Securities Industry Commentator by Bill Singer Esq

Fired Bankers' Job Prospects Fade With Firms Under Pressure to Cut Costs (Bloomberg by Elaine Chen)

Federal Court Dismisses Challenge to Six Year Old FINRA AWC (BrokeAndBroker.com Blog)

San Antonio Businessman Brian Alfaro Sentenced to Ten Years in Federal Prison on Mail Fraud Charges (DOJ Release)

CoConspirator Sentenced to 10 Years' Imprisonment in Multi-Million Dollar Investment Fraud Scheme that Victimized Professional Hockey Players and Long Island Investors (DOJ Release)

Former Financial Advisor Sentenced to 6 Years in Federal Prison for His Role in Scheme to Defraud Investors Out of $3.5 Million (DOJ Release)

In the Matter of Alexandre S. Clug, Aurum Mining, LLC, PanAm Terra, Inc., and the Corsair Group, Inc. (SEC Opinion and Order)

In the Matter of William J. Sears (SEC ALJ Initial Decision)

FINRA Imposes Censure and Fine on Member Firm for Failed Research Report Disclosures

In the Matter of Citigroup Global Markets, Inc., Respondent (FINRA AWC)

In recent weeks, Wells Fargo cut more than 700 commercial-banking jobs and dozens of fixed-income research analysts. JPMorgan Chase & Co. started hundreds of dismissals, including about 80 at its consumer unit. Goldman Sachs Group Inc. began eliminating roughly 400 positions, including back-office roles that had been folded into bigger money-making divisions.

But Wells Fargo, the largest employer among U.S. banks, is expected to go much further in the coming years, eventually shedding up to tens of thousands of workers. The bank has said it will continue to reduce branches as part of cost-cutting efforts.

[F]rom January 2012 to June 2015, Alfaro offered individuals the opportunity to invest in numerous oil and gas prospects, including the Screaming Eagle 4H Prospect in Gonzales County, Screaming Eagle 6H Prospect also in Gonzales County, and Black Hawk Horizontal Buda #1 Prospect.  Investors mailed investment checks to Primera in San Antonio.  Alfaro told investors their monies would be used for expenses related to operation of the prospects, however, Alfaro used investor funds to support his extravagant lifestyle to include purchasing a high-end Rolex watch and numerous luxury vehicles such as a Lamborghini, a Mercedes Benz and a Porsche.  In addition, Alfaro purchased VIP season tickets to the San Antonio Spurs valued at approximately $100,000.

. . .

Many of the victims in this case were retired or nearing retirement and the loss of the investment wiped out their retirement.  One victim, a 76-year-old widow, had been using her investment to supplement her social security.  She has now been forced to go back to work.  A couple, who fell victims to Alfaro's scheme, had saved up approximately $100,000 over 35 years.  They have a daughter with disabilities that will require her to receive care for the rest of her life.  The couple invested their entire savings hoping to expand the nest egg that they were building to provide care for their daughter after they pass away.  That is all now gone.  Many victims had to delay or rethink retirement plans as well as college plans for children and grandchildren.

As early as 2004, Constantine and Kenner siphoned millions of investor dollars into a labyrinth of holding companies, diverting those dollars from their approved uses into companies, real estate and other ventures - such as Constantine's car racing endeavors - that solely benefited the defendants.

Constantine gained access to these investor funds via his relationship with Kenner.  Kenner was a collegiate hockey player in upstate New York, and his teammate, Joe Juneau, a future Olympian and National Hockey League star, introduced Kenner to a number of other NHL players in the 1990's as Kenner began his career as a Boston-based financial advisor.  Through those early contacts, Kenner developed a roster of clients, including former New York Islander Michael Peca; former New York Islander and New York Ranger Brian Berard; Darryl Sydor and Bill Ranford, both two-time Stanley Cup champions; and other NHL players whose careers and playing earnings blossomed just as they placed more and more trust in Kenner to invest and manage their finances and wealth.  Instead, Kenner and Constantine diverted these earnings for their own uses.

The Hawaii Real Estate Investment Scheme

Beginning in 2003, Kenner convinced Peca, Berard and several others to invest $100,000 each for the development of land in Hawaii into luxury estates and to open personal lines of credit at a bank, collateralized by their personal stock, bond and savings accounts worth at least $10 million.  Kenner assured the investors that the lines of credit would be used only to pay for initial development costs associated with the Hawaii project and would be fully replenished after Lehman Brothers Holdings, Inc. agreed to loan the project up to $105 million in August 2006.  In fact, Kenner borrowed nearly all of investors' lines of credit to acquire his personal interest in unrelated real estate projects in Hawaii and Mexico and to cover his own and Constantine's personal expenses. 

