and CC-1 exchanged emails and text messages regarding their existing debts.  On September 5, 2016, for example, Wright emailed CARTON and CC-1, "for the sake of our conversation tomorrow," and outlined "the debt past due and due next week."  Wright listed several apparent creditors, to whom he, CC-1, and/or CARTON were personally indebted for over a million dollars.  Wright listed eight possible options for repaying the debt, including "Run to Costa Rica, change name, and start life all over again - may not be an option."  CARTON responded to Wright and CC-1, stating "don't forget I have $1m coming tomorrow from ticket investor[.]  will need to be discussed how to handle."  On September 7, 2016, CARTON emailed Wright and CC-1, referenced a potential investor ("Investor-1") in an upcoming holiday concert tour, and suggested "borrow[ing] against projected profits" on that investment. 

Later in the fall of 2016, CARTON began negotiating with a hedge fund (the "Hedge Fund") regarding a transaction in which the Hedge Fund would extend CARTON capital to finance CARTON's purchase of event tickets, which CARTON would then re-sell at a profit.  In early December 2016, CC-1 texted CARTON and Wright and discussed using the Hedge Fund's capital "to repay debts," and not for the purchase of tickets. 

The next day, December 7, 2016, CARTON emailed the Hedge Fund five agreements between (i) CC-1 and a company controlled by CC-1 (the "CC-1 Entity") and (ii) the Concert Promotion Company.  In each of the purported agreements, the Concert Promotion Company agreed to sell the CC-1 Entity up $10 million worth of tickets to different concert tours.  However, as alleged, these agreements were fraudulent and had not, in fact, been entered into by the Concert Promotion Company.

The following day, the Hedge Fund and CARTON executed the revolving loan agreement (the "Revolving Loan Agreement"), under which the Hedge Fund agreed to provide CARTON with up to $10 million, for the purpose of funding investments in the purchase of tickets for events.  The Revolving Loan Agreement provided, in sum and substance, that the proceeds of the loan would be used only to purchase tickets pursuant to agreements for the acquisition of tickets, including the agreements with the Concert Promotion Company and for limited business expenses.  The Hedge Fund would receive a share of the profits from the resale of the tickets.

The Hedge Fund then sent $700,000 to the CC-1 Entity to finance the purchase of tickets pursuant to the agreements between the CC-1 Entity and the Concert Promotion Company.  CC-1, however, then sent this money to a bank account controlled by Wright, who then, on December 12, sent $200,000 to CARTON's personal bank account (the "CARTON Bank Account"), which CARTON then wired to a casino.  Also on December 12, Wright sent another $500,000 to an individual who had previously lent CARTON $500,000, which was due to be repaid that day.

Later in December 2016, the Hedge Fund sent an additional $1.9 million to the CC-1 Entity, to finance the purchase of tickets pursuant to agreements between the CC-1 Entity and the Concert Promotion Company.  Once again, the Concert Promotion Company had not entered into any such agreements.  CC-1, Wright, and CARTON engaged in text messages regarding the disposition of these funds.  Some of the money was used by CC-1 to repay two individuals who had previously invested with CC-1 in a related scheme involving the purported investment in the resale of tickets, and by CARTON to pay casinos and to pay Investor-1 a purported return on an earlier investment in a ticket-related venture.

CARTON also induced the Hedge Fund to wire $2 million to the Sports and Entertainment Company, based purportedly on an agreement he had with the Sports and Entertainment Company (the "Sports and Entertainment Company Agreement").  The Sports and Entertainment Company Agreement purportedly gave an entity controlled by CARTON (the "CARTON Entity") the right to purchase $2 million of tickets to concerts at one of the venues operated by the Sports and Entertainment Company.  CARTON, among other things, sent the Hedge Fund a copy of the Sports and Entertainment Company Agreement that purportedly had been signed by the chief executive officer of the Sports and Entertainment Company.  However, this agreement was fraudulent and had never been entered into by the Sports and Entertainment Company or signed by the chief executive officer. 

On December 20, 2016, when the Hedge Fund wired the $2 million to the Sports and Entertainment Company, CARTON contacted the Sports and Entertainment Company and told them, in sum and substance, that the wire had been sent in error and should be sent to the bank account for an entity operated by CARTON and Wright, for which Wright is the signatory.  After the money was rewired to that account, Wright wired $966,000 to Wright's personal bank account and $700,000 to the CARTON Bank Account.  CARTON then wired approximately $188,000 from the CARTON Bank Account, including at least $133,000 in wires to several casinos.

The SEC's order finds that despite assuring subscribers that it would maintain the confidentiality of their trading information, ITG improperly disclosed the confidential dark pool trading information of firm clients.  For example, from 2010 to 2015, ITG sent daily Top 100 Reports for the prior day's trading activity.  The reports identified the top 100 stocks for which certain orders were submitted to POSIT and the top 100 stocks for which certain orders were executed.  ITG informed some high frequency trading firms that they could use these Top 100 Reports to identify "potential unsatisfied liquidity needs" in the dark pool, despite assuring subscribers that ITG would not signal their trading intentions.

According to the SEC's order, ITG misleadingly omitted important structural features of the dark pool.  From 2010 to mid-2014, ITG split the dark pool into two separate pools, which prevented certain orders in the two pools from interacting with one another.  ITG failed to disclose the separate pools, which had different performance and fill rates, despite specific questions from subscribers about whether ITG "tiered" or segmented the dark pool in any way.  The SEC's order further finds that from mid-2014 to late 2016, ITG failed to disclose that the firm applied a "speedbump" to slow down interactions involving orders from certain high frequency trading firms.

Since the Committee last addressed this topic at the June 2018 meeting, we have received well over 6,000 comment letters (approximately 3,000 of which are unique) on our proposed rulemaking package.  In addition, we have been seeking input from retail investors through a Commission website, www.sec.gov/tell-us, where investors can view examples of the proposed Customer Relationship Summary and submit feedback on key questions from the proposal.  We have hosted a series of open-forum roundtables across the country, where Main Street investors have had the opportunity to speak directly with me, my fellow Commissioners and senior staff about the proposed rules and a host of related matters.  Finally, the Office of the Investor Advocate engaged RAND Corporation to perform investor testing of the proposed Customer Relationship Summary.  That testing has now been completed, and the results will be made available in the comment file within the next few days.

Our staff has been carefully reviewing all of this information and working diligently to develop a recommendation for the final rules.  I would like to take this opportunity to thank the staff for their tremendous work on this important rulemaking.  I am very pleased with the progress we have made in achieving the goals of our proposals to address investor confusion and to raise the standard of conduct for broker-dealers when they provide recommendations to retail investors while at the same time preserving retail investor access (in terms of choice and cost) to a variety of types of investment services and investment products.

• Securities Industry Commentator by Bill Singer Esq