The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

February 25, 2021

Vero Beach Man Sentenced To 15 Years In Federal Prison For More Than $40 Million In Fraud (DOJ Release)

Court Imposes Fraud Injunction and Penny Stock Bar On Individual and Orders Judgments of Over $14 Million Against Entities That Facilitated International Microcap Scheme (DOJ Release)

Final Defendant Sentenced in $7 Billion Investment Fraud Scheme (DOJ Release)

Former COO Of Publicly Traded Biopharmaceutical Company Sentenced For Accounting Fraud (DOJ Release)



http://www.brokeandbroker.com/5712/finra-atm-boa/
Someone lost about $100 from a Bank of America drive-up ATM. Someone found it. That first finder wasn't a keeper. That first finder gave the $100 to a BOA employee, who apparently misplaced the cash in his jacket for a week. At some point, having "found" the "lost" cash in his jacket, the BOA employee decided that finders keepers, losers weepers was the way things would go down, and he kept the cash. FINRA was not amused. Not by a long shot.

Wall Street clearing firm proposes 1-day trade settlement after Robinhood controversy (CNBC by Maggie Fitzgerald)
https://www.cnbc.com/2021/02/24/wall-street-clearing-firm-proposes-1-day-trade-settlement-after-robinhood-controversy.html
Hard to imagine how anyone could write a better article about a more complex issue -- kudos to CNBC's Fitzgerald. Read about The Depository Trust & Clearing Corporation's ("DTCC's") proposal to go to a one-day settlement (T+1).READ: "OUR PERSPECTIVE ON ADVANCING INNOVATION: ADVANCING TOGETHER: ACCELERATED DIGITAL SETTLEMENT SERVICE" (DTC.com)  https://perspectives.dtcc.com/articles/project-ion

Vero Beach Man Sentenced To 15 Years In Federal Prison For More Than $40 Million In Fraud (DOJ Release)
https://www.justice.gov/usao-mdfl/pr/vero-beach-man-sentenced-15-years-federal-prison-more-40-million-fraud
David John Ridling pled guilty to 10 counts of wire fraud, 4 counts of bank fraud, 8 counts of money laundering, and 2 counts of aggravated identity theft in the United States District Court for the Middle District of Florida, and he was sentenced 15 years in prison. As alleged in part in the DOJ Release;

[R]idling is a farmer. Over the course of three years, Ridling attempted to defraud five financial institutions, one financial services provider, and one local Orlando business out of over $50 million. Ridling's scheme involved the use of false brokerage account statements, fabricated tax returns, and false financial statements to obtain loans and lines of credit. 

As part of his scheme, Ridling falsely claimed that three individuals were his account representatives at a financial brokerage company and set up fake email accounts for two of those individuals without their consent or knowledge.  Assuming the identities of those two individuals, Ridling sent emails from the fake email accounts in an effort to convince lenders that he had millions of dollars in his two brokerage accounts. In fact, Ridling only had one brokerage account, which never had more than $2,000 in it. During the last year of Ridling's scheme, he was able to obtain three loans totaling more than $25 million, based in part on his claim that his brokerage accounts had millions of dollars. During that timeframe, Ridling's brokerage account had less than $2.00.

In total, Ridling was successful in receiving over $40 million in proceeds from his scheme, and he attempted to receive another $15 million from another victim.  Ridling used some of the proceeds that he obtained from his victims to pay amounts that he owed to other victims, prolonging his scheme.

The Farmer in the Jail?


In a Complaint filed in the United States District Court for the Southern District of New York
https://www.sec.gov/litigation/complaints/2020/comp24712-2.pdf, Anthony Killarney and Kenneth Ciapala were charged with using Blacklight SA to help undisclosed insiders/control person to secretly dump microcap stock. As alleged in part in the DOJ Release:

[K]illarney and Ciapala, as alleged, coordinated the illegal stock sales with Steve M. Bajic, a citizen of Canada and Croatia, and Rajesh Taneja, a Canadian citizen. The complaint further alleged that Bajic and Taneja used a network of foreign companies they controlled, including Tamarind and SSID, to buy and sell stock in order to conceal the ownership interest of numerous companies' control persons.

