Securities Industry Commentator by Bill Singer Esq

Brawls Erupt in U.S. Debt Markets After Borrowers Get Desperate (Bloomberg by Sally Bakewell, Claire Boston, and Katherine Doherty)

SEC Settles with Three Defendants in Boiler Room Scheme (SEC Release)

Federal Court Orders Trading Advisor to Pay $890,000 for Defrauding Church and Community Members in Forex Scheme (CFTC Release)

SEC Charges Microcap Fraud Scheme Participants Attempting to Capitalize on the COVID-19 Pandemic (SEC Release)

Owner of Business Consulting Firm Admits Orchestrating Multimillion-Dollar Bank Fraud and Securities Fraud Scheme (DOJ Release)

Vancouver Man Charged with Securities Fraud and Conspiracy for Impersonating President of Penny Stock Company (DOJ Release)

Goshen Man Charged In Investment Fraud Scheme (DOJ Release) 

Two Former EarthWater Executives Plead Guilty for Investment Fraud Scheme Targeting Elderly Victims (DOJ Release)

SEC Obtains Final Monetary Judgment Against Giga Entertainment Media's Former De Facto CEO (SEC Release)

Fifteen Defendants Plead Guilty to Racketeering Conspiracy in International Cyber Fraud Scheme (DOJ Release)

FINRA Imposes Fine and Suspension for Failure to Conduct OBA/Rule 3270 Reviews.

In the Matter of John W. Loofbourrow, Respondent (FINRA AWC)

Paul Singer's Elliott Management Corp. last month became locked in a fight with lenders of global bookings operator Travelport, which Elliott bought last year with Siris Capital Group. The owners shifted intellectual property estimated to be worth more than $1 billion to an unrestricted subsidiary -- putting it out of reach of the creditors -- to help it raise cash.

Lenders led by GSO demanded that Travelport unwind the transaction for violating indenture agreements, and declared the step a default. The owners, who argue it was permitted, told them they would reverse the asset transfer if the creditors provided roughly $500 million of new financing and rolled up some existing debt holdings at a discount.

engaged in a fraudulent scheme using threatening and deceitful sales tactics to pressure retail investors to purchase penny stocks. The defendants used information they learned about the victims' purchase orders to facilitate the placement of opposing sell orders to dump shares owned by participants in the fraudulent scheme.

In a parallel criminal action, Hardy, Vassallo, and Ramirez pleaded guilty. Hardy was sentenced to 120 months in prison followed by three years' supervised release. Vassallo and Ramirez are awaiting sentencing.

[F]rom at least June 18, 2008 to in or around 2014, Hartshorn fraudulently solicited at least 13 individuals, including members of his church, as well as individuals in the local community, to trade off-exchange forex.  According to the order, Hartshorn falsely told most, if not all, of his clients that he had traded forex profitably on behalf of himself and others, that his clients could expect substantial profits if they permitted him to trade forex on their behalf, and that he would limit the risk of loss. In reality, Hartshorn repeatedly employed risky trading strategies and suffered significant trading losses-often creating devastating single-day losses-on behalf of his clients.

The order finds that Hartshorn failed to disclose to clients that under his so-called "profit" sharing agreement with clients, he could be, and often was, compensated even as his clients lost money trading. The order also finds that Hartshorn misappropriated the funds of at least two clients and failed to disclose that misappropriation to his other clients.

The order further finds that Hartshorn failed to register as a commodity trading advisor (CTA) as required under the Commodity Exchange Act and CFTC regulations and that he violated various CTA requirements, including failing to produce certain documents to the CFTC that he was required to maintain. This order resolves the CFTC's case against Hartshorn that was filed in the Southern District of New York in 2016. [See CFTC Press Release No. 7506-16]

[F]rom at least January 2018 to the present, Canadian citizen Nelson Gomes, working with Canadian Michael Luckhoo-Bouche and others, enabled corporate control persons that were unknown to the public to conceal their identities while dumping their company's stock into the market for purchase by unsuspecting investors. The complaint alleges that these illegal stock sales were often boosted by promotional campaigns that, in some instances, included false and misleading information designed to fraudulently capitalize on the COVID-19 pandemic. For example, the alleged promotions included claims that Sandy Steele could produce medical quality facemasks and that WOD Retail had automated kiosks for retailers to use in response to the COVID-19 pandemic. The complaint also charges Canadians Shane Schmidt, Douglas Roe, and Kelly Warawa with fraudulently dumping shares of Sandy Steele.

