Securities Industry Commentator by Bill Singer Esq

FINRA AWC Did Not Require Acceptance of Findings But Why Does Regulator Publish Denials? (BrokeAndBroker.com Blog)

Four Individuals Charged with Long-Running Global Pump-and-Dump Scheme / Defendants allegedly generated at least tens of millions in illicit proceeds (DOJ Release)

SEC Charges International Microcap Fraud Scheme Participants (SEC Release)

SEC Charges Poloniex for Operating Unregistered Digital Asset Exchange (SEC Release)

SEC Charges Former Domino's Pizza Accountant with Insider Trading (SEC Release)

Regulation of Inter-dealer Quotation Systems / FINRA Adopts Rule 6439 Governing the Operation of Inter-dealer Quotation Systems and Announces Closure of the OTC Bulletin Board / Effective Date of Rule 6439 (except paragraph (d)(1)(B)): October 1, 2021 (FINRA Regulatory Notice 21-21)

Public Customer Alleges Schwab Violated IV Amendment Per IRS Summons Production

In the Matter of the Arbitration Between Constantine Gus Cristo, Claimant, v. Charles Schwab & Co., Inc., Charles Schwab Bank, Charles Schwab Corporation, Charles Schwab Investment Management Inc, and Schwab Holdings, Inc., Respondents (FINRA Arbitration Award 19-02822)

The defendants allegedly engaged in a lucrative securities fraud scheme dating back to no later than 2014 involving the use of a sophisticated platform provided by Sharp to conceal Carrillo's and Veldhuis's respective control of millions of shares of multiple microcap companies. Carrillo and Veldhuis allegedly used Sharp's platform to hide their large penny stock holdings in nominee entities in tranches of less than five percent of the issuers' total outstanding shares in order to evade certain securities disclosure requirements and brokers' compliance protocols. Kelln, who worked for Sharp, allegedly facilitated the breakdown and transfer of Carrillo's and Veldhuis's shares to Sharp's nominee entities in blocks of less than five percent, as well as the shares' subsequent deposit with a Swiss asset management firm to facilitate their sale to unsuspecting investors. It is alleged that those sales were directed by Carrillo and Veldhuis, respectively, and were timed alongside multifaceted promotional campaigns, to include "boiler rooms" involving cold calls to unsuspecting U.S. investors in Massachusetts, and elsewhere, touting the stocks and soliciting purchases. 

It is further alleged that, to conceal their scheme, the defendants used codenames to refer to one another, as well as various encrypted communications platforms. One of those platforms was a closed communication network on dedicated BlackBerry devices provided by Sharp that the defendants referred to as "xphones." Sharp also allegedly maintained an offshore accounting system that the defendants referred to as "Q" that was used to track the scheme's stock sales and the remittance of illicit proceeds.

Sharp's Q accounting system tracked over $140 million in stock sales through a Swiss asset management firm between 2014 and 2018, involving over 70 issuers. The charging documents specifically identify four such issuers whose shares were sold during pump-and-dumps as part of the scheme:

• Vitality BioPharma, Inc. (ticker VBIO), millions of shares of which were sold between November 2016 and September 2018 generating proceeds of approximately $16.8 million;
• OneLife Technologies Corp. (ticker OLMM), millions of shares of which were sold between November 2017 and October 2018, generating proceeds of approximately $5.2 million;
• Garmatex Holdings, Ltd. (ticker GRMX), millions of shares of which were sold between March and May 2017, generating proceeds of approximately $5 million; and
• PureSnax International, Inc. (ticker PSNX), millions of shares of which were sold between November 2015 and September 2016 generating proceeds of approximately $1.4 million dollars.

[C]anadian resident Frederick L. Sharp masterminded a complex scheme from 2011 to 2019 in which he and his associates - Canadian residents Zhiying Yvonne Gasarch and Courtney Kelln - enabled control persons of microcap companies whose stock was publicly traded in the U.S. securities markets to conceal their control and ownership of huge amounts of penny stock.  They then surreptitiously dumped the stock into the U.S. markets in violation of federal securities laws.  The services Sharp and his associates allegedly provided included furnishing networks of offshore shell companies to conceal stock ownership, arranging stock transfers and money transmittals, and providing encrypted accounting and communications systems.  According to the complaint, Sharp and his associates facilitated over a billion dollars in gross sales in hundreds of penny stock companies.

