Securities Industry Commentator by Bill Singer

UPDATE: E Pur Si Mouve, Idioti! (Or So An SEC ALJ Should Mutter) (BrokeAndBroker.com Blog)

SEC Bars John Thomas Capital's Jarkesy

In the Matter of John Thomas Capital Management Group LLC d/b/a Patriot 28 LLC; and George R. Jarkesy Jr., Respondents (SEC Opinion)

Fraud Alert: Scammers Claiming to be with DOJ, Preying on Elderly (DOJ Release)

Investors Warned to Be Wary of Online Schemes by Parties Impersonating Registered Firms and Persons (TSSB Release)

Don't Respond to the Birdsong: Securities Commissioner Takes Action to Stop Forex Birds, Others Accused of Fraudulent Securities Offerings (TSSB Release)

FINRA Imposes Fine, Suspension, and Continuing Ed Undertaking on Rep for Blank Account Forms and Mismarked Solicited Orders 

In the Matter of Chin-Ming Huang, Respondent (FINRA AWC)

This proceeding concerns fraudulent conduct by George R. Jarkesy, Jr. and John Thomas Capital Management Group LLC ("JTCM"), the unregistered investment adviser that he owned, in the offer and sale of interests in two hedge funds: John Thomas Bridge and Opportunity Fund LP I ("Fund I") and John Thomas Bridge and Opportunity Fund LP II ("Fund II"). Jarkesy founded JTCM in 2007, and together they launched Fund I in 2007 and Fund II in 2009. JTCM served as the Funds' general partner; Jarkesy managed and controlled JTCM and the Funds. Together, the Funds had about 120 investors. Fund I accepted new investors from 2007 to 2010 (for a total of about $20 million assets under management), and Fund II accepted new investors from 2009 to 2010 (for a total of about $4 million assets under management).

Respondents appeal from an administrative law judge's initial decision finding that they

violated, and aided and abetted and caused violations of, the antifraud provisions of the federal securities laws by (i) misrepresenting the identity of the Funds' auditor and prime broker, and the Funds' investment parameters and safeguards; and (ii) overvaluing the Funds' holdings to increase management and performance fees.¹ The ALJ barred Jarkesy from the securities industry and from participating in the offering of a penny stock; ordered Respondents to cease and desist from antifraud violations; and ordered Respondents to pay, jointly and severally, disgorgement of $1,278,597, plus prejudgment interest, and third-tier civil penalties of $450,000. On appeal, Respondents challenge the ALJ's findings of fact and conclusions of law, and raise numerous constitutional and procedural objections; the Division of Enforcement cross-appeals and requests an accounting and greater monetary sanctions.²

Based on our independent review of the record, we find that Respondents violated

Section 17(a)(2) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) thereunder, and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. We impose bars on Jarkesy; cease-and-desist orders on Respondents; civil penalties of $300,000 on Respondents jointly and severally; and disgorgement of $684,935.38 plus prejudgment interest on JTCM.

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FOOTNOTE 1: John Thomas Cap. Mgmt. Grp. LLC, d/b/a Patriot28 LLC, Initial Decision Release No. 693, 2014 WL 5304908 (Oct. 17, 2014). Two other respondents settled this proceeding: John Thomas Financial, Inc. ("JTF"), a broker-dealer and the Funds' primary placement agent, and Anastasios "Tommy" Belesis, JTF's founder and CEO. John Thomas Cap. Mgmt. Grp. LLC, d/b/a Patriot28 LLC, Exchange Act Release No. 70989, 2013 WL 6327500 (Dec. 5, 2013).

FOOTNOTE 2: We previously granted in part and deferred ruling in part on Respondents' request to adduce additional evidence pertaining to ALJ Foelak's appointment as an SEC ALJ. See John Thomas Capital Mgmt. Grp. LLC, Exchange Act Release No. 75590, 2015 WL 4608057 (Aug. 3,2015). We now deny the remainder of Respondents' request because, as we stated in an order issued on February 21, 2019, Respondents expressly forfeited, waived, and withdrew from their petition for review "any right to challenge the historical proceedings before [ALJ Foelak] on the

grounds that the ALJ had not been constitutionally appointed." John Thomas Capital Mgmt. Grp. LLC, Exchange Act Release No. 85172, 2019 WL 857535, at *1 (Feb. 21, 2019).