The Bank Fraud Conspiracy

Espinal was the founder and chief executive officer of Cash Flow and controlled the company's operations. From March 2016 through December 2019, Espinal led and directed a bank fraud conspiracy designed to obtain millions of dollars in loans from banks on the basis of false representations. To attract customers, Cash Flow released internet advertisements and held seminars offering to assist customers with low-paying salaries in obtaining loans. These advertisements included promotional videos featuring Espinal and a former telenovela actor. Customers contacted Cash Flow and were routed to the company's sales department.

Employees in the sales department then encouraged customers to sign up for various loan programs that Cash Flow provided and to enter into contracts with Cash Flow. Under those contracts, employees would help customers obtain loans from banks. The Cash Flow contracts permitted customers to keep a portion of the loan proceeds and customers agreed to provide the remaining percentage of the proceeds to Cash Flow. Cash Flow agreed to pay off the loans on behalf of its customers.

Cash Flow then used false information and fraudulent documents to obtain loans for its customers for which they otherwise would not have qualified, and posed as the customers in communications with the banks.

The Securities Fraud

From July 2016 through September 2019, Espinal obtained more than $5 million in investments from victim investors on the basis of false and fraudulent pretenses and representations.

Espinal solicited investments from prospective customers using a marketing campaign on Spanish language television channels and the internet, the "Cash Flow TV" YouTube page, and live presentations in Cash Flow's offices and elsewhere. Espinal also solicited investments from individuals who obtained loans through Cash Flow's bank fraud conspiracy, encouraging loan customers to invest loan proceeds in Cash Flow's investment program. Once investors agreed to invest in Cash Flow, Espinal issued "promissory notes" to investors that guaranteed monthly investment returns between 1.25 percent and 4 percent. The promissory notes stated that Cash Flow would return investors' principal either one year from the date of the promissory note, or 60 days after investors demanded payment. Espinal and other Cash Flow employees signed the promissory notes on behalf of Cash Flow.

Espinal made a number of misrepresentations to investors. He told investors that he would pool their funds with the funds of other investors in investments related to real estate, real estate companies, a gold mine in Ecuador, and construction projects in countries outside of the United States. In reality, Espinal used investor funds to pay returns to earlier investors, to pay for personal expenses for himself, his family, and another Cash Flow employee, to perpetuate the bank fraud scheme, and to market the bank fraud and investment scheme to future victims. Espinal falsely claimed that Cash Flow's purported real estate fund, Cash Flow Capital, was "licensed" by the Securities and Exchange Commission. He guaranteed monthly returns on investment based on the purported proceeds from the sale of properties in Cash Flow's investment portfolio. In reality, Espinal did not sell Cash Flow properties, so no profits were derived from the sale of Cash Flow properties.

[B]eginning in or about December 2018, Schmidt purported to be "John Scott," the sole director and officer of the company Sandy Steele Unlimited, Inc. ("SSTU").  Acting as John Scott, Schmidt provided fraudulent information to the stock quotation service OTC Markets, including fake documents purporting to reflect John Scott's authorized takeover of SSTU and a fake passport for John Scott, bearing Schmidt's picture. Schmidt also established a website for SSTU that described SSTU's purported heated garment business, but which used false and misleading pictures of products for sale by other manufacturers from other websites. Schmidt allegedly took these steps in order to enable SSTU's stock to trade via OTC Markets, to generate interest in the stock, and to share in the proceeds of stock sales, which he later did. At or about the same time as a boiler room campaign promoted the stock in the fall of 2019, SSTU's stock price increased dramatically as investors purchased it, before later precipitously falling.

