Securities Industry Commentator by Bill Singer Esq

FINRA, NASDAQ, BX, PHLX, ISE, NYSE, NYSE Arca, NYSE American, Cboe, BZX, BYX, EDGA, and EDGX Permanently Bar Samuel Lek and Fine Lek Securities Corporation for Supervisory and Market Access Rule Violations (FINRA Release)

Owner of Purported U.K. Investment Firm and Two Richmond-Area Men Charged for Roles in Investment Fraud Scheme (DOJ Release)

Third Conspirator Pleads Guilty to Participation in a Ponzi Scheme Involving $2.5B in Transactions and $1B in Loss (DOJ Release)

Two South Bay Residents Indicted For Securities Fraud Relating To Palo Alto Networks, Inc. / The Insider Trading Scheme Allegedly Generated $7 Million in Illegal Profits (DOJ Release)

Manhattan Fund Manager Charged With Misappropriating Clients' Money (DOJ Release)

Silicon Valley IT Administrator and Friends Charged in Multimillion Dollar Insider Trading Ring (SEC Release)

Former Yellowstone Partners' CEO Pleads Guilty / David Hansen Admits to 8-Year Wire Fraud Scheme (DOJ Release)

Ponte Vedra Man Sentenced To 5 Years In Federal Prison And Ordered To Pay $8.9 Million In Restitution For Fraud And Money Laundering (DOJ Release)

Pro Se Petitioner's Lucia Challenge Deemed Untimely by 9Cir. Jacob Keith Cooper, Petitioner, v. United States Securities and Exchange Commission, Respondent (Memorandum, 9Cir)

For several years, Lek Securities provided market access to foreign traders who engaged in various forms of manipulative trading on U.S. equity and options exchanges, including layering, spoofing, and cross-product manipulation. Samuel Lek and Lek Securities substantially assisted this trading through a master-sub account held at Lek Securities and failed to reasonably supervise it.

Broker-dealers are required to establish and maintain reasonable supervisory procedures and market access controls to monitor for potentially manipulative trading activity by their customers, whether the activity is occurring through a master-sub account or otherwise.

Notwithstanding numerous "red flags" and ongoing investigations into the activity by FINRA, the Exchanges and the U.S. Securities and Exchange Commission (SEC), Samuel Lek and Lek Securities allowed the manipulative trading to continue for years. Samuel Lek and Lek Securities even provided office space, computer servers, trading software, and other services to the master-sub account used by those customer-traders.

For these reasons, among others, FINRA and the Exchanges found that Samuel Lek and Lek Securities failed to supervise the activities of the firm's registered persons to achieve compliance with applicable securities laws and regulations, and failed to establish, maintain, and enforce written supervisory procedures to supervise the types of business in which the firm engaged.

Lek Securities also violated the Market Access Rule, which requires broker-dealers that provide their customers access to an exchange or alternative trading system to reasonably control the financial and regulatory risks of providing such access. Disregarding repeated alerts and communications from regulators concerning potentially manipulative trading in the master-sub account, Samuel Lek and Lek Securities continued to allow their customers to engage in layering, spoofing, and cross-product manipulation. In addition to Lek Securities' primary violation of the Market Access Rule, FINRA and the Exchanges also found that Samuel Lek caused the firm's violations of the Market Access Rule.

[B]ridge - working with Johnson and Smith in the Richmond area - operated a worldwide scheme through Chimera Group Ltd. The scheme operated as an advance fee scheme which involved the defendants as promoters who promised to pay the victims a sum of money at a later date in exchange for an upfront advanced payment.  Among other misrepresentations, Bridge, Johnson and Smith allegedly told potential victims that their principal payments would be protected based on letters of credit and other documents that purported to be from a large financial institution.  However, these letters were fabricated, the indictment alleges.  The indictment also alleges that the defendants used escrow attorneys who were themselves part of the scheme in order to give the victims the appearance that their money would remain secure until the defendants' promises had been kept.  Upon receiving the victims' funds, those attorneys immediately forwarded the money out of their escrow accounts to the defendants and affiliated individuals, the indictment alleges.

The indictment alleges that the defendants stole at least $6.2 million from their victims.

[B]etween 2011 and 2018, the solar energy company manufactured mobile solar generator units (MSG), solar generators that were mounted on trailers. The company touted the versatility and environmental sustainability of the MSGs and claimed that they were used by cellphone companies to provide emergency power to cell towers in the case of a power failure. They were also claimed to be used to power lights at sporting and other events.

The company solicited investors by claiming that there were very favorable federal tax benefits associated with investments in alternative energy. The company structured the transactions in order to maximize the tax benefits to the investors. Investors would buy the MSGs without ever taking possession of them. They would pay a percentage of the sales price and finance the balance with the company. Then the investors would lease the MSGs back to the company, which in turn leased them to third parties. A portion of the lease revenue would be used to pay the investors' debts to the company and to the investors. The third‑party leases, however, generated little income and the company paid early investors with funds contributed by later investors.

