Securities Industry Commentator by Bill Singer Esq

[B]itqyck and founders Bruce Bise and Sam Mendez created and sold Bitqy and BitqyM in unregistered securities offerings to more than 13,000 investors, raising more than $13 million. Investors allegedly received $4.5 million for referring new investors to Bitqyck but collectively lost more than two-thirds of their investment in the Dallas-based company.

The SEC's complaint alleges that Bise and Mendez misrepresented QyckDeals, a daily deals platform using Bitqy, as a global online marketplace, and falsely claimed that each Bitqy token provided fractional shares of Bitqyck stock through a "smart contract." The complaint alleges that the defendants falsely told investors that BitqyM tokens provided an interest in a Bitqyck cryptocurrency mining facility powered by below-market rate electricity. In reality, Bitqyck did not have access to discounted electricity and didn't own any mining facility.  Bitqyck, aided and abetted by its founders, also is alleged to have illegally operated TradeBQ, an unregistered national security exchange offering trading in a single security, Bitqy.  

[2]0 investors in two proprietary hedge funds operating out of Howard's law offices.  According to the SEC's complaint, the defendants advertised that the funds would invest in a variety of instruments, but unbeknownst to investors, in fact invested almost exclusively in settlement advance loans to more than 70 of Howard's NFL class-action clients.

As alleged, the defendants represented that Reinhard was an "extremely successful investment manager," but failed to mention that he had served jail time for bankruptcy and tax fraud, and had been barred by the SEC from working for any investment adviser firm.  The SEC further alleges that Howard defrauded investors by borrowing $612,000 in undisclosed personal mortgage loans from the funds, which he never repaid, and that Howard and Reinhard used investor funds to pay themselves fabricated "broker fees" on settlement advance loans to Howard's legal clients.  Howard and Reinhard allegedly raised $4 million from the retired NFL players, about half of whom rolled over their NFL 401(k) accounts to the hedge funds.

[F]rom at least September 2012 through December 2016, Cetera invested and held clients in mutual fund share classes that charged 12b-1 fees - which are recurring fees deducted from the fund's assets - even when it knew these clients were eligible to invest in lower-cost shares of the same funds without 12b-1 fees. Clients whom Cetera invested in the higher-cost, otherwise identical share classes paid additional compensation to Cetera for as long as they held these investments. The SEC's complaint also alleges that Cetera participated in a program offered by its clearing broker whereby it agreed to share with Cetera revenues and service fees it received from certain mutual funds. As a result, Cetera had an incentive to favor these mutual funds in the program over other investments when advising clients. The SEC's complaint further alleges that Cetera directed its clearing broker to mark-up certain fees charged to Cetera's advisory clients, which Cetera then received indirectly from these same clients.

According to the SEC's complaint, Cetera failed to adequately disclose to its advisory clients each of these practices and the conflicts of interest associated with them. As a result of these failures, the SEC alleges that Cetera generated over $10 million in undisclosed compensation.

On November 22, 2016, THOMAS was charged in a 21-Count Indictment with wire fraud, bank fraud and money laundering.  This Indictment charged THOMAS, who represented himself as a successful Harvard educated investment advisor, with defrauding his father's used car warranty company, NC&VA Warranty of Roxboro, N.C., several of its customers, his wife, and his father-in-law.  THOMAS claimed he was conservatively investing their money in U.S. Treasury Bills.  Instead, through an on-line brokerage firm, THOMAS used these funds to conduct risky trades in the commodities and futures market.  To conceal this fraud scheme, THOMAS provided these victims and various financial institutions with false information and fabricated bank and brokerage statements.  To obtain additional funds, the Indictment charged THOMAS with using the same false information and fabricated statements to defraud financial institutions out of approximately 1.9 million dollars in loan proceeds.   In addition to losing the victims' money in risky trades, the Indictment charged THOMAS with spending more than 1.6 million dollars to pay personal expenses.       

On March 15, 2018, THOMAS was charged in another Indictment with six counts of income tax evasion for the calendar years 2010 through 2015 and two counts of failing to disclose his interest in and authority over foreign bank accounts.  According to court records, THOMAS failed to file United States Income Tax Returns (Forms 1040) or pay taxes for two decades.  To conceal his income, THOMAS used offshore entities, in the Cayman Islands, the British Virgin Islands and Nevis, and employed individuals from offshore corporation management companies to act as his nominee in numerous business ventures.  These foreigners opened and managed bank accounts through which THOMAS moved the victims' funds in and out of the United States.  Additionally, THOMAS created fake or "ghost" employees to make it appear that he operated a large, successful investment fund.   To conceal his own identity, THOMAS used aliases or variations of his given name. 