In an offshoot of the scheme, Constantine brokered a $3.5 million loan from an Arizona businessman ostensibly to close on a Hawaii parcel of land.  Constantine put up no money of his own, but walked away from the transaction - funded with assets diverted from Peca, Berard and others - with approximately $2 million. 

The Eufora LLC Scheme

In 2002, Constantine founded Eufora LLC, a prepaid debit card business.  Between February 2008 and May 2009, Eufora was operating in the red, and as Constantine testified in civil depositions, the company was nearly worthless.  Notwithstanding, Kenner persuaded clients to invest in Eufora.  While representing that he was investing his clients' funds in Eufora, Kenner instead wired $725,000 of his clients' funds to Constantine's personal account.  Kenner also directed the wiring of an additional $700,000 of his clients' funds to Eufora's account, and promptly re-wired those funds to a coconspirator's personal account.  The diverted funds were used to cover the costs of Kenner's and Constantine's home mortgages, credit card bills and other debts. 

The Global Settlement Fund Scheme

In early 2009, Kenner's clients who had opened lines of credit for the Hawaii venture received notices that their credit lines were in default.  For years, Kenner concealed that he had wiped out most of his clients' funds by borrowing against one line of credit to pay monthly interest charges for other another account.  By late 2008, the concealment scheme collapsed.  Notwithstanding, Kenner and Constantine persuaded their clients to invest additional funds to a Global Settlement Fund.  The clients contributed  more than $2.9 million toward the fund, but the vast majority of the money was diverted to the defendants' personal use, which included Constantine buying his personal home out of foreclosure, Kenner and Constantine paying legal bills related to Kenner's personal investment in a tequila company in Mexico, defending Constantine in Florida litigation over his race car sponsorship activities, and an exploratory and unsuccessful effort by Constantine to buy Playboy Enterprises.

Smith, formerly a financial investment advisor in Shreveport, persuaded multiple victims to invest approximately $3.5 million with his co-defendant, Kirbyjon H. Caldwell ("Caldwell"). According to evidence presented to the court, Smith began approaching existing clients, friends, and acquaintances in the spring of 2013 about an investment opportunity in historical chinese bonds. Smith told these potential investors that they would be obtaining a partial ownership interest in the bonds and that they would receive exponential returns on their investments in a short period of time. Smith neglected to tell these individuals that historical chinese bonds, bonds issued by the former Republic of China prior to losing power to the communist government in 1949, held no value. In fact, the bonds were considered by the Securities and Exchange Commission to be mere collectables with no value outside of the memorabilia market.

After Smith made the fraudulent pitch, victim-investors who believed and trusted Smith agreed to invest in these bonds. These victims were provided with a "participation agreement" indicating that if the sale of the bonds failed to occur within a certain number of days, the invested funds would be returned within a defined period of time. They were instructed to wire funds to various bank accounts held by or controlled by Caldwell or his representative. The funds were then divided between Smith, Caldwell, and others. Smith received $1.08 million of the total $3.5 million and used it to pay down loans, purchase two luxury sport utility vehicles, place a down payment on a vacation property, and maintain his lifestyle. The victims never received the promised returns from these chinese bonds.

This is a partially settled proceeding against Respondent William J. Sears. The Securities and Exchange Commission found that he violated Section 5(a) and (c) of the Securities Act of 1933 and the antifraud provisions of Securities Act Section 17(a), Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission also found that Sears aided and abetted and caused an entity's violation of these provisions. Under the settlement, Sears cannot argue that he did not commit these violations and has agreed to a cease-and-desist order and penny-stock and officer-and-director bars. The only remaining issues are whether I should order Sears to pay a civil monetary penalty and disgorgement, and if so, in what amounts. At the Division of Enforcement's request, I order no civil monetary penalty and order that Sears's disgorgement obligation is satisfied by the judgment in a related criminal case.

Sears was convicted in 2007 of securities fraud and of conspiracy to commit securities fraud and commercial bribery. After being convicted, he engaged in a "stock public relations and promotional business through Microcap Management, LLC," which was a Nevada company that he formed. Sears used his home address as Microcap's primary business address. During this time, Sears also formed Bayside Realty Holdings LLC, which used Sears's mother's home address as its business address.  

In 2010, Sears's brother-in-law, Scott M. Dittman, decided to develop a business selling refurbished shipping containers, called PharmPods, for use in growing cannabis. Dittman persuaded Sears to help develop and promote the business.