The complaint alleges that one group of control persons comprised of Canadian residents Mike K. Veldhuis, Paul Sexton, and Jackson T. Friesen frequently collaborated with Sharp to dump huge stock positions while hiding their control positions and stock promotional activities from the investing public.  The complaint further alleges that California resident Avtar S. Dhillon, who chaired the boards of directors of four of the public companies whose stocks were fraudulently sold during the schemes, reaped millions in illicit proceeds from those illegal sales. Dhillon was allegedly complicit with Veldhuis and his associates as well as with others, including Canadian resident Graham R. Taylor. According to the complaint, Maryland resident William T. Kaitz worked as a promoter and allegedly touted stocks that Veldhuis, Sexton, and Friesen simultaneously planned to sell, while concealing their roles.

The SEC filed a related action on Aug. 4, 2021, charging Mexican resident Luis Jimenez Carrillo for engaging in deceptive penny stock schemes that generated more than $75 million from the fraudulent sales of multiple microcap companies' stock. Carrillo, who allegedly utilized Sharp's services, partnered with Canadian resident Amar Bahadoorsingh and United Kingdom residents Justin Roger Wall and Jamie Samuel Wilson on at least one of the schemes.

[F]rom July 2017 through November 2019, when Poloniex sold its platform, Poloniex operated a web-based trading platform that facilitated buying and selling digital assets, including digital assets that were investment contracts and therefore securities.  According to the SEC's order, the Poloniex trading platform met the criteria of an "exchange" as defined by the securities laws because the trading platform provided the non-discretionary means for trade orders to interact and execute through the combined use of the Poloniex website, an order book, and the Poloniex trading engine.  The order finds that notwithstanding its operation of the Poloniex trading platform, which was available to U.S. investors, Poloniex did not register as a national securities exchange nor did it operate pursuant to an exemption from registration at any time, and its failure to do so was a violation of Section 5 of the Exchange Act.  

The SEC's order further finds that in or around August 2017, Poloniex employees stated internally that they wanted Poloniex to be "aggressive" in making available for trading new digital assets on the Poloniex trading platform, including digital assets that might be considered securities under the Howey test, in an effort to increase market share.  Further, according to the SEC's order, in or around July 2018, Poloniex determined that it would continue to provide users of the Poloniex trading platform the ability to trade digital assets that it characterized as "medium risk" of being considered securities in light of the business rewards that would provide to Poloniex.

[B]arr used confidential financial data he obtained through his role as an accountant at Domino's to trade ahead of two Domino's earnings announcements in 2016 and 2020 and obtained illicit profits of $34,180.

The SEC's complaint alleges that Barr violated the antifraud provisions of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder. Without admitting or denying the allegations, Barr consented to the entry of an order, subject to court approval, that permanently enjoins him from violating these provisions, and orders him to pay a civil penalty of $68,360. Barr further agreed to settle an administrative proceeding brought pursuant to Rule 102(e) of the Commission's Rules of Practice by agreeing to be suspended from appearing or practicing before the Commission as an accountant, with the right to reapply for reinstatement after five years.

FINRA has adopted new Rule 6439 (Requirements for Member Inter-Dealer Quotation Systems),1 which implements additional requirements for firms that operate systems that regularly disseminate the quotations of identified broker-dealers in OTC Equity Securities (each an "inter-dealer quotation system" or "IDQS").2 Rule 6439 will become effective on October 1, 2021, except for paragraph (d)(1)(B), which relates to the collection of order-level information. The effective date for this paragraph will be announced at a later date to better coordinate, and avoid regulatory duplication, with reporting obligations to the Consolidated Audit Trail (CAT) under Rule 6830 (Industry Member Data Reporting).

FINRA also is deleting the Rule 6500 Series and other rules related to the OTC Bulletin Board (OTCBB) - a FINRA-operated inter-dealer quotation system - and ceasing its operation. The permanent closure of the OTCBB will not occur prior to October 1, 2021. FINRA will announce the effective date of the deletion of the OTCBB-related rules and its closure in a separate communication.

violation of Claimant's 4th amendment rights and violation of the U.S. Constitution's Due Process Clause, as well as an allegation that the Panel is not authorized to rule on Right to Financial Privacy Act ("RFPA") violations. The causes of action relate to Schwab producing Claimant's financial documents in response to a summons from the Internal Revenue Service ("IRS"). 

• Securities Industry Commentator
• Bill Singer