Jarkesy's misconduct was egregious, recurrent, and at least reckless. For over three years, Jarkesy repeatedly misled investors and prospective investors, thereby increasing the fees he collected from his clients.  "[W]e have consistently viewed misconduct involving a breach of fiduciary duty or dishonest conduct on the part of a fiduciary . . . as egregious."

Jarkesy has not recognized the wrongful nature of his misconduct; instead he has attempted to blame the Funds' administrator, auditor, and counsel. Nor has Jarkesy supplied assurances against future violations. And considering his occupation as a fund manager and investment adviser, he will be presented with opportunities to violate the securities laws in the future. Jarkesy contends that he has no intention to serve as a fund manager or investment adviser, but absent a bar there would be nothing to prevent him from reentering the industry.

We conclude that Jarkesy poses a significant danger to investors, and that bars will prevent him from putting investors at further risk. Accordingly, we find it in the public interest to bar Jarkesy from the securities industry and from participating in a penny stock offering. 

Respondents contend that Jarkesy should not be barred because he was not a registered securities professional and JTCM was not registered. But Respondents acknowledge that this factor "is not a barrier to" a bar, and courts and the Commission have held that the Commission has authority under Advisers Act Section 203(f) to bar persons associated with unregistered investment advisers. Moreover, Exchange Act Section 15(b)(6) and Investment Company Act Section 9(b) do not require that Jarkesy be a registered securities professional or JTCM a registered investment adviser in order for us to bar him to protect the public.

The Office of Justice Programs' Office for Victims of Crime (OVC) has received multiple reports that individuals claiming to represent the Department of Justice are calling members of the public as part of an imposter scam. The department strongly encourages the public to remain vigilant and not to provide personal information during these calls, which appear to target the elderly.

Reports to the National Elder Fraud Hotline indicate these scammers falsely represent themselves as Department of Justice investigators or employees and attempt to obtain personal information from the call recipient, or they leave a voicemail with a return phone number. The return phone number directs users to a recorded menu that matches the recorded menu for the department's main phone number. Eventually, the user reaches an "operator" who steers the user to someone claiming to be an investigator. That "investigator" then attempts to gain the user's personal information.

Amage Trades and Admin OnlineExpo are accused of registering internet websites and social media accounts that purport to depict the likenesses of three registered parties.   The respondents allegedly adopted aliases that were substantially similar to the names of the registered parties, and they published photographs throughout the websites and social media platforms that purported to depict the registered parties.  The domain of one of the fraudulent websites was even strikingly similar to the domain of a website maintained by a registered party - differing by only one of 24 characters, according to the order. 

It gets worse.  In addition to creating phony websites and social media accounts that purported to depict the registered parties, the respondents are accused of using the CRD Numbers and SEC Number of the registered parties.  These identifiers are commonly used by both securities regulators and licensees, and the respondents' use of these identifiers only added legitimacy to their scheme.  Not only did they appear to be the registered parties, but the use of the CRD Number and the SEC Number backed up the appearance. 

It didn't stop with appropriation of identity, according to the order.  Instead, the respondents allegedly - while falsely acting as if they were the registered parties - solicited sales of investments in forex trading programs from the public.  The pitch was enticing - investors reportedly paid a minimum of $1,000 to receive a projected daily return of at least between 5 percent and 10 percent or a projected monthly return of at least 60 percent to 120 percent.   Other trading methods purportedly paid greater profits, including a program projected to pay between 120 and 480 percent returns. 

Investors were presented with a contract for the sale of the investments, according to the order.  The contract was allegedly part of the scheme, including forged signatures of the registered parties.  The contract also appeared to be notarized - again, adding legitimacy to the scheme - but the notary seal was also forged, according to the order.

The order alleged the tactics were used as part of a scheme to trick investors, believing they were dealing with registered parties, to part with their money.  Once tricked into sending their money and providing other information, the respondents would be able to take full control of the money and abscond with it, using it for purposes wholly unrelated to the forex investment program. 