As part of their plan, Sears and Dittman took over an existing company and changed its name in 2011 to Fusion Pharm, Inc.  Fusion Pharm's offices were in Denver. The company was supposedly involved in developing and selling PharmPods. Fusion Pharm's stock was quoted on OTC Link from 2011 until 2014, when the Commission suspended trading in its stock for 10 days. Fusion Pharm never registered a securities offering under the Securities Act or a class of securities under the Exchange Act.

Although Dittman and Sears listed Dittman as Fusion Pharm's CEO, Sears acted as an undisclosed executive officer. Sears worked at Fusion Pharm from its inception, appeared on non-public company documents as an officer, drew a salary, and handled daily responsibilities typically assigned to an officer. 

As it turned out, Fusion Pharm had almost no revenue. From 2011 through 2013, it was mostly funded through illegal securities sales. Fusion Pharm's initial funding came from the sale of stock that Sears received in Microcap's name. This stock came from Fusion Pharm's predecessor entity and as part of the transition to Fusion Pharm. To hide what they were doing, Sears and Dittman made it appear that Sears had loaned money to Fusion Pharm through Bayside and Meadpoint Venture Partners, LLC, another entity Sears formed and owned.  And after Sears and Dittman depleted these funds, Sears converted the fake debts to Bayside and Meadpoint into unrestricted Fusion Pharm shares. He then caused Bayside and Meadpoint to illegally sell those shares into the market.

In 2016, the government charged Sears in a two-count criminal information with (1) conspiracy to defraud the Commission, commit securities fraud, sell unregistered securities, commit mail fraud, and commit wire fraud, all in violation of 18 U.S.C. § 371; and (2) filing a false tax return, in violation of 26 U.S.C. § 7206(1). The information sought forfeiture of assets, including a money judgment, derived from gross proceeds traceable to Sears's conspiracy offense. Sears entered into a written plea agreement in September 2016, in which he agreed to plead guilty and consented to forfeiture of property, including a money judgment in excess of $12 million. The United States District Court for the District of Colorado imposed judgment against Sears in January 2020, sentenced him to 96 months' imprisonment, and ordered him to pay $2,433,818 in restitution.

The court also entered an amended preliminary order of forfeiture in which it held that Sears "obtained $10,810,916.90 of the 12,204,172.00 in Fusion Pharm, Inc. stock sales proceeds, personally, or through accounts he controlled." In the final order of forfeiture, the court ordered Sears to pay $2,433,818.00 in restitution to the Internal Revenue Service, entered a personal money judgment against him in the amount of $1,914,049.49, and ordered forfeiture of identified property totaling $6,463,049.42. The court of appeals dismissed Sears's appeal in August 2020. 

Alexandre S. Clug appeals, and the Division of Enforcement cross-appeals, an administrative law judge's initial decision and subsequent orders concerning alleged violations of the antifraud, reporting, and registration provisions of the federal securities laws by Clug, Michael W. Crow, and three companies that they founded in 2011 and controlled-Aurum Mining, LLC ("Aurum"), PanAm Terra, Inc. ("PanAm"), and The Corsair Group ("Corsair").   

The ALJ found that: (i) Aurum, Clug, and Crow violated, and Clug and Crow aided, abetted, and caused violations of, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933, by misrepresenting: Crow's professional background; that Aurum had satisfied the conditions necessary for it to retain investor funds when it had not and that Aurum had satisfied the conditions necessary for noteholders to convert into shares when it had not; and Aurum's gold production estimates for a mining exploration property; (ii) PanAm violated Securities Act Section 17(a)(2) by misrepresenting in its filings the status of a convertible note held by Crow and that the company had submitted an application to list its stock on the OTC Bulletin Board; (iii) Corsair, Clug, and Crow violated, and Clug and Crow aided, abetted, and caused Corsair's violation of, Exchange Act Section 15(a)(1) by acting as unregistered broker-dealers; and (iv) Crow violated Exchange Act Section 15(b)(6)(B) by associating with a broker-dealer (Corsair) in contravention of a bar that prohibited him from doing so, and Clug aided, abetted, and caused that violation. 

The ALJ ordered that Clug and Crow cease-and-desist from further violations of the relevant statutory provisions, pay disgorgement plus prejudgment interest, and be barred from the securities industry and from participating in penny stock offerings. Crow was also ordered to pay a civil penalty. The ALJ did not sanction Aurum, PanAm, or Corsair. 

