Securities Industry Commentator by Bill Singer Esq

How SoftBank and Robinhooders Added Fuel to the Stock Market Boom (Bloomberg Podcast by Joe Weisenthal and Tracy Alloway)

Atlanta director and producer indicted for operating cryptocurrency-based investment schemes that cost victims over $2 million in losses (DOJ Release)

SEC Charges Film Producer, Rapper, and Others for Participation in Two Fraudulent ICOs (SEC Release)

FINRA Censures and Fines ViewTrade Over Resales of Returned IPO Shares

In the Matter of ViewTrade Securities, Incorporated, Respondent (FINRA AWC)

FINRA Censures and Fines INTL FCStone Financial Over Microcap and AML Supervision 

In the Matter of INTL FCStone Financial Inc., Respondent (FINRA AWC)

[I]n 2017 and 2018, Felton promoted initial coin offerings (ICO) for two new entities-FLiK and CoinSpark.  ICOs are fundraising events during which the issuers of a unique "token" or "coin" set an amount they want to raise, offer it to the public in a crowdsale, and receive cryptocurrency from investors in exchange. 

Felton marketed FLiK as an entertainment streaming platform, and he founded CoinSpark as a new cryptocurrency trading exchange.  In order to increase, or pump, the price of the coins, Felton made numerous false representations and material omissions before, during and after the ICOs. For example, Felton claimed that all investor funds would go towards the development, launch, and support of the platforms and that private investors made significant investments in the entities.  Felton also posed as a potential investor, using fake names, on various internet forums and social media sites in order to further promote false information and build up excitement in CoinSpark.  After the ICOs ended, Felton secretly sold thousands of coins on secondary cryptocurrency markets to take advantage of the artificially inflated coin prices based on his misrepresentations and eventually transferred the vast majority of investor funds into his personal financial accounts.

Felton used the vast majority of the investor proceeds to fund his extravagant lifestyle, including an all-cash purchase of a $1.5 million residence and an all-cash purchase of a $180,000 red 2007 Ferrari 599 GTB Fioran Coupe.  The government is seeking to forfeit the proceeds of his schemes and previously filed a civil forfeiture action, which is stayed pending the resolution of the criminal prosecution.

The Securities and Exchange Commission today announced charges against five Atlanta-based individuals, including film producer Ryan Felton, rapper and actor Clifford Harris, Jr., known as T.I. or Tip, and three others who each promoted one of Felton's two unregistered and fraudulent initial coin offerings (ICOs).  The SEC also charged FLiK and CoinSpark, the two companies controlled by Felton that conducted the ICOs. Aside from Felton, all of the individuals have agreed to settlements to resolve the charges against them.

The SEC's complaint alleges that Felton promised to build a digital streaming platform for FLiK, and a digital-asset trading platform for CoinSpark. Instead, Felton allegedly misappropriated the funds raised in the ICOs. The complaint also alleges that Felton secretly transferred FLiK tokens to himself and sold them into the market, reaping an additional $2.2 million in profits, and that he engaged in manipulative trading to inflate the price of SPARK tokens.  Felton allegedly used the funds he misappropriated and the proceeds of his manipulative trading to buy a Ferrari, a million-dollar home, diamond jewelry, and other luxury goods.

In a settled administrative order, the SEC finds that T.I. offered and sold FLiK tokens on his social media accounts, falsely claiming to be a FLiK co-owner and encouraging his followers to invest in the FLiK ICO. T.I. also asked a celebrity friend to promote the FLiK ICO on social media and provided the language for posts, referring to FLiK as T.I.'s "new venture." The SEC's complaint alleges that T.I.'s social media manager William Sparks, Jr. offered and sold FLiK tokens on T.I.'s social media accounts, and that two other Atlanta residents, Chance White and Owen Smith, promoted SPARK tokens without disclosing they were promised compensation in return.

In December 2015, an issuer engaged ViewTrade as lead placement agent in connection with an initial public offering. The IPO was a best-efforts minimum/maximum offering with a minimum of 2,000,000 shares, and a maximum of 2,400,000 shares. The offering also had a NASDAQ listing requirement of at least 300 round-lot shareholders. 

By December 18, 2015, the offering satisfied both the share and listing contingencies and the transaction closed. After the closing, ViewTrade realized that the offering exceeded the maximum share cap and began contacting investors to reduce the number of shares allocated to them. Seventeen investors agreed to reduce their subscription amounts. 

Over the next two business days, after secondary trading had begun, 4,525 shares were returned to ViewTrade as a result of trade cancellations and other returns. Instead of offering those shares to the 17 investors with unfilled orders pursuant to a random allocation methodology as required, ViewTrade sold the shares to two other investors. Specifically, the Firm sold 2,525 shares to a new investor at the IPO price of $4 per share while the shares were trading at $10.15 per share, and 2000 shares to an investor who did not reduce his subscription, at the IPO price of $4 per share while the shares were trading at $11.45 per share. As a result, the two investors received an instant profit of $30,428.75. 

Between January 2016 and October 2016, INTL liquidated low-priced securities for two foreign financial institutions, one of which was an investment management company based in the United Arab Emirates (UAE) and the other a broker based in Sweden. 

Respondent's supervisory system was not reasonably designed to detect red flags associated with the trading or otherwise assess whether its customers were engaged in unlawful trading activity, such as manipulation of microcap securities and/or the sale of unregistered securities. As a result, INTL failed to satisfy its supervisory and anti-money laundering (AML) obligations, thereby violating FINRA Rules 3110, 3310, and 2010. 

In addition, from July 2017 until separate time periods in 2018 and 2019, INTL's AML program for its newly-acquired clearing business had certain deficiencies in how it tracked (or failed to track) ACH transfers, foreign accounts that had common addresses, and customers that had previously been blocked by its direct business. These weaknesses in its AML program also violated FINRA Rules 3310 and 2010.

• Securities Industry Commentator
• Bill Singer