Securities Industry Commentator by Bill Singer Esq

[T]he Espositos operated U.S. Coin Bullion, a local Orlando company formed in 2012. From 2014 to July 2019, the Espositos engaged in a conspiracy to defraud U.S. Coin Bullion's customers. Instead of using the customers' funds to purchase precious metals as had been promised, the Espositos caused U.S. Coin Bullion to use customer funds to pay other customers, to pay commissions and other business expenses, and to purchase silver for the company itself. 

U.S. Coin Bullion used its customers' funds to purchase silver on "margin," or "leverage," by which it acquired an interest in the silver by paying only a portion of its full price. The company took out loans to purchase the silver on margin and then used more customer funds to pay the interest associated with those loans, as well as storage fees for the silver. And, because it was buying on margin, U.S. Coin Bullion was subject to "margin calls"; if the market price for silver declined, the company might immediately have to deposit more (customer) funds into its accounts to maintain its interest in the silver.

U.S. Coin Bullion never told its customers that their funds were being used in this way. By at least 2016, it was regularly using its customers' funds to buy millions of dollars worth of silver. When the price for silver fell from more than $35 an ounce (in 2012) to less than $15 an ounce during the conspiracy, the company experienced massive losses and had to spend customer funds due to margin calls.

To cover up U.S. Coin Bullion's losses, the Espositos provided customers with false account statements making it appear that the company had purchased the silver for the customers (not itself) and that their accounts maintained value despite any drop in the market price of silver. Ultimately, U.S. Coin Bullion's margin purchases resulted in a loss of nearly all the market value of the silver that its customers believed they had purchased and held.

[W]hen Conde, a securities fraud recidivist, acquired large blocks of RBNW shares through convertible notes purchased from RBNW by Essex Global Investment Corp., an entity that Conde controlled. As alleged, from approximately March to July 2017, Conde paid a New York boiler room to promote RBNW stock to seniors and unsophisticated retail investors, fraudulently "pumping" the market price and trading volume of RBNW. According to the SEC's complaint, Conde engaged in manipulative trading, including by coordinating trading on the opposite side of the boiler room victims through encrypted messaging, which further artificially raised RBNW's market price. The SEC alleges that Conde sold more than 8 million shares of RBNW, generating millions in illicit profits. Conde allegedly disguised the source of his payments to the boiler room by making payments to an intermediary pursuant to fabricated invoices.

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The SEC's charges today follow two related actions in which the same affiliated boiler rooms were used to carry out the alleged schemes. In July 2017, the SEC charged two boiler rooms and 13 individuals with bilking victims out of more than $10 million in penny stock scams, and in November 2018, the SEC charged one of the boiler rooms and four individuals with a separate manipulation that generated over $3.3 million in illegal profits. The SEC's litigation in the two actions are continuing. The U.S. Attorney's Office for the Eastern District of New York filed parallel criminal charges in these matters and in a parallel action filed today.

penny stock fraud ring ("the Group") through recklessly arranging materially misleading penny stock promotional campaigns for the Group. According to the complaint, between at least March 2013 and December 2016, when arranging penny stock promotional campaigns for the Group, Barrilleaux recklessly disregarded that the Group had already acquired shares of the relevant penny stocks and planned to, and did, sell its shares into the share price and trading volume rises triggered by the promotional campaigns. Barrilleaux likewise recklessly failed to include in the promotional materials any disclosure of the Group's ownership of the shares, its plans to sell, or its selling of, such shares. Five members of the Group already settled charges with the SEC in May 2019, and also pleaded guilty in a parallel criminal action.

[B]etween at least January 2016 and June 2018, TMC Bonds publicly touted its anonymous trading platform, but, in fact, disclosed the identities of certain firms seeking to trade corporate bonds to potential counterparties over 2,500 times during a two-and-a-half year period.  According to the order, these disclosures occurred because TMC Bonds failed to establish and implement adequate safeguards or procedures to protect the confidential trading information of its subscribers. The SEC's order also finds that TMC Bonds failed to provide notice to the SEC that it was operating in a way that was inconsistent with its SEC filings. 

