Securities Industry Commentator by Bill Singer Esq

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that the judgment of the district court is AFFIRMED. 

Defendant-Appellant Martin Shkreli ("Shkreli") appeals from an amended judgment of the United States District Court for the Eastern District of New York, dated April 11, 2018, sentencing him to 84 months' imprisonment and ordering him to pay (1) a fine of $75,000; (2) restitution of $388,336.49; and (3) forfeiture in the amount of $7,360,450.00, following a jury verdict convicting him of two counts of securities fraud and one count of conspiracy to commit securities fraud, in violation of 15 U.S.C. § 78j(b) and 18 U.S.C. § 371, respectively. See Amended Judgment, No. 15-cr-637 (KAM) (E.D.N.Y. Filed April 17, 2018), ECF No. 583. We assume the parties' familiarity with the underlying facts, the procedural history of the case, and the issues on appeal.  

[I]n exchange for an up-front deposit of approximately $150,000 into an escrow account, Abraham, operating as Advanced Funding Group, using aliases such as "J. Samuel Ibrahim" and "Jamal S. Ibrahim," and also posing as an attorney calling himself "John Wynn," claimed that he could "lease" for clients a Standby Letter of Credit (SBLC) from a European Bank in the "face amount" of approximately $100 million. Of this large sum, clients were promised they could simply keep approximately $20 million as a "non-recourse loan." A supposed "monetizer" would then use the remainder of the funds over the course of the year-long lease of the SBLC in order to engage in lucrative overseas trades (also known as "platform trading"), which would supposedly generate profits sufficient to repay the entire SBLC.

As part of the scheme, clients were directed to wire money to Escrow Agent Kenneth Thomas of "K. Thomas and Company Escrow Services." In reality, the money was wired to the personal checking account of Kenneth Thomas, whose true profession was acting as Abraham's chauffer and as a designer of cat towers. Thomas promptly provided most of the money to Abraham. According to the Superseding Indictment, Abraham then spent large sums of the money gambling at the Motor City Casino in Detroit, and on vehicles and a condominium. According to the Superseding Indictment, Abraham took in approximately $1million in proceeds from the fraud. Victims resided in Virginia, Arizona, Nevada, and other locations.

Standby Letters of Credit as marketed by the defendants do not exist and have long been the subject of public service announcements by the FBI and the Securities and Exchange Commission. Abraham has a prior federal conviction and also a permanent injunction entered against him by the SEC for operating the same scheme.

[S]akelarakis held himself out as having the necessary qualifications, experience and abilities to provide investment services to an elderly victim-investor.  Sakelarakis falsely represented to the victim that he had a number of investment clients, that he was making a substantial profit including by day trading, and that he had a contact in an investment firm who provided him with stock tips.  Sakelarakis also represented that he would invest in stocks, options and other financial instruments on behalf of the victim and that his compensation would be a commission on 10 percent of the profits.

In October 2017, the victim provided Sakelarakis with a $60,000 check.  The funds were more than half of what the victim had saved for retirement.  Within days after receiving and depositing the check, Sakelarakis withdrew $30,000 in cash, and then made additional cash withdrawals, including several large withdrawals at ATMs.  Sakelarakis spent a portion of the funds at stores such as Armani Exchange, Foot Locker, Macy's and Gamestop.  In October and November 2017, Sakelarakis made several false representations in e-mails to the victim-investor relating to the status of the "investments" and the victim's account.  No funds were ever returned to the victim.

Last year, FINRA took several steps to engage with members regarding their current and planned activities relating to digital assets. These efforts included the issuance of Regulatory Notice 18-20, which encouraged firms to keep their Regulatory Coordinator informed if the firm, or its associated persons or affiliates, engaged, or intended to engage, in activities related to digital assets, including digital assets that are non-securities.1 Regulatory Notice 18-20 requested that firms provide these updates to Regulatory Coordinators until July 31, 2019. FINRA appreciates members' cooperation over the past year and is encouraging firms to continue keeping their Regulatory Coordinators abreast of their activities related to digital assets until July 31, 2020.

Respondent Merrimac Corporate Securities violated (1) FINRA Rules 8210 and 2010 by providing false documents to FINRA; (2) FINRA Rule 2010 by selling unregistered securities in violation of Section 5 of the Securities Act of 1933; (3) NASD Rule 3011 and FINRA Rules 3310 and 2010 by failing to establish and implement Anti-Money Laundering ("AML") policies and procedures that can be reasonably expected to achieve compliance with AML rules and regulations and monitor and detect suspicious activity; (4) NASD Rules 3010 and 2110 and FINRA Rule 2010 by failing to maintain a reasonable supervisory system; and (5) FINRA Rule 2010 by effecting securities transactions while its registration was suspended. 

