Securities Industry Commentator by Bill Singer Esq

Chicago Nursing Home Executives Charged With Operating Ponzi Scheme (DOJ Release)

Indian National Admits to Participating in Telemarketing Scam to Defraud Americans (DOJ Release)

Unregistered ICO Issuer Agrees to Disable Tokens and Pay Penalty for Distribution to Harmed Investors (SEC Release)

Statement on SEC Settlement Charging Token Issuer with Violation of Registration Provisions of the Securities Act of 1933 by SEC Commissioner Hester Peirce

SEC Obtains Judgments Against Two Individuals in Fraud Scheme Involving Biotech Start-Up (SEC Release)

SEC Charges Arizona-Based Financial Services Companies and Their CEO with Fraud (SEC Release)

Federal Court Orders Illinois Software Development Firm to Pay Penalty and Disgorgement for Aiding and Abetting Illegal Conduct (CFTC Release)

FINRA Bars Associated Person for Altering Series 6 Exam Results

In the Matter of Alonzo C. Castillo, Respondent (FINRA AWC)

Wells Fargo Sues Over Transitional and Production Bonuses And Rep Fights Back (BrokeAndBroker.com Blog)

[F]rom 2012 to 2017, Feiner and Baver operated a fraud scheme involving the misappropriation of funds raised through the sale of membership interests in companies that Feiner created under the FNR umbrella to purchase and sell nursing homes and assisted living facilities, according to an indictment returned in U.S. District Court in Chicago.  The indictment accuses Feiner and Baver of intentionally misleading investors about the financial condition of the companies in order to fraudulently raise funds. 

In reality, the payments of returns to investors were funded through a Ponzi scheme, with Feiner and Baver paying early investors with money raised from later investors, the charges allege.  Feiner and Baver also used investor funds for purposes unrelated to the purchase or acquisition of the healthcare facilities, including for Feiner's and Baver's own personal benefit, the indictment states.

The indictment seeks forfeiture from Feiner of $13.56 million, and from Baver of $3.76 million.

admitted that he participated in a telemarketing scheme that offered victims supposed computer protection services after misleading them to believe that malware had been detected on their computers. While executing the scheme, call center operators in India obtained personal and banking information from victims' computers through remote access applications and from the victims directly. Sachdeva admitted that he later attempted to use the personal and banking information to misappropriate funds from the victims' bank accounts. 

Sachdeva admitted that he contacted an acquaintance in Rhode Island and enlisted him to assist in accessing and stealing funds from the victims' bank accounts. According to court documents, an FBI investigation determined that Sachdeva provided his acquaintance with personal and banking information sufficient to enable online access into the accounts of at least seven individuals, each over the age of 65. The investigation determined that the intended loss to these victims totaled $600,000.

Unbeknownst to Sachdeva, his acquaintance in Rhode Island was assisting the FBI in an investigation into the telemarking fraud scheme. Sachdeva was arrested by FBI agents on February 16, 2020, as he deplaned in Boston from a flight from India. 

[B]etween June and October 2017, Unikrn raised approximately $31 million through its offering of the UnikoinGold (UKG) token. The order finds that Unikrn planned to use the offering proceeds to make more features available on the gaming platform and to develop additional applications for the UKG tokens. Unikrn promised investors that it would facilitate a secondary trading market for the tokens and that its efforts to increase the usages for the UKG token would increase demand for and in turn, the value of, the tokens. The order finds that Unikrn offered and sold UKG as investment contracts, which constituted securities, yet failed to register the offering or qualify for an exemption.

Today's settlement with Unikrn, Inc., is the latest in a growing line of enforcement actions arising from initial coin offerings.[1] While many SEC enforcement actions in this space include allegations of fraud, Unikrn falls within the narrower category of token issuers charged only with violating Section 5 of the Securities Act.[2] In other words, Unikrn is alleged to have offered and sold its tokens in an unregistered offering and in a manner that did not qualify for an exemption; it is not alleged to have engaged in any fraud in doing so. Registration violations, even standing alone, are serious, and our enforcement actions can serve to deter such violations and protect harmed investors. We should strive to avoid enforcement actions and sanctions, however, that enervate innovation and stifle the economic growth that innovation brings. I believe that this action and its accompanying sanctions will have such consequences.

The settlement requires Unikrn to permanently disable its blockchain-based token, which it had integrated into its product offerings, and pay a penalty of $6.1 million, which represents substantially all of the company's assets. In other words, the Commission is effectively forcing the company to cease operations because of an allegedly improper offering of supposed securities.[3]

While I do not concur in my colleagues' opinion that Unikrn's token offering constituted a securities offering, I recognize that the determination of whether an instrument is offered and sold as a security in the form of an investment contract requires a subjective weighing of the facts and circumstances. Such analysis, idiosyncratic by its very nature, does not produce clear guideposts for entrepreneurs and others to follow. The challenge of discerning a clear legal line is especially difficult with respect to new forms of business and novel technologies. Entrepreneurs may be forced to choose between unpalatable options: expending their limited capital on costly legal consultation and compliance or forgoing their pursuit of innovation due to fear of becoming subject to an enforcement action. A regulatory safe harbor could resolve this unhappy dilemma.

As I proposed earlier this year,[4] a well-designed, narrowly tailored regulatory safe harbor would efficiently and effectively combine the Commission's interest in protecting investors with developers' ambition to experiment. Affording a company like Unikrn a three-year regulatory window within which to further develop and refine its platform-while still subjecting it to the antifraud laws-would provide benefits to token purchasers, token issuers, and the Commission.