[M]iller, a former real estate investor, began raising money for a new private investment firm named "5 Star Capital" in 2012.  He began recruiting predominately novice investors, including members of the Amish community, for "investment opportunities" with 5 Star Capital, 5 Star Commercial and other real estate entities.  Miller allegedly solicited funds to invest in "green energy saving product that save the American consumer hundreds of dollars each year."  It is alleged that from June 2014 to August 2015, Mr. Miller raised at least $4.3 million from at least 70 investors through lies.  He falsely told investors that he would not get paid anything for managing their funds when, in truth, he misappropriated over $1 million dollars from 5 Star Commercial investors for his personal use including to pay off a former business partner.   Mr. Miller also did not own "green product" patents and performed virtually no due diligence into the purported "green" companies before placing his investors' assets.  In addition, to the wire fraud, Mr. Miller is charged securities fraud and bankruptcy fraud for omissions made during bankruptcy proceedings. 

John Mervyn Price, 64, of Dallas, Texas, pleaded guilty today to one count of conspiracy to commit mail and wire fraud, 10 counts of mail fraud, 10 counts of wire fraud, and one count of money laundering, before U.S. Magistrate Judge Renee H. Toliver of the Northern District of Texas.  Price will be sentenced on Oct. 7, 2020, before U.S. District Court Judge Ed Kinkeade.

Cengiz Jan Comu, 59, of Dallas, Texas, pleaded guilty on March 10, 2020, to one count of conspiracy to commit mail and wire fraud, 10 counts of mail fraud, 10 counts of wire fraud, and two counts of money laundering, before U.S. Magistrate Judge Toliver.  Comu's sentencing is currently scheduled for July 8, 2020, before Judge Kinkeade. 

As part of his guilty plea, Price, who had been EarthWater's chief operating officer, admitted that, beginning in or about 2013 and continuing through on or about Sept. 30, 2016, he and Comu, who had been EarthWater's chief executive officer, managed and supervised a scheme to defraud individuals by convincing them to invest in EarthWater under the false pretense that their investment would increase substantially in value in the immediate future.  Price further admitted that, in truth and in fact, he and his co-conspirators knew that the proceeds of EarthWater stock sales were not invested in EarthWater as described to investors, but paid out to Price and his co-conspirators to be used for their personal benefit.  Price also admitted that Comu lied to investors about being a successful Wall Street veteran and that Comu had, in fact, defrauded EarthWater investors by misusing investor funds for Comu's personal benefit.

Price also admitted that he and Comu partnered with two stock promoters, Richard Laurence Kadish, 59, of Miami, Florida, and Richard Lawrence Green, 69, of Deerfield Beach, Florida, to sell EarthWater stock and that whenever Kadish, Green or a salesperson that Kadish or Green recruited, made a sale of EarthWater stock to a victim, Comu and Price paid Kadish and Green a commission of approximately 50 percent of the victim's funds.  Price further admitted that, starting in or about 2016, through in or about January 2019, Price also worked directly with another stock promoter, Russell Filippo, 69, of Oklahoma City, Oklahoma, to sell Price's personal shares of EarthWater stock for approximately 30 percent commission.  Price told Filippo that Comu lied about being a successful Wall Street veteran and that Comu had, in fact, defrauded EarthWater investors by misusing investor funds for Comu's personal benefit.  In addition, Price admitted he and Comu had engaged in monetary transactions in excess of $10,000 in funds obtained by defrauding investors through a company called Regus Advisors, Inc.

As part of his guilty plea, Comu similarly admitted that he conspired to obtain EarthWater investor funds through a scheme to defraud in which he made materially false and fraudulent misrepresentations to investors that the majority of their funds would be used to support EarthWater's operations, when, in fact, the funds were used to pay undisclosed, excessive commissions to those selling EarthWater stock on Comu's behalf.  Comu further admitted that he knowingly engaged in monetary transactions in amounts greater than $10,000 involving investor funds obtained as part of the fraudulent scheme.

