Securities Industry Commentator by Bill Singer Esq

FINRA Expungement Arbitration Takes on Aspects of a Psychiatric Case (BrokeAndBroker.com Blog)

Quebec Man Indicted By A Federal Grand Jury For Multi-Million Dollar Fraud Scheme Targeting Elderly Victims (DOJ Release)

U.S.-Based Promoter of Foreign Cryptocurrency Companies Charged in over $11 Million Securities Fraud Scheme (DOJ Release)

SEC Charges Three Individuals in Digital Asset Frauds (SEC Release)

FBI, Partners Disarm Emotet Malware / Global Law Enforcement and Private Sector Take Down a Major Cyber Crime Tool (FBI Release)

Former natural gas trader pleads guilty for role in commodities insider trading scheme (DOJ Release)

CFTC Charges Swaps Trader with Manipulation, Attempted Manipulation, and Making False Statements (CFTC Release)

FINRA Imposes Fine and Suspension for Untimely Amendment of Form U4 for Tax Liens

In the Matter of James Daniel Kent, Jr, Respondent (FINRA AWC)

FINRA Censures and Fines Firm for Contingency Offerings Failures

In the Matter of Cantone Research Inc. Respondent (FINRA AWC)

FINRA Publishes 2021 Report on FINRA's Examination and Risk Monitoring Program / Report Combines and Replaces Annual Exam and Risk Monitoring Findings Report, Priorities Letter (FINRA Release)

[B]etween September 2015 and March 2020, the defendant conspired with multiple co-defendants to defraud elderly victims using a fraudulent telemarketing scheme.  

Hogan would place telephone calls from Canada to victims in the United States and tell victims that they had won the Canadian lottery. However, before collecting their winnings, victims had to first pay the taxes, brokerage fee, and/or custom fees due in connection with the winnings. Victims were instructed by the defendant and others to pay these taxes, brokerage fees, and/or custom fees by wire transferring funds to a bank account in Rochester, NY, controlled by co-defendant Bernard Perkins, or by mailing funds to Perkins or addresses in the United States controlled by co-defendants Anthony Laughing, Jr., Cory LaPlant and others.

After receiving funds from victims, defendants Bernard Perkins, Anthony Laughing, Jr., and  Cory LaPlant would keep a small portion of the funds and then pay co-defendants Devlin Laughing and Brenda Garrow to smuggle the remaining funds from the United States to the defendant Hogan in Canada.

As a result of this fraudulent telemarketing scheme, defendant Hogan and his co-defendants caused approximately 37 victims over the age of 55 to mail approximately 200 packages and wire transfer funds totaling approximately $2 million.

[B]etween 2017 and 2018, DeMarr conspired with others to defraud  numerous victims of $11.4 million by inducing them to invest in their companies, "Start Options" and "B2G," based on materially false and misleading representations. Start Options purported to be an online investment platform that provided cryptocurrency mining, trading, and digital asset trading services. B2G was purportedly an "ecosystem" that would allow users to trade B2G tokens, provide digital wallet staking, and trade digitial and fiat currencies "on a secure, comprehensive platform."

According to the allegations, however, both Start Options and B2G were fraudulent. In approximately December 2017, DeMarr and others began offering securities in the form of investment contracts to U.S. and international investors through the Start Options website. Investments were accepted in Bitcoin, U.S. dollars, or Euros. To participate, investors had to deposit their funds for a specified contract period, after which they could purportedly withdraw their money at a significant profit. 

Among other things, DeMarr and others falsely claimed that investor funds would be invested in digitial asset mining and trading platforms that would earn them massive profits. In truth, however, the money was never invested and was instead diverted to accounts controlled by DeMarr and others and used for various personal expeditures, including the purchase of a Porsche, jewelry, and renovations to DeMarr's home in California. 

Similarly, according to the complaint, Start Options also purported to feature celebrity endorsements to promote its securities offerings. For example, a professional athlete purportedly endorsed Start Options when, as alleged in the indictment, the athlete had no involvement with Start Options and his name and likeness were used without his consent. Based on this and other fraudulent promotional materials, investors sent millions of dollars worth of Bitcoin, Ethereum, and fiat currency to financial accounts, including cryptowallets, controlled by DeMarr and others in the U.S. and abroad. 