According to court documents, Karmann, a certified public accountant, joined the company in 2014 and became its Chief Financial Officer (CFO). Karmann and his co-conspirators used fraudulent financial statements and other false information to hide from investors the company's use of later investor payments to pay financial obligations the company made to earlier investors-in a classic Ponzi scheme. In his role as CFO, Karmann managed and directed the periodic transfers of new investor money to pay the company's obligations to existing investors. Karmann also disseminated false financial and other information to investors to mislead them about material aspects of the MSG investments. Karmann's criminal conduct was intended to create the false impression for investors that the MSG investments were operating as promised, which helped lull existing investors, lured prospective investors, and caused investors to seek more than $1 billion in tax benefits from the Internal Revenue Service to which they were not entitled. Karmann also pleaded guilty to securities violations associated with the same investment fraud scheme.

[N]ellore traded on and provided Barama and others with confidential, non-public, material, inside information about the financial performance of Palo Alto Networks, Inc. ("PANW"), headquartered in Santa Clara, Calif.  Nellore worked in PANW's Operations and Support group, an information technology department.  Using his position at PANW, Nellore accessed and obtained material nonpublic information regarding PANW's quarterly financial performance, including PANW's target and actual billings, bookings, revenue, and growth rate.  With that inside information, Nellore acted as both a trader and a tipper.  Nellore traded PANW securities using inside information before the company disclosed its financial results to the public.  In a number of "straddle trades," Nellore placed call and put options before earnings announcements and sold the options after the announcements.   

As alleged in the superseding indictment, Nellore shared the inside information with Barama and others, who Nellore knew would trade PANW securities using the inside information he had provided.  Nellore also sometimes tried to conceal this scheme to defraud by using the brokerage accounts of others.  

According to the superseding indictment, from March 2015 through September 2018, Nellore, Barama, and others placed approximately 800 straddle trades of PANW securities, generating illegal profits in excess of $7 million as a result of the insider trading scheme.  When making non-straddle trades of PANW securities or trading in other stocks, the conspirators lost money. 

Barama was arrested this morning in Fremont and will make his initial appearance in federal court in San Jose today before U.S. Magistrate Judge Virginia K. DeMarchi, where Barama and Nellore will be arraigned on the superseding indictment.       

Nellore was previously detained as a flight risk by United States Magistrate Judge Nathanael M. Cousins, after Nellore was arrested at the San Francisco International Airport with a ticket to leave the United States and without any apparent intention to return.  The FBI interviewed Nellore in connection with this investigation on May 7, 2019.  After the interview, Nellore purchased one-way tickets to New Delhi, India, for himself and his family on an Air India flight departing the very next morning, May 8, 2019, at 11:30 a.m.  FBI agents intercepted Nellore while he was trying to board the flight.  

From in or about 2013 through in or about 2017, LAGUARDIA solicited millions of dollars from investors for the LR Global Frontier Master Fund and two related feeder funds (collectively, the "Frontier Funds"), which had a stated focus on investments in "frontier" markets in Latin America, Central and Eastern Europe, the Middle East, Africa, and Asia.  Contrary to LAGUARDIA's representations, and in breach of his duties to investors in the Frontier Funds, LAGUARDIA misappropriated investors' money to finance L-R Managers' payroll, rent for its office space on Park Avenue in Manhattan, and hundreds of thousands of dollars in charges on the firm's credit card, among other unauthorized expenses.  At least $191,000 of the misappropriated money went directly to, or for the benefit of, LAGUARDIA personally.

In one example, in 2013, LAGUARDIA solicited an $800,000 investment in the Frontier Funds from an investor ("Investor-1").  Upon receipt of Investor-1's money, an L-R Managers employee sent an email to LAGUARDIA and another person asking for approval to forward the $800,000 to the Frontier Funds.  LAGUARDIA responded, "Dont [sic] wire anything yet!"  LAGUARDIA then caused approximately $390,000 of Investor-1's investment never to be transmitted to the Frontier Funds, but instead to be used to pay himself approximately $52,000 and for various other personal and business expenses.

By September 2015, L-R Managers faced substantial financial difficulties.  On September 1, 2015, an L-R Managers principal sent an email to LAGUARDIA and others at the firm stating that it would be "ethically troubling to accept money into the [Frontier Funds] when [L-R Managers] can no longer support . . . payroll and mission critical services."  Nevertheless, just a few days later, a new investor solicited by LAGUARDIA ("Investor-2") made a $2 million investment into the Frontier Funds.  Prior to this investment, LAGUARDIA concealed his firm's near insolvency from Investor-2 and did not disclose that the Frontier Funds had been paying substantial expenses for L-R Managers, contrary to the representations in the funds' offering documents.  LAGUARDIA then proceeded, over the course of several months, to use a substantial portion of Investor-2's investment in the Frontier Funds to continue paying himself and subsidizing his firm's business expenses.