[B]eginning in 2012, defendants fraudulently raised hundreds of millions of dollars from investors by claiming to offer investors an opportunity to make short-term, high-interest loans to parties seeking to acquire California alcohol licenses. In truth, the SEC alleges, the investment opportunity was a sham. Contrary to defendants' representations, the SEC asserts, defendants did not use investor funds to make loans to alcohol license applicants. Instead, Cain directed significant amounts of investor funds to a relief defendant that she controlled.  

Live Well was a Richmond, Virginia-based company that originated, serviced, and securitized government-guaranteed reverse mortgages known as Home Equity Conversion Mortgages ("HECMs").   In or about 2014, Live Well acquired a portfolio of approximately 20 bonds, each entitling the holder to receive a portion of the interest payments, but not the principal payments, from a particular pool of reverse mortgages ("HECM IO bonds.").  Live Well purchased the HECM IO bond portfolio for approximately $50 million.  At the same time that Live Well purchased the HECM IO bond portfolio, HILD established within Live Well a New York City-based trading desk to manage and grow Live Well's bond portfolio.  STUMBERGER supervised the trading desk.

Live Well financed the acquisition and growth of its bond portfolio through a series of loans in which Live Well used its bond portfolio as collateral.  The majority of Live Well's lenders were securities dealers whose lending arrangements with Live Well were structured as bond repurchase agreements, also known as "repo agreements."  A repo agreement is a short-term loan in which both parties agree to the sale and future repurchase of an asset within a specified contract period.  The seller sells the asset to the lender with a promise to buy it back at a specific date and at a price that includes an interest payment.  Functionally, a repo agreement is a collateralized loan in which title of the collateral is transferred to the lender.  When the loan is repaid by the borrower, the collateral is returned to the borrower through a repurchase.  Additionally, at least one of Live Well's lenders was an FDIC-insured bank, and its lending arrangement with Live Well was structured as a secured loan, with certain bonds held as collateral by a third-party custodian.

The Scheme to Mismark the Bond Portfolio

Live Well's financing agreements with all but one of the lenders required that any bond that Live Well sought to borrow against be priced by a third-party pricing source in order to determine the market value of the bond as of the measurement date.  The lenders then used the value of the bond, minus 10% to 20%, generally, to determine the amount of money to lend Live Well.

The lenders generally relied on a particular widely utilized subscription service (the "Pricing Service") to price various securities.  In or about September 2014, HILD, ROHR, STUMBERGER, and their co-conspirators embarked on a scheme to cause the Pricing Service to publish valuations for the bonds that far exceeded actual market prices.  By doing so, the conspirators induced the lenders to extend credit to Live Well far in excess of the prices for which the bonds could be sold in the market.  The inflated prices were based on a set of market assumptions that the conspirators called "Scenario 14." 

HILD was aware that if the lenders had known that the Pricing Service was publishing bond prices that did not reflect fair value (meaning the price at which a lender could sell the bond in the market if necessary to recoup its capital), they would have refused to use those prices in determining how much money to loan to Live Well.  To prevent the Pricing Service and the lenders from learning that the prices did not reflect market value, HILD directed ROHR, STUMBERGER, and others to take steps to conceal their provision of inflated marks to the Pricing Service.  Ultimately, due to the asset overvaluation and the purchase of additional bonds using the capital generated by the scheme, Live Well grew the purported value of its bond portfolio to $500 million by December 2016.

In addition to using the liquidity generated by the scheme to expand Live Well's bond portfolio, in or about September 2016, HILD used $18 million generated from the repo lenders to buy out the preferred stockholders in Live Well.  The elimination of the preferred stockholders gave HILD exclusive control of the company and allowed him to substantially increase his personal compensation.  Accordingly, HILD's compensation jumped from approximately $1.4 million in 2015, to approximately $5 million in 2016, approximately $9.7 million in 2017, and over $8 million in 2018.

In or about late 2018, ROHR resigned as chief financial officer of Live Well.  In or about May 2019, the company's interim chief financial officer informed HILD that he would not sign the company's interim financial statements because he believed that the company's carrying value for the HECM IO bond portfolio was significantly overstated.  On or about May 4, 2019, Live Well announced that it would cease operations and unwind.  After the announcement of Live Well's closing, Live Well's interim chief financial officer provided a balance sheet to Live Well's lenders showing that Live Well had reduced the value of its bond portfolio by approximately $141 million.  As of May 31, 2019, the debt Live Well owed to its lenders on the bond portfolio exceeded the portfolio's carrying value by approximately $65 million.

On June 10, 2019, three of Live Well's lenders filed a Chapter 7 petition for involuntary bankruptcy against Live Well in the United States Bankruptcy Court for the District of Delaware.  See In re Live Well Financial, Inc., 19-11317 (LSS).  On or about July 1, 2019, the bankruptcy court appointed a trustee for Live Well.

• Securities Industry Commentator
• Bill Singer