Respondent Robert G. Nash violated (1) FINRA Rules 8210 and 2010 by providing false documents to FINRA; and (2) NASD Rules 3010 and 2110 and FINRA Rule 2010 by failing to maintain a reasonable supervisory system and procedures. The Panel dismissed the AML charges against Nash, alleging violations of NASD Rule 3011 and FINRA Rules 3310 and 2010. 

Merrimac is fined a total of $225,000, suspended from FINRA membership for 30 business days, suspended for one year from receiving and liquidating penny stocks for which no registration statement is in effect, and required to retain an independent consultant to revise its written supervisory procedures. The sanctions associated with each violation are as follows: For violating FINRA Rules 8210 and 2010 by providing false documents to FINRA, Merrimac is fined $50,000. For violating FINRA Rule 2010 by selling unregistered securities in violation of Section 5 of the Securities Act, Merrimac is fined $50,000. For violating NASD Rule 3011 and FINRA Rules 3310 and 2010 by failing to establish and implement AML policies and procedures that can be reasonably expected to detect and cause the reporting of suspicious transactions, Merrimac is fined $25,000. For violating NASD Rules 3010 and 2110 and FINRA Rule 2010 by failing to maintain a reasonable supervisory system, Merrimac is fined $50,000, suspended for one year from receiving and liquidating penny stocks for which no registration statement is in effect, and required to retain an independent consultant, acceptable to Enforcement, with experience in designing and evaluating broker-dealer procedures to review and approve its written supervisory procedures. For violating FINRA Rule 2010 by effecting securities transactions while its registration was suspended, Merrimac is fined $50,000 and suspended from FINRA membership for 30 business days. Merrimac's suspension from receiving and liquidating penny stocks for which no registration statement is in effect shall run consecutive to Merrimac's 30-business day suspension from FINRA membership. 

Nash is fined a total of $50,000, suspended for one year in all principal capacities, and required to requalify as a principal. The sanctions associated with each violation are as follows: For violating FINRA Rules 8210 and 2010 by providing false documents to FINRA, Nash is fined $25,000 and suspended for one year in all principal capacities. For violating NASD Rules 3010 and 2110 and FINRA Rule 2010 by failing to maintain a reasonable supervisory system and procedures, Nash is fined $25,000, suspended for one year in all principal capacities, and required to requalify as a principal before acting in any capacity requiring that qualification. Nash's suspensions shall be concurrent. In addition, Respondents are ordered to pay costs.

Merrimac Corporate Securities, Inc. provided false documents to FINRA; sold unregistered securities; failed to establish and implement adequate AML policies; failed to maintain a reasonable supervisory system and adequate written supervisory procedures; and effected securities transactions while its registration was suspended. 

Respondent Robert Nash provided false documents to FINRA and failed to maintain a reasonable supervisory system and adequate written supervisory procedures. 

Held, findings and sanctions affirmed. 

Registered securities association found that member firm and its chief compliance officer violated the association's rules. Both applicants provided falsified documents to FINRA, and failed to maintain an effective supervisory system. Firm also caused the unregistered sale of securities not subject to exemption in violation of Section 5 of the Securities Act of 1933, failed to establish and implement an effective anti-money-laundering system, and effected securities transactions while its registration was suspended. Held, FINRA's findings of violations and imposition of sanctions are sustained in part.

[N]ash was responsible for reviewing and drafting the firm's WSPs, and the WSPs provided that all advertising would be reviewed for misleading or inaccurate statements and that David Matthews, the firm's president, would do so. The WSPs also specified that "[a]ll business messages on the internet shall be considered advertising." And NASD Rule 2210 defined "advertisements" to include "[a]ny material . . . that is published, or used in any electronic . . . public media, including any Web site." Yet the NAC faulted Nash for not "identify[ing]" in the WSPs that "websites [are] advertising to be reviewed"; its rationale for holding Nash liable was that "Merrimac's procedures did not specifically state that websites were advertising." Neither the NAC's cursory explanation nor FINRA's briefs on appeal have demonstrated why the WSPs were inadequate in light of the various provisions of the WSPs and the terms of NASD Rule 2210. Under the circumstances, Nash did not fail to establish a reasonably designed supervisory system with respect to the websites. 