On February 1, 2021, the court entered a final judgment against Killarney, enjoining him from future violations of the securities registration provisions of Sections 5(a) and (c) of the Securities Act, the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder, and the reporting provisions of Section 13(d) of the Exchange Act, and from acting as an unregistered broker or dealer under Section 15(a) of the Exchange Act. The judgment imposes a penny stock bar and orders disgorgement of ill-gotten gains and/or penalties for Killarney in an amount to be determined at a later date by the court. On February 23, 2021, the court entered final judgments by default against Blacklight, Tamarind, and SSID and, among other relief, ordered each to pay disgorgement and prejudgment interest that combined totaled more than $13.5 million. The court also ordered Blacklight to pay a penalty of $963,837.

https://www.justice.gov/opa/pr/final-defendant-sentenced-7-billion-investment-fraud-scheme
Antigua's Financial Services Regulatory Commission ("FSRC") former Chief, Leroy King, 74, pled guilty in January 2020 in the United States District Court for the Southern District of Texas to one count of conspiracy to obstruct justice and one count of obstruction of justice for his role in obstructing the Securities and Exchange Commission ("SEC") investigation into Stanford International Bank ("SIB"); and he was sentenced to 10 years in prison. As alleged in part in the DOJ Release, beginning around 2002, King:

served as the administrator and CEO of the FSRC, an agency of the Antiguan government. As part of his duties, he was responsible for Antigua's regulatory oversight of Stanford International Bank Limited's (SIBL) investment portfolio, including the review of SIBL financial reports and responses to requests by foreign regulators, including the SEC, for information and documents about SIBL's operations.

In or about 2005, the SEC began investigating R. Allen Stanford and Stanford Financial Group (SFG) and made official inquiries with the FSRC regarding the value and content of SIBL's purported investments. 

King admitted that Stanford's cash payments to King totaled approximately $520,963.87 over the course of the conspiracy. Stanford also provided King tickets to both Super Bowl XXXVIII in Houston (2004) and Super Bowl XL in Detroit (2006). In addition, Stanford provided King with repeated flights on private jets Stanford or SFG entities owned. King later denied the SEC's request for help, and he wrote that the FSRC "had no authority to act in the manner requested and would itself be in breach of law if it were to accede to your request." In reality, the FSRC did have this authority and failed to exercise it because of the payments and other benefits Stanford gave to King.

A federal jury found Stanford guilty in June 2012 for his role in orchestrating a 20-year investment fraud scheme in which he misappropriated $7 billion from SIB to finance his personal businesses. He is serving a 110-year prison sentence. Five others were also convicted for their roles in the scheme and received sentences ranging from 3 to 20 years in federal prison

Former COO Of Publicly Traded Biopharmaceutical Company Sentenced For Accounting Fraud (DOJ Release)
https://www.justice.gov/usao-sdny/pr/former-coo-publicly-traded-biopharmaceutical-company-sentenced-accounting-fraud
After a four-week jury trial in the United States District Court for the Southern District of New York, MiMedx Group, Inc.'s former Chief Operating Officer, William Taylor, 52, was convicted on one count of conspiracy to commit securities fraud, make false filings with the SEC, and mislead the conduct of audits; and he was sentenced to one year in prison and ordered to pay a fine of $250,000. As alleged in part in the DOJ Release:

MiMedx was headquartered in Marietta, Georgia, and its securities traded under the symbol "MDXG" on the NASDAQ.  MiMedx sold regenerative biologic products, such as skin grafts and amniotic fluid, both directly to end users, such as public and private hospitals, and to various stocking distributors, which, in turn, resold the product to end users. 

One of the most critical financial metrics disclosed in MiMedx's public filings with the Securities and Exchange Commission ("SEC"), and touted in MiMedx's accompanying press releases, was MiMedx's quarterly and annual sales revenue.  Under Generally Accepted Accounting Principles (GAAP) and SEC guidance, a company like MiMedx that engages in the sale of products through a distributor may recognize revenue upon transfer of the product to a distributor if certain requirements are satisfied, including that delivery has occurred or services have been rendered, the seller's price to the buyer is fixed or determinable, and collectability of payment is reasonably assured.  TAYLOR and Petit, MiMedx's former chief executive officer, repeatedly demonstrated and touted their understanding of these rules governing revenue recognition.  They also publicly identified revenue as the principal metric reflecting MiMedx's growth, and touted MiMedx's consistent record of quarter-over-quarter revenue growth and meeting or exceeding revenue guidance in 17 consecutive quarters, from 2011 through year-end 2015.  By 2015, however, it became increasingly difficult for MiMedx to reach its revenue guidance due to decreased demand from certain distributors and the increasingly aggressive revenue targets that MiMedx had publicly announced. 