As alleged, in or about late January 2018, rather than permitting Start Options investors to withdraw money from their accounts after the requisite time period, DeMarr and others required investors to roll over their accounts into an unregistered "initial coin offering," or ICO, of B2G, the second of the two fraudulent companies in which DeMarr was involved. Among other fraudulent misrepresentations, DeMarr and others falsely told investors that the ICO would raise capital for the company to build an "ecosystem" that would allow users to trade B2G tokens, provide digital wallet staking, and trading. In truth, investors never actually received any digital tokens and funds from the offering were not used to develop the B2G platform.

According to the complaint, DeMarr and others also paid various promoters, including an actor famous for martial arts films made in the 1980s and 1990s, to serve as a promoter and celebrity spokesperson, falsely claiming that B2G could generate an "8000%" return for investors within one year, and that he was a participant in the ICO. DeMarr and others also created false press releases and whitepapers about B2G, fabricated B2G account statements, and refused to allow investors to withdraw their money. 

As alleged in the complaint, DeMarr staged his own disappearance to avoid facing disgruntled B2G investors. DeMarr instructed others to release statements asserting that DeMarr had been assaulted and went missing in Montenegro, and telling B2G investors to stop attempting to contact DeMarr or his family regarding their inability to have the money they invested in B2G returned. In truth, however, DeMarr did not disappear in Montenegro and instead was believed to be residing in California.

[F]rom approximately December 2017 through May 2018, Kristijan Krstic, founder of Start Options and Bitcoiin2Gen, and John DeMarr, the primary U.S.-based promoter for these companies, fraudulently induced investors to buy digital asset securities. The SEC alleges that, from approximately December 2017 through late January 2018, Krstic and DeMarr touted Start Options' purported digital asset mining and trading platform. According to the complaint, they falsely claimed Start Options was "the largest Bitcoin exchange in euro volume and liquidity" and "consistently rated the best and most secure Bitcoin exchange by independent news media."

The SEC also alleges that, starting in January 2018, Krstic and DeMarr promoted Bitcoiin2Gen's unregistered initial coin offering (ICO) of digital asset securities known as B2G tokens. According to the complaint, another individual, Robin Enos, working with DeMarr, drafted fraudulent promotional materials that Enos knew would be disseminated to the investing public. These materials allegedly contained numerous false statements, including that the B2G tokens would be deliverable on the Ethereum blockchain, that the invested funds would be used to develop a coin that was "mineable," and that the tokens would be tradeable on a proprietary digital asset trading platform at the platform's "launch" in early April 2018. In reality, the complaint alleges, these claims about the B2G tokens were false, Bitcoiin2Gen was a sham, and Krstic and DeMarr allegedly misappropriated millions of dollars of investor funds for their own personal benefit.

The FBI has seen Emotet hit nearly every sector within the U.S.-paralyzing school systems, small and large businesses, non-profits, government services, and individuals. "Emotet did not discriminate," Nye said.  

 

Even if a victim of Emotet avoided a ransomware attack or direct financial loss, the disruptions and expense of remediating the infection were substantial. "Victims incurred substantial monetary costs to effectively clean compromised machines," Nye stressed. According to the U.S. Cybersecurity and Infrastructure Security Agency, Emotet infections cost local, state, tribal, and territorial governments up to $1 million per incident to remediate.  

 

Last week's global action allowed law enforcement to dismantle the foundational components of Emotet's operation-taking down multiple layers of infrastructure located around the world. "Through the combined efforts of the incredible FBI team, foreign partners, and private sector partners, the command and control network of Emotet was dismantled," Nye said. "To recreate this botnet, the criminals would have to rebuild from scratch."  

 

The unprecedented effort closed off the access this malware had opened to millions of machines. "When you can take out the delivery arm of all these countless pieces of malware, it means greater protection and limiting the ability of cyber criminals to get onto machines throughout the globe," Nye explained.