[T]he defendants sought to evade detection, with Nellore insisting that the ring use the code word "baby" in texts and emails to refer to his employer's stock, and advising they "exit baby," or "enter few baby." The complaint also alleges that certain traders kicked back trading profits to Nellore in small cash transactions intended to avoid bank scrutiny and reporting requirements. After the FBI interviewed Nellore about the trading in May, he purchased one-way tickets to India for himself and his family and was arrested at the airport.

[C]lients of Yellowstone Partners entrusted their monies to Yellowstone Partners to invest and manage on their behalf. In exchange, Yellowstone Partners earned fees for its services.  Yellowstone Partners' fees were set forth in investment agreements between Yellowstone Partners and its clients.

According to court records, Yellowstone Partners' clients' monies were kept in accounts at third party custodians. Yellowstone Partners directed how the monies in client accounts were invested and how they were disbursed. This included submitting email billing requests to a third party custodian to take fees from client accounts and to deposit them into Yellowstone Partners' own accounts.

According to court records, from 2008 through April of 2016, Hansen knowingly and intentionally devised a scheme to defraud clients of Yellowstone Partners by obtaining money or property by means of false and fraudulent pretenses, representations, and promises. Specifically, the scheme was to fraudulently bill clients for fees to which Yellowstone Partners was not entitled under the terms of the investment agreements or otherwise. Through this overbilling scheme, Hansen fraudulently obtained client funds from a third party custodian and used them to enrich himself and to fund Yellowstone Partners' operations. For certain identified victims, Hansen personally submitted, or was carbon-copied, on 50 fraudulent overbilling requests to a custodian, which resulted in a loss of $2,675,856. For each of the overbillings, Hansen acted with the intent to deceive or cheat the victims.

As part of the plea agreement, Hansen agreed to pay full restitution to the victims of the wire fraud scheme, in an amount to be determined by the court at the time of sentencing. Further, Hansen agreed to a forfeiture judgment in the amount of restitution ordered by the court at the time of sentencing. Finally, Hansen agreed to cooperate with an Internal Revenue Service civil tax examination and assessment, and pay any unpaid tax due and owing, and accrued interest for his 2012 and 2013 Form 1040 joint income tax returns.

[B]rewer engaged in two fraud schemes that resulted in him receiving more than $8 million. In one scheme, Brewer solicited an individual to invest in a company that manufactured paddleboards by the name of USBoardco (also known as WatersEdge). As part of the scheme, Brewer sent the victim copies of bank statements, tax returns, and other financial documents that had been falsified to inflate the sales, profits, income, and bank account balance for the company.  In reliance upon those and other misrepresentations, the victim invested over $1 million.

The second scheme related to some real estate located in Seminole County. In 2012, an investor loaned more than $4 million to assist Brewer in the purchase of the property. In return, the investor obtained a mortgage on the property. A couple of years later, Brewer defrauded a bank into lending his companies $7.75 million that involved Brewer forging documents and using a fake email account that he had created for his investor. This scheme consisted of two parts. First, Brewer forged a letter that transferred the mortgage from his investor to an entity that Brewer controlled.  Second, Brewer forged an estoppel letter from his investor that falsely promised that the investor would release his mortgage for $3.5 million. Brewer used a fake email account that he had established for the investor to send the forged estoppel letter and to pretend to be the investor in communications with the bank. Relying upon the forged letters and his other misrepresentations, the bank loaned one of Brewer's companies $7.75 million. 

[B]ecause Cooper did not timely raise this issue before the Commission, he may not raise the issue on appeal. See 15 U.S.C. § 78y(c)(1) ("No objection . . . may be considered by the court unless it was urged before the Commission or there was reasonable ground for failure to do so."); Lucia v. SEC, 138 S. Ct. 2044, 2055 (2018) ("[O]ne who makes a timely challenge to the constitutional validity of the appointment of an officer who adjudicates his case is entitled to relief." (citation and internal quotation marks omitted)); Inter-Tribal Council of Nevada v. United States Dept. of Labor, 701 F.2d 770, 771 (9th Cir. 1983) ("All issues which a party contests on appeal must be raised at the appropriate time under the agency practice."); see also Malouf v. SEC, 933 F.3d 1248, 1255-58 (10th Cir. 2019). 

We do not consider matters not specifically and distinctly raised and argued in the opening brief, or arguments and allegations raised for the first time on reply. See Padgett v. Wright, 587 F.3d 983, 985 n. 2 (9th Cir. 2009).

• Securities Industry Commentator
• Bill Singer