Aurum, PanAm, Corsair, and Crow did not appeal or respond to the Division's cross-appeal. Crow settled with the Commission during the pendency of this appeal. Clug appeals the findings of fact and conclusions of law as to his violations and sanctions. 

The Division cross-appeals the ALJ's conclusion that it did not establish that Crow served as a de facto executive officer of PanAm. According to the Division, we should find that Crow was a de facto executive officer and that the following violations resulted from PanAm's failure to disclosure that fact or information about Crow's background in its periodic reports: (i) PanAm violated, and Clug aided, abetted, and caused PanAm's violations of, the antifraud provisions of Exchange Act Section 10(b) and Rule 10b-5 and Securities Act Section 17(a); (ii) PanAm violated, and Clug aided, abetted, and caused PanAm's violations of, the public company reporting requirements of Exchange Act Section 13(a) and Rules 12b-20, 13a-1, and 13a-13 thereunder; and (iii) Clug violated Exchange Act Rule 13a-14(a) by certifying certain of those reports as PanAm's CEO. The Division further cross-appeals the ALJ's finding that PanAm violated Securities Act Section 17(a)(2) by misrepresenting the status of a convertible note held by Crow; it contends that through this misrepresentation PanAm also violated Securities Act Sections 17(a)(1) and (a)(3) and Exchange Act Section 10(b) and Rule 10b-5, and that Clug aided, abetted, and caused those violations. Finally, the Division seeks the imposition of cease-and-desist orders, disgorgement plus prejudgment interest, and civil penalties on Clug, Aurum, PanAm, and Corsair; and industry, penny stock, and officer-and-director bars on Clug. 

No party appealed the findings that: (i) Aurum violated Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 by making the misrepresentations noted above; (ii) PanAm violated Securities Act Section 17(a)(2) by misrepresenting that it had submitted an application to list its stock on the OTC Bulletin Board; and (iii) Corsair violated Exchange Act Section 15(a)(1). But the initial decision "cease[d] to have any force or effect" when we granted the petitions for review. . . .

ORDERED that Alexandre S. Clug cease and desist from committing or causing any violations or future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) thereunder; Exchange Act Section 13(a) and Rules 12b-20, 13a-1, 13a-13, and 13a14(a) thereunder; and Exchange Act Section 15(a)(1); and it is further 

ORDERED that Aurum Mining, LLC cease and desist from committing or causing any violations or future violations of Exchange Act Section 10(b) and Rule 10b-5(b) thereunder; that PanAm Terra, Inc. cease and desist from committing or causing any violations or future violations of Exchange Act Sections 10(b) and 13(a) and Rules 10b-5(b), 12b-20, 13a-1, and 13a-13 thereunder; and that The Corsair Group, Inc. cease and desist from committing or causing any violations or future violations of Exchange Act Section 15(a)(1); and it is further 

ORDERED that Alexandre S. Clug is barred from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; barred from acting as a promoter, finder, consultant, or agent, or otherwise engaging in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock, with the exception discussed in the above opinion; and prohibited permanently from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter; and it is further 

ORDERED that Alexandre S. Clug disgorge $286,810.01, plus prejudgment interest of $90,221.23, such prejudgment interest calculated beginning from December 1, 2013, with such interest continuing to accrue on funds owed until they are paid, in accordance with Rule of Practice 600, 17 C.F.R. § 201.600; and it is further 

ORDERED that Aurum Mining, LLC disgorge $3,615,964.99, plus prejudgment interest of $1,137,466.41, such prejudgment interest calculated beginning from December 1, 2013, with such interest continuing to accrue on funds owed until they are paid, in accordance with Rule of Practice 600, 17 C.F.R. § 201.600; that PanAm Terra, Inc. disgorge $224,000, plus prejudgment interest of $76,432.05, such prejudgment interest calculated beginning from April 1, 2013, with such interest continuing to accrue on funds owed until they are paid, in accordance with Rule of Practice 600, 17 C.F.R. § 201.600; and that The Corsair Group, Inc. disgorge $38,563, plus prejudgment interest of $12,130.69, such prejudgment interest calculated beginning from December 1, 2013, with such interest continuing to accrue on funds owed until they are paid, in accordance with Rule of Practice 600, 17 C.F.R. § 201.600; and it is further 

ORDERED that Alexandre S. Clug pay a civil money penalty of $150,000. 

ORDERED that the disgorgement, prejudgment interest, and civil money penalty amounts be used to create a Fair Fund for the benefit of investors harmed by Respondents' violations pursuant to Rules of Practice 1100-1106. . . .

