Securities Industry Commentator by Bill Singer Esq

GUEST BLOG [In]Securities: Singin' the Varsity Blues, Part 3: Walkin' That Lonesome Valley by Aegis Frumento Esq (BrokeAndBroker.com Blog)

Law Firm Seeks Litigation Associate (Warren Law Group)

Cryptocurrencies a Growing Target of Theft / Charges Against North Korean Hackers Show Cyber Thieves Shifting to Virtual Currency Markets and Exchanges (FBI Release)

New Bank Fraud and Aggravated Identity Theft Charges Added to Non-Profit CEO'S Previous Federal Indictment Charging Her with Wire Fraud, Bank Fraud, and Aggravated Identity Theft / Allegedly Defrauded a New Victim of More Than $71,000 While on Pretrial Release (DOJ Release)

SEC Charges Denver Resident for Role In Fraudulent Scheme (SEC Release)

South Carolina Investment Fund Manager Admits $20 Million Securities Fraud Scheme (DOJ Release)

SEC Charges Unregistered Investment Adviser with Misleading Investors in Decade-Long Fraud (SEC Release)

SEC Halts Alleged Ongoing Offering Fraud Involving Digital Asset Trading Fund (SEC Release)

Moving Forward Together - Enforcement for Everyone (Speech by SEC Commissioner Caroline A. Crenshaw)

Did You Hear the One About the Oligarch Money Launderer and Arms Dealer? (BrokeAndBroker.com Blog)

A Court Seems Unimpressed by Financial Exploitation of an Elderly Widow (BrokeAndBroker.com Blog)

FINRA Suffers Stunning Rebuke by SEC in Tysk Appeal (BrokeAndBroker.com Blog)

The North Korean hackers are alleged to have created several malicious cryptocurrency applications that looked legitimate but contained malware that provided the hackers access to the computers of victims who downloaded them. Those targeted could be individual investors but were more likely to be employees of virtual currency exchanges. The applications were supported by professional-looking websites that added an air of legitimacy to the new tools.

Once the application was installed, it could give the criminals access to the victim's cryptocurrency wallets and private keys -- allowing them to transfer funds from the victim's wallet to cryptocurrency wallets controlled by the hackers.

According to the 12-count superseding indictment, between October 9, 2020 and October 21, 2020, while on pretrial release, Hodges allegedly defrauded her fourth victim by claiming she would monitor the victim's finances while the victim prepared to move out of state. Hodges assured the victim that she would return the funds once the victim was settled in her new location. Hodges drove the victim to her financial institution and procured a check for $71,731.85, which Hodges deposited into her own bank account. Hodges then allegedly spent the victim's money on personal expenditures, without the victim's authorization, and failed to repay the victim.

According to the superseding indictment, Hodges owned and was the Chief Executive Officer of Still I Rise Incorporated, a non-profit entity which purported to provide services and resources to minority survivors of domestic violence, sexual assault and stalking; Still I Rise Comprehensive Support & Training Services LLC ("CSST"), a for-profit entity; and the Women's Wellness Center (WWC), a for-profit medical weight loss clinic operated under the umbrella of CSST. Between 2010 and 2017, Hodges was awarded more than $2 million in grants from the United States Department of Justice's ("DOJ") Office of Violence Against Women ("OVW") and Prince George's County to implement a violence against women program through Still I Rise.

The three grants that DOJ OVW awarded Hodges and Still I Rise were authorized only for the stated purpose of implementing Still I Rise's non-profit program to address violence against women.  Specifically, Hodges represented that the funds would be used to provide community services related to violence against women, including crisis intervention, support groups, financial and employment counseling, material assistance, job training, advocacy, court and medical accompaniment, language services, and transportation.  Hodges allegedly represented that she would accept only a $12,000 stipend each year as the Director of Still I Rise.  However, the superseding indictment alleges that Hodges converted funding from the grant awards to her personal benefit and to pay WWC payroll and other WWC expenses.  By 2016, Hodges had exhausted the grant funding and her companies were financially distressed.  The superseding indictment alleges that Hodges then used fraudulent means to inject additional funding into WWC and Still I Rise.