For his supervisory violations, the NAC fined Nash $25,000, imposed a one-year suspension in a principal capacity, and required him to requalify as a general securities principal. The NAC based these sanctions, in part, on its finding that Nash failed to establish reasonable WSPs regarding the investment-related websites. Because we set aside that finding of violation, we remand for the NAC to determine the appropriate sanctions for Nash's supervisory violations that we sustain. We express no opinion as to the appropriate sanctions on remand.

[B]eginning in late 2016, West Mountain and Alar directed two funds that they managed to invest in subsidiaries of two privately held companies. According to the complaint, at the time of the investments, both companies had minimal revenues, very limited operations, and minimal numbers of employees. Nevertheless, Alar and West Mountain recorded in the financial records for their two funds a collective unrealized gain of $18.6 million based on those investments, thereby allowing them to collect approximately $900,000 of additional fees.

The complaint further alleges that, in valuing the unrealized gains, West Mountain and Alar falsely represented to investors that independent valuations by a third party supported their valuations, even though they knew that the third-party expressly stated it "should not be regarded as an independent valuation." In addition, West Mountain's auditors had advised that the valuation methodology used to calculate the unrealized gains was unreasonable and inappropriate. The SEC also alleges that, in 2017, West Mountain and Alar misrepresented that one of the companies was actively negotiating an anticipated agreement that would result in massive gains for investors. According to the complaint, however, these "active negotiations" never existed.

[F]rom July 2014 to July 2016, Milles and Lutzko raised at least $3.9 million from approximately 70 investors by offering and selling interests in five oil and gas projects managed by Capital Energy Group, LLC, a company they founded and controlled. The complaint alleges that Milles and Lutzko guaranteed investors returns of 227% to 363% and grossly overstated each project's past and current oil and gas production. In reality, most of the wells failed to produce any oil or gas and none ever produced any revenue. The complaint further alleges that Milles and Lutzko used investor funds to make Ponzi-style payments to investors, pay personal credit card bills and rent, and transfer funds to family members and related companies.

[F]rom June 2016 to April 2017, while employed by the fund's adviser, Rege manipulated the inputs he used to value interest rate swaps and swap options to create the false impression that his investments for the fund were profitable. Rege's conduct, the SEC's order finds, artificially inflated the fund's reported returns and caused the fund to pay too much in fees. Rege took steps to conceal his mispricing from the fund's adviser. Because of Rege's inflated valuations, he received a $600,000 bonus. The order states that the adviser ultimately fired Rege, closed the fund, and returned the excessive management fees to the fund.

. . .

The Commodity Futures Trading Commission (CFTC) today also entered a consent order against Rege, involving substantially the same conduct as described in the SEC's order. The CFTC's order finds that Rege violated the Commodity Exchange Act and imposes a trading ban for a period of at least three years, disgorgement that will be deemed satisfied by the payment of disgorgement under the SEC's order, and an additional penalty of $100,000.

Counsel for Wahl and Chung was retained on May 11, 2019. It was necessary to obtain the approval of the Bankruptcy Court for counsel's representation of Wahl as debtor in possession in an ongoing bankruptcy proceeding. The court granted Wahl's request for approval, filed May 29, 2019, on July 1, 2019. Counsel performed several ministerial acts before that date, but despite due diligence following the July 1 approval, is unable to provide expert reports as scheduled and thus requests a ten-day extension, until July 25. The Division's opposition cites a history of delay and foot-dragging by Wahl prior to his retention of current counsel. In view of the brief extension that counsel requests, which will not interfere with the scheduled hearing date, and in order to enable Wahl and Chung to properly defend themselves, the date for exchange of expert reports will be postponed until July 25, 2019. The dates for rebuttal expert reports and deadline to complete depositions of experts will be postponed accordingly, to August 15 and 26, respectively. All other procedural dates remain the same. Further postponements of the expert report deadlines will not be contemplated.

knew that the company was going to fall far short of its revenue and earnings expectations in the last quarter of 2015. Just days before the end of the quarter, Loman made options trades betting that OSI's stock would go down in price. When OSI publicly announced its disappointing quarterly financial results, its stock dropped approximately 35%, netting Loman more than $300,000 on the options trades. As alleged, Loman further profited from the misuse of nonpublic information by purchasing stock in a target company after he learned that OSI was in negotiations to acquire the target at a premium over its market price. When OSI's intended acquisition was announced publicly, Loman immediately sold his shares, netting more than $100,000.

• Securities Industry Commentator
• Bill Singer