The respondents, operating from overseas, are accused of using online solicitations and other means of recruiting investors in the off-market programs.  They are allegedly enticing investors with promises of significant returns - Forex Birds was allegedly telling investors it could earn an 11 percent return, with deposits fully insured up to $1 million.  According to the order, Balusek was even telling investors they could earn five percent in profits after 24 hours for four days by investing with Forex Birds.

Forex Birds is accused of fraudulently touting its legitimacy to lure investors.  It claimed to be regulated and registered with the "Europian [sic] and Investments Commission," as well as the Australian Securities and Investments Commission and the Saint Vincent Finance Service Authority.  The order found the representations regarding registration were false.  Even if true, according the order, Forex Birds was not registered to deal in securities in Texas.

The state registration requirements are important components of investor protection.  Registrants need to undergo a thorough background check, adhere to regulatory standards and periodically open their books and records to state inspection.

Pek Universe, the alleged promoter of cryptocurrency programs, was promising to earn daily profits for investors - up to 1.9 percent per day for 30 days.  Among other things, it is accused of using fraudulent photographs to depict its board of directors.  

Additionally, Pek Universe was not registered to deal in securities in Texas. 

[O]n March 4, 2019, Huang was charged with five felonies and one misdemeanor for misappropriating $13,792 from three insurance customers. Huang's activities took place between November 2011 through July 2013, at times when he was not associated with any member firm. Huang never amended his Form U4 to disclose these criminal charges. 

On May 10, 2019, Huang pled nolo contendere to the charge of misdemeanor theft, and the felony charges were dropped. Form U4 Question 14B(1)(a) asked whether the respondent has ever pled nolo contendere to any misdemeanor involving wrongful taking of property Huang never amended his Form U4 to disclose his nolo contendere plea to the misdemeanor theft charge.

In addition, on June 3, 2019, Huang falsely certified on the firm's annual compliance questionnaire that he had not been charged with or pled no contest to any felony or misdemeanor involving fraud or wrongful taking of property since July 18, 2018, the date he last completed a compliance questionnaire for the firm. 

Respondent understands that this settlement includes a finding that he willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this omission makes him subject to a statutory disqualification with respect to association with a member. 

Criminal Disclosure

14A. 

(1) Have you ever:

(a) been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign, or military court to any felony?

(b) been charged with any felony? 

. . .

Charged: Means being accused of a crime in a formal complaint, information, or indictment (or equivalent formal charge).

Q3: If a registered person is arrested but not charged with a crime, is the arrest required to be reported?

A: No. An arrest without a charge is not required to be reported. (02/13/98)

(c) Every application for registration filed with the Corporation shall be kept current at all times by supplementary amendments via electronic process or such other process as the Corporation may prescribe to the original application. Such amendment to the application shall be filed with the Corporation not later than 30 days after learning of the facts or circumstances giving rise to the amendment. If such amendment involves a statutory disqualification as defined in Section 3(a)(39) and Section 15(b)(4) of the Act, such amendment shall be filed not later than ten days after such disqualification occurs.

No member or person associated with a member shall file with FINRA information with respect to membership or registration which is incomplete or inaccurate so as to be misleading, or which could in any way tend to mislead, or fail to correct such filing after notice thereof.

(a) Each member shall promptly report to FINRA, but in any event not later than 30 calendar days, after the member knows or should have known of the existence of any of the following:

(1) the member or an associated person of the member:

(A) has been found to have violated any securities-, insurance-, commodities-, financial- or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body, self-regulatory organization or business or professional organization;

(B) is the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery;

(C) is named as a defendant or respondent in any proceeding brought by a domestic or foreign regulatory body or self-regulatory organization alleging the violation of any provision of the Exchange Act, or of any other federal, state or foreign securities, insurance or commodities statute, or of any rule or regulation thereunder, or of any provision of the by-laws, rules or similar governing instruments of any securities, insurance or commodities domestic or foreign regulatory body or self-regulatory organization;

(D) is denied registration or is expelled, enjoined, directed to cease and desist, suspended or otherwise disciplined by any securities, insurance or commodities industry domestic or foreign regulatory body or self-regulatory organization or is denied membership or continued membership in any such self-regulatory organization; or is barred from becoming associated with any member of any such self-regulatory organization;