The FBI identified more than 45,000 computers and networks in the United States that had been recently affected by Emotet malware. "The Emotet malware on those machines is no longer harmful to those it infected," Nye reassured.

[J]ames admitted he conspired with others to misappropriate material, nonpublic information and to use that information to engage in fraudulent, pre-arranged trades in natural gas futures contracts. These pre-arranged trades generated approximately $966,403 in illicit proceeds. He further admitted the net profits from these fraudulent trades were split between himself and others involved in the fraudulent trading scheme. James also admitted he and others agreed to falsely document certain proceeds as income on IRS forms in part to conceal the true nature of the funds and to make the illicit profits appear to be legitimate income paid. 

[O] February 3, 2015, a bond issuer was pricing bonds and a related swap with the bank using a specific screen displaying prices from a swap execution facility (SEF), including the price for U.S. dollar interest rate swap spreads with a 10-year maturity (10-year swap spreads). Gorman, who was located in Japan at the time, knew that the swap would be more profitable to the bank, at the expense of the issuer, if the screen reflected a lower price for 10-year swap spreads. Gorman therefore traded to manipulate the price of 10-year swap spreads by selling 10-year swap spreads to move the price down on the screen during the pricing of the bond and swap. Although he spoke to the issuer during the pricing call about the price, Gorman did not disclose that he was himself trading to move the price of 10-year swap spreads down.

In addition, the complaint alleges that Gorman expressed his manipulative intent in text messages he sent from his personal phone before, during, and after the pricing. For example, Gorman texted a colleague that he traded through a SEF broker in the United States-which he usually did not do-because Gorman "only care[d] who can move the screen the quickest." Gorman, who was aware that market prices were rising before the pricing, also told his supervisor in text messages that he would "get the print at" (i.e., move the screen to) a lower level.      

The complaint also alleges that Gorman later tried to cover up his misconduct. In its investigation, the Division of Enforcement asked Gorman to preserve certain messages on his personal phone. According to the complaint, after receiving the request, Gorman deleted messages that were covered by the request, including messages on WhatsApp, and then falsely told the CFTC, both in a letter from his counsel and in investigative testimony under oath, that he had complied. 

In 1999, a New York Stock Exchange Hearing Panel, in Decision No. 99-85, accepted Kent's consent to a censure and 10-week bar for unsuitable and excessive trades in one customer account, mismarking order tickets as "unsolicited" in that account, and unsuitable trades and an unauthorized trade in the account of a second customer. 

In 2000, the Illinois Securities Department, revoked Kent's registration based on the NYSE decision. 

On January 3, 2017, the IRS filed a Notice of Federal Tax Lien against Kent for $131,954.45 relating to four tax years. Kent learned of the lien in January 2017, but he did not promptly disclose the lien to Emerson or on his Form U4. Beginning in 2017, Kent worked with a Certified Public Account"#$ to petition the IRS to remove the lien because he believed it had been filed in error. On August 20, 2018, after Kent had paid approximately $4,600, the IRS released the lien. Kent reported the lien on his Form U4 on December 17, 2018, after FINRA inquired with Emerson about it. 

From December 2018 through May 2019, Cantone acted as the placement agent for a private placement, which was structured as a contingency offering of securities, on behalf of an issuer. In connection with that offering, Cantone failed to deposit investors' funds into a bank escrow account. Cantone thus violated Section 15(c)(2) of the Securities Exchange Act of 1934 (Exchange Act), Rule 15c2-4 thereunder, and FINRA Rule 2010. 

In addition, in connection with that same offering, Cantone failed to promptly return funds to investors after the minimum contingency amount was reduced. Cantone also failed to inform investors that the closing date had been extended; investors, therefore, did not affirmatively confirm in writing their decision to continue their investments despite that extension. Cantone thus willfully violated Exchange Act Rule 10b-9 and thereby violated FINRA Rule 2010.

Respondent understands that this settlement includes a finding that it willfully violated Rule 10b-9 of the Securities Exchange Act of 1934 and that under Article III, Section 4 of FINRA's By-Laws, this makes Respondent subject to a statutory disqualification with respect to membership.

• Securities Industry Commentator
• Bill Singer