Specifically, the superseding indictment alleges that on October 9, 2015, Hodges caused $134,800 to be stolen from Victim 1-a mutual fund in Pennsylvania-and wired into a bank account associated with Still I Rise, and then used the stolen funds for expenditures at WWC and for her personal benefit.  In addition, on April 8, 2016, Hodges deposited a $72,938 altered business check related to a federal cancer research grant that had allegedly been stolen from Victim 2, a prominent university in Texas, into a different bank account opened in the name of Still I Rise and over which Hodges was the sole authorized signer. 

Further, the superseding indictment alleges that between March 10 and August 26, 2016, Hodges fraudulently opened credit accounts at two financial institutions using the identifying information of Victim 3, an elderly volunteer at Still I Rise, without the victim's knowledge or permission, accumulating at least $45,000 in debt.  According to court documents, to secure one of the lines of credit, Hodges had Victim 3 medically transported to a nearby bank. When Victim 3 was brought to the bank, Victim 3 was in pain and in a wheelchair, and had an antibiotic catheter line running to her heart.

Finally, the superseding indictment alleges that, as the owner of WWC, and to preserve the medical clinic's capital, Hodges directed her medical practitioners to inject saline solution into patients rather than Lipo-C, a weight-loss injection therapy requested by patients, and issued nonsufficient funds checks to her employees..[sic]

[K]alistratos "Kelly" Kabilafkas secretly purchased essentially all the outstanding stock of the shell company now known as Airborne, then distributed millions of shares among himself and his associates, including defendant Nicholas Kabylafkas. As alleged, Nicholas Kabylafkas participated in Kelly Kabilafkas's scheme by recruiting and falsely completing share transfer paperwork for at least one investor. In exchange, Kelly Kabilafkas allegedly gave Nicholas Kabylafkas Airborne shares and money. The complaint alleges that, at Kelly Kabilafkas's direction, Nicholas Kabylafkas deceived Airborne's transfer agent as well as a broker dealer in order to have those shares transferred into his own name, deposited in a brokerage account, and cleared for sale to the public. The complaint also alleges that Nicholas Kabylafkas then sold a portion of those shares for approximately $22,000. The SEC previously charged Kelly Kabilafkas and others in connection with this alleged scheme.

Heckler managed, controlled or was involved with multiple investment funds, including Conestoga Partner Holdings (Conestoga), Cassatt Short Term Trading Fund LP (Cassatt), CV Special Opportunity Fund LP (CVSO), and TA1 LLC (TA1). 

From 2014 to 2018, Heckler misrepresented to investors that he would invest their funds in particular trading strategies. Instead, he diverted their funds out of Cassatt and TA1 for purposes inconsistent with the trading strategies, including to pay out millions of dollars to other investors. Heckler also used investors' funds to cover investment losses suffered by other funds under his management and/or control.

Heckler solicited investments from Victim-1, claiming the investments would be invested in Cassatt, which employed a "first loss" trading strategy intended to protect investors from losses. However, as of December 2013, Cassatt no longer had a brokerage account that was necessary to employ the represented trading strategy. Despite Cassatt no longer having a brokerage account, in 2014, Heckler represented to Victim-1 that Cassatt was still engaged in a first loss trading strategy and solicited Victim-1's investment in Cassatt. In September 2014, Victim-1 invested approximately $9.1 million in Cassatt, relying on Heckler's representation that Victim-1's money would be invested consistent with Cassatt's first loss trading strategy.  Heckler used $4.6 million of Victim-1's investment to repay existing investors and the remainder to satisfy other obligations Heckler owed that were unrelated to Cassatt.