In addition to Price and Comu, Kadish, Green, Filippo, and six other defendants have been charged in the Northern District of Texas for their roles in the EarthWater fraud, including Harley E. "Buddy" Barnes, III, 61, of Plano, Texas; Daniel Thomas Broyles Sr., 63, formerly of Malibu, California; Suzanne Aileen Gagnier, 66, of Huntington Beach, California; Joe Edward Duchinsky, 65, of Alhambra, California; Joseph Lucien Duplain, 79, of Murrieta, California; and Donald Andrew Rothman, 72, of Coral Springs, Florida.  All of these defendants, except for Kadish and Rothman, were charged by a federal grand jury in a superseding indictment unsealed on Nov. 8, 2019.  Kadish was charged by a federal grand jury in an indictment filed on March 5, 2019, and Rothman was charged in an information filed on Sept. 6, 2019.  Kadish, Green and Rothman have pleaded guilty and are scheduled to be sentenced on Nov. 18, 2020, before Judge Kinkeade.   The remaining defendants are awaiting trial, which is currently set for Jan. 19, 2021, before Judge Kinkeade. 

Barnes and Beth Ellen DeGroot, 59, of Plano, Texas, were separately charged by a federal grand jury in the Northern District of Texas with conspiracy to commit wire fraud and bank fraud and obstruction of justice relating to the ongoing investigation into EarthWater, in a superseding indictment returned on March 5, 2020.  Barnes and DeGroot are awaiting trial, which is currently set for Oct. 5, 2020, before Judge Kinkeade. 

When the SEC filed its complaint, all defendants agreed to full or partial settlements. The settlements with Nerlinger and Giga's Treasurer, Lawrence Silver, did not specify the amounts of any monetary remedies against them, which were left to be determined by the court. The court entered a final judgment as to monetary relief against Silver on September 17, 2019, ordering him to pay a penalty of $184,767. The court's final judgment against Nerlinger orders him to pay a penalty of $739,068 and to disgorge $239,807 plus prejudgment interest of $57,710. The final judgment against Nerlinger concludes this litigation.

Bogdan-Stefan Popescu, 30, of Romania, pleaded guilty on June 11, 2020, to one count of RICO conspiracy.  According to plea documents, Popescu operated a car wash in Bucharest, Romania, where he managed coconspirators in the RICO enterprise.  From at least December of 2013, Popescu oversaw an operation whereby he knowingly negotiated fraudulently obtained Bitcoin.  He did so in many ways.  For example, he would sometimes receive cryptocurrency from coconspirators who obtained the funds through online fraud scams, transfer the cryptocurrency to other conspirators such as codefendant Vlad-Călin Nistor.  He would then direct that Nistor exchange the cryptocurrency for fiat currency, and deposit the fiat currency into bank accounts held in the names of various employees and family members.  According to court documents, in addition to providing money laundering services, Popescu also coordinated the dissemination of tools used to defraud American-based victims, such as the language and photographs for fake advertisements as well as usernames and passwords for IP address anonymizing services.  Popescu also assisted members of the RICO conspiracy by connecting them with other members who could provide call center services-that is, who would impersonate eBay customer service representatives over the phone.

Liviu-Sorin Nedelcu, 34, of Romania, pleaded guilty on June 11, 2020, to one count of RICO conspiracy.  According to court documents, Nedelcu worked in conjunction with others to post advertisements for goods online.  To maintain the appearance of legitimacy, Nedelcu created fictitious entities through which he purported to sell vehicles.  Once Nedelcu and his coconspirators convinced victims to purchase falsely advertised goods, they sent the victims invoices for payment that appeared to be from legitimate sellers, such as eBay Motors.  Upon receiving payment, Nedelcu and his coconspirators engaged in a sophisticated money laundering scheme to convert the victim payment into Bitcoin.

Vlad-Călin Nistor, 33, of Romania, pleaded guilty on May 19, 2020, to one count of RICO conspiracy.  According to plea documents, Nistor was the founder and owner of the Romania-based Bitcoin exchange Coinflux Services SRL.  He exchanged cryptocurrency into local fiat currency on behalf of the Romania-based members of the conspiracy, knowing that the Bitcoin represented the proceeds of illegal activity.  According to plea documents for example, Nistor exchanged over $1.8 million worth of Bitcoin for co-defendant Bogdan Popescu.