Exchange Act Section 21C(f) authorizes us to bar a person from acting as an officer or director of any issuer that has a class of securities registered under Exchange Act Section 12, or that is required to file reports under Exchange Act Section 15(d), if we find that (i) the person violated Exchange Act Section 10(b) or the rules thereunder; and (ii) "the conduct of that person demonstrates unfitness to serve as an officer or director of any such issuer." The ALJ declined to impose an officer-and-director bar on Clug because he found that Clug was denied adequate notice and an opportunity to defend this issue. The OIP did not include an officer-and-director bar among the sanctions it stated were at issue or indicate that other sanctions might be at issue; and the Division did not request an officer-and-director bar until its post-hearing brief. Under these circumstances, we also decline to impose an officer-and-director bar on Clug. As the ALJ stated, by not requesting the bar until after the close of evidence, Clug was deprived the opportunity of presenting "additional and perhaps even mitigating evidence, such as developing a record about his potential prior public company roles before the conduct at issue and calling favorable witnesses from those companies to testify in his defense." 

The Division acknowledges that omitting the request for an officer-and-director bar from its pre-hearing brief was an "unintentional oversight," but contends that our rules do not provide that relief is waived if not disclosed in a pre-hearing brief. But the issue here is notice and not waiver. Under the circumstances, Clug would be denied fair notice were we to impose a bar now. We therefore decline to impose an officer-and-director bar on Clug. 

On June 16, 2006, the firm executed AWC No. 2005000792101, in which the NASD found that, from July 2002 to May 2005, the firm, among other things, failed to make various disclosures required by NASD Rule 2711(h) in certain types of published research reports, and failed to establish and maintain a supervisory system reasonably designed to detect and prevent violations of NASD Rule 2711(h), in violation of NASD Rule 3010. The firm consented to a censure, a $350,000 fine, and an undertaking to perform a comprehensive review of its research disclosures in certain types of published research reports. 

On January 3, 2012, the firm executed AWC 2008012310101, in which FINRA found that, from at least January 2007 to at least March 2010, the firm failed to comply with various research rating disclosure requirements, in violation of NASD Rule 2711 and the Global Research Analyst Settlement. The firm also failed to establish and maintain a supervisory system reasonably designed to detect that the firm was not populating its research reports with required disclosures and that it was not complying with certain undertakings pursuant to the Global Research Analyst Settlement, in violation of NASD Rule 3010. The firm consented to a censure and a $725,000 fine.

From November 2012 to November 2017, CGMI omitted approximately 24,800 required disclosures in 16,850 equity research reports that it was either a manager or co-manager of a public offering of equity securities for the companies covered in the reports. These omissions constituted approximately 6.75 percent of required manager/co-manager disclosures during the five-year period and affected approximately 4.43 percent of published equity research reports during this time period. By virtue of the foregoing, the firm violated NASD Rule 2711(h)(2)(A)(ii)(a) and FINRA Rule 2241(c)(4)(C)(i).

The firm's omissions were the result, in part, of CGMI's failure to establish and maintain a supervisory system and written supervisory procedures reasonably designed to achieve compliance with NASD Rule 2711(h)(2)(A)(ii)(a) and FINRA Rule 2241(c)(4)(C)(i). By virtue of the foregoing, the firm violated NASD Rules 2711(i) and 3010(a) and (b)(1) and FINRA Rules 3110(a) and (b)(1) and 2010.

CREDIT FOR EXTRAORDINARY COOPERATION 

In resolving this matter, Enforcement recognizes CGMI's extraordinary cooperation for: (1) discovering the omitted disclosures during a planned compliance review, initiating an internal review prior to detection or intervention by FINRA or another regulator, and selfreporting directly to FINRA staff; (2) promptly correcting the cause of the omitted disclosures to prevent further omissions; (3) conducting a five-year lookback to determine the number of omitted disclosures, which required expending significant staff time to manually review voluminous transaction and disclosure data; (4) voluntarily employing corrective measures, such as changing vendors, revising its supervisory systems, and implementing automated testing with periodic manual checks; and (5) providing substantial assistance to FINRA's investigation by maintaining an open dialogue with FINRA staff regarding improvements to supervisory systems, procedures, and controls, meeting with staff to explain how disclosures were applied to research reports, the particular issues with the vendor data that caused the omitted disclosures, and how the change in vendors and processes remediated the disclosure omissions, and by sharing the results of its five-year lookback periodically and at its conclusion.

• Securities Industry Commentator
• Bill Singer