Heckler also approached Victim-2 about the possibility of creating a hedge fund that would deploy capital to first-loss traders, who would serve as the "first loss" protection for investors' capital. In late 2015, Victim-2 formed a hedge fund, utilizing the concept proposed by Heckler (Entity-1). In 2015 and 2016, Entity-1 invested $10.1 million in TA1 via a participation agreement that provided that Entity-1's investment would be used for an "options arbitrage dividend recapture trade," otherwise known as the "skate trade." In fact, none of Entity-1's investment was used for the "skate trade."  Entity-1's investment was used for other purposes, including repaying others who had previously invested with Heckler.

Over the course of the scheme, Heckler sent out statements to investors that misled them into believing the value of their investments was increasing, when, in fact, the value was declining. Heckler took approximately $1 million in fees and distributions from the fraudulently obtained investments for his personal use. 

[H]eckler, after forming Cassatt and CV Special, transferred Conestoga's poorly performing assets to those funds and then misrepresented the funds' objectives and performance to Cassatt and CV Special investors. The complaint alleges that, between 2009 and 2019, Heckler falsely told investors that their funds were being used to engage in very short-term equity trading and that the investments were consistently generating positive returns. In truth, according to the complaint, a substantial amount of investors' funds had not been invested at all or had been used to make Ponzi-like payments to prior investors. According to the complaint, Heckler raised at least $90 million in new investor capital through Cassatt, CV Special, and three other entities he controlled, of which over $32 million was used to repay or redeem prior investors. In addition, the Commission alleges that Heckler took over $1 million for his personal use, and Cassatt and CV Special suffered significant losses as a result of poor investments by Heckler. Heckler also allegedly concealed these losses from investors by providing them with false account statements showing fictitious gains.

[F]rom October 2017 through at least May 2020, Cutting raised at least $6.9 million from over 450 investors by representing that he would pool investor monies into a fund that invested in various digital assets. The complaint alleges that Cutting falsely represented to investors that he had worked as a financial adviser for years and that he held securities licenses. The complaint also alleges that Cutting misappropriated at least hundreds of thousands of dollars of the funds raised from investors, using the money to pay for personal expenses including home improvements, cars, and his daughter's wedding. Cutting allegedly convinced investors that he was trading profitably and induced them to make additional investments by emailing investors fictitious updates that described purported trading and investment returns, at times touting gains exceeding 50% in a single month. The complaint further alleges that Cutting prolonged the fraud by making at least $760,000 in Ponzi-like payments to investors.

Over the years, Commissioners on both sides of the political aisle have agreed that a strong enforcement program incentivizes compliance with the securities laws, and that enforcement helps to promote a market that inspires investor confidence, creating a level playing field for market participants.  But Commissioners have had different views about when corporate penalties further those goals. It is clear to me that the Commission has historically placed too much emphasis on factors beyond the actual misconduct when imposing corporate penalties - including whether the corporation's shareholders benefited from the misconduct, or whether they will be harmed by the assessment of a penalty. This approach is fundamentally flawed.  This approach, more concerningly, could allow companies to profit from fraud as it unnecessarily limits the Commission's ability to craft appropriately tailored penalties that more effectively deter misconduct. If we are going to confront the novel issues today's markets present and deter ever more complicated and hard to detect frauds, we must revisit our approach.

The SEC has a three part mission, and protecting a company's shareholders is part of that, but not at the expense of the larger market, particularly when there are other companies - and shareholders - who have committed to and invested in compliance.  So in setting penalties, we can't look only at the impact the penalty will have on a particular group of investors who own shares in the specific violating entity.  As the Commission noted 15 years ago, we must examine the impact more broadly. We must think about the impact on all investors, and that will help ensure fair and efficient markets.  Every enforcement decision we make effects multiple constituencies in myriad ways.  Therefore, we must consider those impacts and seek the right balance. We must correct this course.

• Securities Industry Commentator
• Bill Singer