Beniamin-Filip Ologeanu, 30, of Romania, pleaded guilty on May 19, 2020, to one count of RICO conspiracy.  According to court documents, Ologeanu worked in conjunction with others in the conspiracy to post advertisements for goods to auction websites, including eBay, and sales websites, including Craigslist.  Once Ologeanu or his coconspirators convinced victims to purchase and provide payment for falsely advertised items, Ologeanu reached out to U.S.-based conspirators to convert the victim payment into other forms of payment and transfer part of it to Ologeanu in Bitcoin.  Ologeanu also purchased fraud proceeds from other coconspirators, typically in the form of prepaid debit cards, to be laundered by U.S.-based coconspirators.

. . .

According to court documents, the defendants participated in a criminal conspiracy that engaged in a large-scale scheme of online auction fraud.  Specifically, Romania-based members of the conspiracy posted false advertisements to popular online auction and sales websites-such as Craigslist and eBay-for high-cost goods (typically vehicles) that did not actually exist.  Members of the conspiracy would convince American victims to send money for the advertised goods by crafting persuasive narratives, for example, by impersonating a military member who needed to sell the advertised item before deployment.

According to court documents, members of the conspiracy created fictitious online accounts to post these advertisements and communicate with victims, often using the stolen identities of Americans to do so.  They also delivered invoices to the victims bearing trademarks of reputable companies in order to make the transaction appear legitimate.  Members of the conspiracy also set up call centers, impersonating customer support, to address questions and alleviate concerns over the advertisements.

Once victims were convinced to send payment, the conspiracy participants engaged in a complicated money laundering scheme wherein domestic associates would accept victim funds, convert these funds to cryptocurrency, and transfer proceeds in the form of cryptocurrency to foreign-based money launderers.

The 15 defendants who have pleaded guilty in this case have yet to be sentenced.  Two other defendants in the case are scheduled for trial starting on Sept. 14, 2020, before the Honorable Robert E. Wier of the U.S. District Court for the Eastern District of Kentucky.  Three others are fugitives.

In addition to pleading guilty in this case, on Jan. 13, 2020, Adrian Mitan pleaded guilty in a related money laundering conspiracy, arising from online schemes, including a credit card phishing and brute-force attack scheme, designed to steal money from Americans.  According to court documents, Mitan phished for payment card information of U.S. customers, hacked into the electronic systems of American businesses, and then conducted a brute-force attack on their point-of-sale systems for the purpose of stealing the remaining payment card information.  Mitan then directed American money launderers to create clone payment cards with the stolen information, which were used to extract money from the customers' accounts.  These fraudulent proceeds were then returned to Mitan in the form of Bitcoin.

[L]oofbourrow was the supervisory principal responsible for reviewing and approving any OBAs the Firm's registered representatives disclosed. During this time, two former registered representatives of JWLA, Representatives 1 and 2, disclosed in writing that they were engaged in outside "investment-related" business activities. Representative 1 disclosed that he was the founder and CEO of several related entities in the "investment-related business," and that as an officer of such entities, he was engaged in capital raising activities. Representative 2 disclosed that he was an officer of two of the same "investment-related business" entities that Representative 1 disclosed, and that as an officer of each entity, he worked to implement their "strategic plans" by, among other things, "selling securities" to accredited investors. Both Representatives 1 and 2 also disclosed that they did not receive compensation from their OBAs. 

Loofbourrow approved these OBAs at the time they were disclosed but failed to conduct the review FINRA Rule 3270 requires. In particular, Loofbourrow did not consider whether the OBAs would interfere with the responsibilities of Representatives 1 and 2 at the Firm or whether customers could view the OBAs as part of the Firm's business. Loofbourrow also failed to consider whether the OBAs of Representatives 1 and 2 were more properly characterized as outside securities transactions subject to FINRA Rule 3280's requirements. Finally, Loofbourrow did not keep a record of the factors he considered in approving the OBAs.

• Securities Industry Commentator
• Bill Singer