[I]n its first quarter through third quarter reports for 2017 and in its 2017 annual report, Efuel stated that it owned $500 million in assets comprised of "land, minerals and gold deposit," and that such financial reports were prepared in accordance with generally accepted accounting principles ("GAAP"). In addition, the complaint alleges the defendants issued numerous press releases over the course of over a year that claimed that the mines contained "substantial mineral, gold, silver and other precious gems and minerals" worth $500 million, that the mines could reap as much as $2-$3 billion in mineral deposits, that the company's valuation claims were supported by geologic and scientific studies, and that a recent scientific study proved that there was more than $5 billion worth of gold in the mines. The complaint further alleges that the defendants told the public that it had scientists conducting detailed studies on the gold mines, and that exploratory and development efforts were ongoing.

The SEC alleges that, in reality, the defendants had simply acquired the right to lease the land for six years, allowing the company to explore for and extract minerals, after which it had the option to purchase the land for the price of $750,000. The complaint further alleges that defendants had no basis to claim that these mining interests were worth $500 million, nor did they take any steps to determine the appropriate manner to account for the transaction in accordance with GAAP. Furthermore, the complaint alleges that, contrary to what the defendants told the public, they had not begun any exploratory or development efforts on the land.

[J]ames Wallace Nall, III misappropriated material nonpublic information concerning the merger of potato chip manufacturer Golden Enterprises, Inc. with privately-held Utz Quality Foods, LLC. According to the SEC's complaint, Nall received the information for a legitimate purpose from a member of Golden Enterprises' board of directors. Nall did not trade on the information, but he tipped his close friend and business partner, Michael Hale Smith, who did trade on it. Smith's father, Michael Dwaine Smith; his brother, Robert Walter Smith; and his boss, Walter Vice Tutt, also traded on the information. As alleged, Tutt and the three Smiths all knew Nall and understood his relationship with a director of Golden Enterprises when they traded Golden Enterprises' stock in advance of the merger announcement, collectively realizing profits of approximately $437,000.

[F]rom February 2014 through February 2016, Comscore, at the direction of its former CEO Serge Matta, entered into non-monetary transactions for the purpose of improperly increasing its reported revenue. Through these transactions, Comscore and a counterparty would negotiate and agree to exchange sets of data without any cash consideration. Comscore recognized revenue on these transactions based on the fair value of the data it delivered, which had been improperly increased in order to inflate revenue. The SEC's orders also find that Comscore and Matta made false and misleading public disclosures regarding the company's customer base and flagship product and that Matta lied to Comscore's internal accountants and external audit firm. This scheme enabled Comscore to artificially exceed its analysts' consensus revenue target in seven consecutive quarters and create the illusion of smooth and steady growth in Comscore's business.

From 2015 through the present (the "Relevant Period"), Hilltop failed to establish procedures reasonably designed to assure that customers received the initial margin interest rate disclosures and failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with Rule 10b-16(a)(1). In fact, many customers did not receive the initial disclosure stating the annual rate or rates of margin interest that could be imposed. As a result, Hilltop violated SEC Rule 10b16(a)(1) and FINRA Rules 3110(a) and (b) and 2010. 

When it adopted Regulation ATS, over 20 years ago, the SEC chose not to require compliance with these rules by venues that limit their activity to government securities. The basis for this decision appears to be that, while Treasury-only venues present regulatory considerations similar to those in the equities markets, the multiple layers of regulatory oversight of the U.S. Treasury market reduced the need for the SEC to apply Regulation ATS. I am neither questioning the basis for the SEC's decision 20-plus years ago, nor disputing the conditions that existed in the U.S. Treasury market at that time.  However, given the conditions and practices that exist in 2019 and in the foreseeable future, I think it is worth considering whether the Commission should apply Regulation ATS to U.S. Treasury venues that fit within the definition of "alternative trading system."  

• Securities Industry Commentator
• Bill Singer