Confronted with the difficulties faced by MiMedx in meeting its quarterly and annual revenue guidance by legitimate means, TAYLOR and Petit orchestrated a fraudulent scheme to falsely recognize revenue upon the shipment of MiMedx product to four stocking distributors, CPM, SLR, Stability Biologics ("Stability"), and First Medical, in the second through fourth quarters of 2015.  TAYLOR and Petit caused MiMedx to report fraudulently inflated revenue figures to the investing public in order to ensure that the reported figures fell within MiMedx's publicly announced revenue guidance, and to fraudulently convey to the investing public that MiMedx was accomplishing consistent growth quarter after quarter, as TAYLOR and Petit had falsely touted to the investing public.  The fraudulent scheme involved the following central features:
  • As to CPM, in the second quarter of 2015, TAYLOR and Petit caused MiMedx fraudulently to recognize $1.4 million in revenue by (1) making a $200,000 sham "consulting" payment to CPM's owner to bribe CPM to buy MiMedx product and (2) secretly agreeing to send CPM approximately $1.1 million of product it did not want and did not intend to sell, while promising that CPM could return the product to MiMedx and swap it for different product in a subsequent quarter.  TAYLOR and Petit entered into the sham "consulting" agreement to conceal that the payment was a bribe to purchase product, and CPM's owner performed no consulting work for the payment.  Neither TAYLOR nor Petit disclosed to MiMedx's outside auditors the "consulting" payment or product swap. 

  • As to SLR, in the third quarter of 2015, TAYLOR and Petit caused MiMedx fraudulently to recognize $4.6 million in revenue by booking the revenue despite understanding that SLR would not make a timely payment for the product, and certainly would not do so within contractual terms.  To hide from MiMedx's auditors that the collectability of payment from SLR was questionable, during the fourth quarter 2015, Petit arranged for his adult children to use a shell company to loan money to SLR (money that came from a trust fund established by Petit for their benefit), with the understanding that the loan proceeds would be used in substantial part to pay down SLR's debt to MiMedx.

  • As to Stability, in the third and fourth quarters of 2015, TAYLOR and Petit caused MiMedx improperly to recognize $2.6 million of revenue, where they (1) failed to agree with Stability on the essential terms of the deal, including when payment was due; (2) reached a secret understanding that Stability could swap or return unwanted product in subsequent quarters; and (3) understood that Stability could not pay for the product in a timely fashion.  In fact, TAYLOR later signed a sham distribution agreement to hide the fact that the original sale had been made without agreement on the essential terms.   
     
  • As to First Medical, in the fourth quarter of 2015, TAYLOR caused MiMedx improperly to recognize $2.2 million in revenue by making an undisclosed promise to First Medical that it could return any product that it could not sell and that MiMedx would not leave First Medical with any losses.  To carry out the scheme, TAYLOR sent two emails four seconds apart to First Medical.  The first was a "cover story" that purported to require payment within a fixed period, as required by MiMedx's accountants.  TAYLOR forwarded the first email to MiMedx's accounting department.  The second email, sent only four seconds after the first, memorialized the true terms of the deal, which involved an agreement to defer payment and take back product if it could not be sold.  TAYLOR hid the second email from MiMedx's internal accountants and outside auditors.  TAYLOR also arranged for a false audit "confirmation," which falsely represented that First Medical was required to pay within a fixed period and omitted the true terms of the deal, to be provided to MiMedx's outside auditors.
TAYLOR and Petit's fraudulent manipulation of MiMedx's revenue caused MiMedx to report materially inflated revenue in the second, third, and fourth quarters of 2015, and for the full year 2015.  In its 2015 10-K, MiMedx reported annual revenue that was fraudulently inflated by approximately $8.2 million.  Absent this fraudulent inflation of revenue, MiMedx would have missed both (1) its quarterly revenue guidance in the third and fourth quarters of 2015 and annual revenue guidance for 2015 and (2) analyst revenue consensus for the second through fourth quarters of 2015 and the full year 2015.  As a result of the fraud, shareholders sustained losses of approximately $35 million.

https://www.justice.gov/usao-edny/pr/ceo-medifirst-inc-solutions-arrested-securities-fraud 
-and-
SEC Charges Issuer, Its President, and a Stock Promoter for Microcap Offering Fraud (SEC Release)
https://www.sec.gov/litigation/litreleases/2021/lr25034.htm

https://www.justice.gov/usao-edny/press-release/file/1370156/download, Medifirst Solutions, Inc.'s Chief Executive Officer, Bruce Schoengood, was charged with securities fraud. As alleged in part in the DOJ Release:

[B]etween May 2016 and January 2019, Schoengood, together with others, engaged in a scheme to defraud MFST investors by manipulating the volume of MFST stock and concealing the sale of that stock by others.  Specifically, Schoengood entered into sham consulting agreements with a co-conspirator (Co-Conspirator 1) so that Co-Conspirator 1 would appear to be working for MFST.  Schoengood then transferred MFST stock to Co-Conspirator 1 and made false statements in public filings and related filings to enable the shares to be deposited and sold by Co-Conspirator 1, so that Co-Conspirator 1 and an investment relations firm could participate in the undisclosed promotion of MFST stock.  Schoengood also issued stock to co-conspirators so that they could sell their shares into the artificially created volume by Co-Conspirator 1 and the investment relations firm, then "kickback" portions of the proceeds to Schoengood.

https://www.sec.gov/litigation/complaints/2021/comp25034.pdf, Medifirst Solutions, Inc.; Medifirst's President, Bruce Schoengood; and Joshua Tyrell were charged with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder and the registration provisions of Section 5 of the Securities Act; and, additionally, Schoengood was charged with violating the manipulative trading provisions of Section 9(a)(2) of the Exchange Act. As alleged in part in the SEC Release:

[B]eginning in December 2016, Schoengood caused Medifirst to make an unregistered issuance of 20 million shares of its stock to Tyrell pursuant to a sham consulting agreement. As alleged, Schoengood and Tyrell were aware that the shares were actually intended to compensate Tyrell for promoting Medifirst's stock. Schoengood and Tyrell allegedly further misled Tyrell's brokerage firm by representing that the shares were being issued to Tyrell for legitimate consulting services and that Tyrell was not involved in promoting Medifirst's stock. Tyrell then allegedly sold over 19 million shares of Medifirst stock in the public market without registration for proceeds of approximately $125,000. The SEC's action also charged Schoengood with arranging manipulative purchases designed to keep Medifirst's stock price from falling over several months in 2017.

In separate Orders, the SEC settled charges against Gulfport Energy Corporation https://www.sec.
gov/litigation/admin/2021/34-91196.pdf and its former Chief Executive Officer, Michael G. Moore https://www.sec.gov/litigation/admin/2021/33-10930.pdf. As alleged in part in the SEC Release:

The SEC's separate orders against Gulfport and Moore find that, from 2014 to 2018, Gulfport failed to disclose approximately $650,000 in executive compensation in the form of perquisites received by Moore, and also failed to disclose certain related person transactions involving Moore. According to the orders, the undisclosed perquisites included the cost of Moore's use of Gulfport's chartered aircraft for certain travel. The undisclosed perquisites also included costs associated with Moore's use of a Gulfport corporate credit card for personal expenses that he did not repay on a timely basis, which resulted in Gulfport extending Moore interest-free credit and carrying a related person account receivable. The orders also find that Gulfport failed to disclose that it paid Moore's son's landscaping company approximately $152,000 in 2015 for its services. The order against Moore further finds that Moore caused Gulfport's violations by failing to supply required information that would have allowed Gulfport to identify and disclose the perquisites and related person transactions.

The SEC's order as to Gulfport notes Gulfport's significant cooperation with the SEC's investigation and its remedial efforts, which included replacing key personnel, developing an internal audit function, enhancing existing policies and procedures, and instituting new review and tracking processes, and that this cooperation and remediation was taken into account in the determination to accept the company's settlement offer.

Statement on the Review of Climate-Related Disclosure by Acting SEC Chair Allison  Lee 
https://www.sec.gov/news/public-statement/lee-statement-review-climate-related-disclosure?utm_medium=email&utm_source=govdelivery
It's 2021. We got Covid. We got Texas taking that Lone Star State thing a bit too serious when it comes to the power grid. We got snow, as in too much of it. We got record heat waves. We got droughts. Hey -- if you think it's just the normal ebb and flow of weather, that's fine with me. On the other hand, given that climate change is, in fact, a front-burner issue these days, Acting SEC Chair Lee's thoughts should be carefully weighed:

Today, I am directing the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. The Commission in 2010 provided guidance to public companies regarding existing disclosure requirements as they apply to climate change matters. As part of its enhanced focus in this area, the staff will review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks. The staff will use insights from this work to begin updating the 2010 guidance to take into account developments in the last decade.

The staff of the SEC plays a critically important role in ensuring compliance with disclosure obligations, including those that implicate climate risk, through its review of public company filings and its engagement with issuers. The perspective the staff brings to bear is invaluable in helping to ensure that issuers comply with their obligations and that investors receive the information they need to properly inform their investment decisions.

Now more than ever, investors are considering climate-related issues when making their investment decisions. It is our responsibility to ensure that they have access to material information when planning for their financial future. Ensuring compliance with the rules on the books and updating existing guidance are immediate steps the agency can take on the path to developing a more comprehensive framework that produces consistent, comparable, and reliable climate-related disclosures.

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