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 Four in International Microcap Fraud Schemes (SEC Release)

Georgia Man Pleads Guilty in New York Federal Court on Charges Related to Ponzi and COVID-19 Fraud Schemes (DOJ Release)

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

In the Matter of Poloniex, LLC (Statement by SEC Commissioner Hester M. Peirce)

SEC Charges Westchester Investment Adviser with Defrauding Members of His Religion (SEC Release)

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

SEC Awards About $3.5 Million to Whistleblower

Order Determining Whistleblower Award Claim

SEC Awards About $2.4 Million to Whistleblower

Order Determining Whistleblower Award Claim

SEC Awards Over $17,000 to Whistleblower

Order Determining Whistleblower Award Claim

Federal Court Orders Texas and Florida Men to Pay Nearly $1.75 Million in Digital Assets Scheme (CFTC Release)

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 at least 2013 through May 2019, Carrillo concealed the fact that he and others controlled the securities of numerous microcap companies whose stock was publicly traded in the U.S. securities markets. According to the complaint, Carrillo secretly sold millions of the companies' shares in violation of the securities laws, often after organizing promotional campaigns to encourage investors to buy the stock. Wall, Wilson, and Bahadoorsingh allegedly worked with Carrillo to gain control of at least one company's securities and fraudulently sell them. According to the complaint, Wall and Wilson used false documents to get the company's shares deposited for sale in brokerage accounts. As a result of these actions, what appeared to be ordinary trading by unaffiliated investors was actually a massive dump of shares orchestrated by Carrillo, Bahadoorsingh, Wall, and Wilson, who were seeking to profit at the expense of retail investors.

The Ponzi Scheme

Between January 2011 and June 2018, Parris conspired with co-defendant Perry Santillo and others to obtain money through an investment fraud, commonly known as a Ponzi scheme. Specifically, in 2007, Parris and Santillo, as equal partners, formed a business known as Lucian Development in Rochester. Prior to approximately July 2007, Lucian Development raised millions of dollars from investors in Rochester, and elsewhere, by soliciting investments for City Capital Corporation, a business operated by Ephren Taylor. In July 2007, Parris and Santillo were advised by Ephren Taylor that their investors' money had been lost. In response, in August 2007, Parris and Santillo agreed to acquire the assets and debts of City Capital Corporation. The acquisition proved financially ruinous, with the amount of the acquired debt far exceeding the value of the acquired assets. Taylor was later prosecuted and convicted of operating a Ponzi scheme.

Subsequently, Parris and Santillo chose not to disclose the truth to investors that their money, entrusted to Lucian Development for investment in City Capital Corporation, was gone. Instead, Parris and Santillo continued to solicit ever-increasing amounts of money from new investors in an unsuccessful attempt to recoup the losses. In order to find potential investors to solicit and defraud, Parris and Santillo purchased businesses from established investment advisors or brokers who were looking to exit their businesses. Between approximately 2008 and September 2017, Parris and Santillo, using money obtained from prior investors, purchased the businesses of at least 15 investment advisors or brokers, located in Tennessee, Ohio, Minnesota, Nevada, California (five businesses), Florida, South Carolina (two businesses), Texas, Pennsylvania, Maryland and Indiana.

The investment offerings pitched by Parris and Santillo consisted principally of unsecured promissory notes and preferred stock issued by various entities controlled by Parris and Santillo. Potential investors were offered an apparent array of investment options to create the illusion of a diversified investment portfolio. Those investment options included products issued by purported issuers such as First Nationle Solutions (FNS), Percipience Global Corporation, United RL Capital Services, Boyles America, Middlebury Development Corporation and NexMedical Solutions, among others. None of these issuers had substantial bona fide business operations or used investor money in the manner and for the purposes represented to investors. To the extent that an issuer may have had some minor legitimate business activities, it was not profitable, and insufficient revenues were generated to pay investors any returns (let alone return the principal amounts of their investments).

Over the years, to keep the Ponzi scheme from being detected, a substantial portion of incoming new investor monies were depleted by making promised interest and other payments to earlier investors. Most of the rest of incoming investor money was used by Parris, Santillo and other co-conspirators to finance lavish lifestyles of the conspirators, their families and associates; to expand the scheme by purchasing investment advisor/brokerage businesses to obtain access to fresh investors; and to pay operating expenses - salaries for a sales force and administrative staff, office rents and related expenses, housing for employees, and interest on loans - all of which were used to keep the scheme going and maintain a façade of legitimate business operations.