Imagine if such a regulatory safe harbor had been available to Unikrn. Instead of permanently disabling its tokens as a result of today's settled enforcement action, Unikrn, in concert with its tokenholders, might be devoting its time and resources to identifying new uses for the token and expanding its user base. Although some may not see the loss of the benefits of innovation as large in this specific instance, posterity will feel the cumulative loss to society of innovation forgone because of such actions. Indeed, we will never know the full magnitude of such losses because some would-be entrepreneurs, having seen one too many Unikrns, may decide it wiser to shelve their most transformative ideas.

By failing to challenge ourselves to experiment with new approaches to regulation, we, and those whose interests we are pledged to serve, risk surrendering the fruits of innovation. I respectfully dissent from the Commission's actions today relating to Unikrn.

[1] See Digital Assets/Initial Coin Offerings Enforcement Actions, available at https://www.sec.gov/spotlight/cybersecurity-enforcement-actions.

[2] See Bitclave PTE Ltd. Order, Release No. 33-10788 (May 28, 2020); Enigma MPC Order, Release No. 33-10755 (Feb. 19, 2020); Blockchain of Things Inc. Order, Release No. 33-10736 (Dec. 18, 2019); SEC v. Telegram Group Inc., et al. (Oct. 11, 2019); Block.one Order, Release No. 33-10714 (Sept. 30, 2019); SimplyVital Health, Inc. Order, Release No. 33-10671 (Aug. 12, 2019); Gladius Network LLC Order, Release No. 33-10608 (Feb. 20, 2019); SEC v. Kik Interactive Inc. (June 4, 2019); CarrierEQ, Inc., D/B/A Airfox Order, Release No. 33-10575 (Nov. 16, 2018); Paragon Coin, Inc. Order, Release No. 33-10574 (Nov. 16, 2018).

[3] As securities, Unikrn's tokens, due to the concomitant application of the federal securities laws, likely would no longer be practical to serve the commercial purposes Unikrn intended for them.

[4] Hester Peirce, Commissioner, SEC, Running on Empty: A Proposal to Fill the Gap Between Regulation and Decentralization (Feb. 6, 2020), https://www.sec.gov/news/speech/peirce-remarks-blockress-2020-02-06.

According to the SEC's complaint, filed in April 2018, Stromsland, PixarBio's Chief Information Officer and VP of Investor and Public Relations, and Herod, an information technology consultant and friend of PixarBio CEO Frank Reynolds, repeated false statements to prospective investors that were made by Reynolds about the company's finances and the FDA approval status of a drug. Stromsland and Herod also allegedly provided potential investors promotional materials written by Reynolds that included the false statements. The complaint also alleged that Reynolds and Herod engaged in a fraudulent scheme to acquire and merge PixarBio with a publicly traded company and that Reynolds, Herod, and Stromsland engaged in a fraudulent scheme to secretly manipulate the sales of shares in the new entity. The SEC's litigation against PixarBio and Reynolds remains pending.

[B]etween 2015 and May 2019, Gary Pryor, founder and CEO of ZipRemit, Inc. and Lendaily, Inc., private companies that claimed to offer merchant branded consumer credit at the point-of-sale, raised approximately $2.9 million from investors while repeatedly misrepresenting the companies' technological capabilities and revenues. According to the complaint, Pryor falsely told investors that ZipRemit and Lendaily earned revenue from interest and loan origination fees and that the companies had several large nationally-recognized brands as customers. The complaint alleges that Pryor repeatedly misrepresented that the companies had developed proprietary software that had been tested, approved, and launched, or was about to be launched, with customers, when, in fact, the companies had not generated any revenue nor had any customers ever used their software, as it was not fully developed. In addition, Pryor allegedly diverted over $1.2 million of investor funds for his own personal use, including making payments on his 4,000 square foot home and spending money on luxury automobiles, lavish ski trips, and private school tuition for his children.

[E]dge aided and abetted Trader A's spoofing (bidding or offering with the intent to cancel the bid or offer before execution) and use of a manipulative and deceptive scheme involving the E-mini S&P futures contract from at least January 30, 2013, through October 30, 2013. Edge enabled Trader A's violations by programming a custom software application that helped send false supply and demand signals for E-mini S&P futures contracts and induced other market participants to react.

The court's permanent injunction prohibits Edge from providing any computer programming services in connection with trading in CFTC-regulated markets for a period of two years. Further, it orders disgorgement of $24,200 and a civil monetary penalty of $48,400, for a total of $72,600 in monetary relief.

. . .

According to the order, Edge programmed a "Back-of-Book" function for Trader A knowing that he planned to use this function to engage in spoofing and to employ a manipulative scheme. The Back-of-Book function had two features helpful to Trader A's illegal conduct. First, it kept Trader A's orders, which were visible to other market participants, behind other orders at a particular price level. This was done to minimize the chances that Trader A's orders would result in executed trades. Second, the Back-of-Book function immediately and automatically cancelled Trader A's orders as soon as any portion of these orders was filled by other market participants. Edge programmed the Back-of-Book function with these features with the understanding that they would help Trader A place large spoof orders and trick other market participants into making decisions and executing trades based on this false information. The order permanently enjoins Edge from selling or possessing any application that includes the Back-of-Book function.

Castillo joined J.P. Morgan in the position of Licensed Banker in November 2019. As a condition of his employment, Castillo was required to successfully complete several licensing and qualifications exams, including the FINRA Series 6 Exam. 

Castillo passed the FINRA Securities Industry Essentials Exam on January 17, 2020. Castillo attempted to pass the FINRA Series 6 Exam on March 12, 2020, and received a score of 54%. A score of 70% or above was required to pass. 

On March 12, Castillo created a modified version of his official score report for that exam, which he altered to represent that he had passed. That same day, Castillo provided this falsified score report to his manager.

• Securities Industry Commentator
• Bill Singer