(E) is indicted, or convicted of, or pleads guilty to, or pleads no contest to, any felony; or any misdemeanor that involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds, or securities, or a conspiracy to commit any of these offenses, or substantially equivalent activity in a domestic, military or foreign court;

(F) is a director, controlling stockholder, partner, officer or sole proprietor of, or an associated person with, a broker, dealer, investment company, investment advisor, underwriter or insurance company that was suspended, expelled or had its registration denied or revoked by any domestic or foreign regulatory body, jurisdiction or organization or is associated in such a capacity with a bank, trust company or other financial institution that was convicted of or pleaded no contest to, any felony or misdemeanor in a domestic or foreign court;

(G) is a defendant or respondent in any securities- or commodities-related civil litigation or arbitration, is a defendant or respondent in any financial-related insurance civil litigation or arbitration, or is the subject of any claim for damages by a customer, broker or dealer that relates to the provision of financial services or relates to a financial transaction, and such civil litigation, arbitration or claim for damages has been disposed of by judgment, award or settlement for an amount exceeding $15,000. However, when the member is the defendant or respondent or is the subject of any claim for damages by a customer, broker or dealer, then the reporting to FINRA shall be required only when such judgment, award or settlement is for an amount exceeding $25,000; or

(H) (i) is subject to a "statutory disqualification" as that term is defined in the Exchange Act; or (ii) is involved in the sale of any financial instrument, the provision of any investment advice or the financing of any such activities with any person that is subject to a "statutory disqualification" as that term is defined in the Exchange Act, provided, however, that this requirement shall not apply to activities with a member or an associated person that has been approved (or is otherwise permitted pursuant to FINRA rules and the federal securities laws) to be a member or to be associated with a member. The report shall include the name of the person subject to the statutory disqualification and details concerning the disqualification; or . . .

(39) A person is subject to a ''statutory disqualification'' with respect to membership or participation in, or association with a member of, a self-regulatory organization, if such person --  

. . .

(F) has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (D), (E), (H), or (G) of paragraph (4) of section 15(b) of this title, has been convicted of any offense specified in subparagraph (B) of such paragraph (4) or any other felony within ten years of the date of the filing of an application for membership or participation in, or to become associated with a member of, such self- regulatory organization, is enjoined from any action, conduct, or practice specified in subparagraph (C) of such paragraph (4), has willfully made or caused to be made in any application for membership or participation in, or to become associated with a member of, a self-regulatory organization, report required to be filed with a self-regulatory organization, or proceeding before a self-regulatory organization, any statement which was at the time, and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, or has omitted to state in any such application, report, or proceeding any material fact which is required to be stated therein.

[A] willful violation of the securities laws means "intentionally committing the act which constitutes the violation."16 The laws do not require that the actor "also be aware that he is violating one of the Rules or Acts."17 If McCune voluntarily committed the acts that constituted the violation, then he acted willfully.

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Footnote 16: Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); see also Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (citing Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)); Craig, 2008 WL 5328784, at *4 (finding that respondent willfully violated IM 1000-1 and NASD Rule 2110 by providing false answers on his Form U4).

Footnote 17: Wonsover, 205 F.3d at 414 (citing Gearheart & Otis, Inc. v. SEC, 348 F.2d 798 (D.C. Cir. 1965)).

Definition of Disqualification 

Sec. 4. A person is subject to a "disqualification" with respect to membership, or association with a member, if such person is subject to any "statutory disqualification" as such term is defined in Section 3(a)(39) of the Act.

I understand that this settlement includes a finding that I willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this these omissions make me subject to a statutory disqualification with respect to association with a member.

For willfully failing to timely update Form U4, in violation of Article V, Section 2(c) of NASD's and FINRA's By-laws, NASD IM-1000-1, NASD Rule 2110, and FINRA Rules 1122 and 2010, Respondent is suspended from associating with any FINRA member firm in any capacity for [insert dates] and fined [insert amount]. Because his misconduct was willful, and the information he failed to disclose was material, he is subject to statutory disqualification. 

• Securities Industry Commentator
• Bill Singer