Very little investor money was deployed in productive investments, and when so deployed, the investments yielded meager income and were not profitable, or failed altogether. The Ponzi scheme was headquartered and based out of locations in Rochester, with a number of satellite offices around the country. Administrative and banking functions were largely performed out of Rochester. The conspiracy employed a variety of salespeople, including Parris and Santillo, who traveled around the country to meet with and solicit new investors.

Between January 2012 and June 19, 2018, Parris and Santillo obtained at least $115.5 million from approximately 1,000 investors. By the time the scheme collapsed in late-2017/early 2018, Parris and Santillo, doing business through an array of corporate entities, had returned approximately $44.8 million to investors as part of their scheme, but continued to owe investors approximately $70.7 million in principal.

Among the Rochester area victims of the Ponzi scheme were the following:

• A resident of Webster, New York, who held a total asset value of $94,341.89 with a fictitious company known as First Nationle Solutions (FNS), which, as of Dec. 31, 2017, was in fact worthless or close to worthless; and
• A resident of Victor, New York, and his wife, who invested approximately $221,758.67 with FNS and Middlebury Development. The couple received three payments of $2,500 but lost approximately $214,258.67.

Parris and Santillo controlled hundreds of different business bank accounts opened under numerous different business names at various financial institutions, including but not limited to Bank of America, Citizens Bank, Genesee Regional Bank and ESL Federal Credit Union. Santillo and Parris directed and authorized the transactions that occurred in the accounts, including deposits, withdrawals, check writing and funds transfers. The various bank accounts were used to transfer money from one account to another. Incoming investor money was routinely transferred through several accounts before the funds were finally spent on whatever purpose Parris and/or Santillo authorized. By moving investors' funds through various accounts in various entity names, Parris and Santillo were able to conceal and obscure the fact that new investor money was being used to repay earlier investors, finance the operations of the Ponzi scheme, and fund their lifestyles.

Santillo was previously convicted and is awaiting sentencing.

The COVID-19 Fraud Scheme

Parris also pleaded guilty in a case originally charged in the U.S. District Court for the District of Columbia to defrauding the U.S. Department of Veterans' Affairs (VA), as well as at least eight other victim companies, in a scheme involving personal protection equipment (PPE). Between February and April 10, 2020, the defendant, as the owner and operator of Encore Health Group, a company based in Atlanta, that purported to broker medical equipment, offered to sell scarce PPE, including 3M-brand N95 respirator masks, to various medical supply companies and governmental entities. In these proposals, Parris knowingly misrepresented his access to, and ability to obtain and deliver on time, vast quantities of 3M N95 masks and other PPE. The defendant falsely represented that he was able to obtain 3M N95 masks directly from authorized sources in the United States, when in fact, he had no ready access to 3M factories or 3M N95 masks or other PPE, no proven source of supply, and no track record of procuring and delivering such items.

For example, in March 2021, Parris offered to sell the VA 125 million 3M N95 masks at a cost of $6.45 per mask. In this process, the defendant attempted to obtain an upfront payment of $3.075 million from the VA, even though he knew at the time that he had no access to the promised masks or present ability to deliver the promised masks.

As part of his guilty plea, Parris admitted that, in addition to attempting to defraud the VA, he actually obtained upfront payments totaling approximately $7.4 million from at least eight clients for 3M N95 masks that he knew he had no access to or present ability to obtain or deliver on time. Parris also admitted that the proceeds of the scheme totaled approximately $6,218,525. In total, Parris sought orders in excess of $65 million for the non-existent PPE equipment.

[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.

Today's enforcement action against Poloniex, once a popular crypto trading platform in the United States, doubles down on the Commission's enforcement-centric approach to crypto. Poloniex, the Commission contends, was not registered 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. There is just one minor problem-during the period at issue here (mid 2017 through 2019), the Commission was moving very cautiously with respect to regulated entities' engagement with crypto assets. Sure, Poloniex could have tried to register as a securities exchange or, more likely, as a broker-dealer to operate an alternative trading system (ATS), a type of regulated trading venue that might be better able to accommodate non-traditional securities. Had it done so, it likely would have waited . . . and waited . . . and waited some more.

Given the unique characteristics of crypto assets and consequent implications for broker-dealers, ATSs, and exchanges interacting with crypto assets, the Commission and Financial Industry Regulatory Authority ("FINRA") watched uneasily as entities interested in handling crypto lined up outside their doors waiting for permission to interact with crypto. On July 8, 2019, acknowledging the growing number of unregistered entities seeking to register and registered entities seeking to get permission to deal in digital assets, staff at the two regulators issued a joint statement on broker-dealer custody of digital asset securities.[1] The statement began with a reminder "that the application of the federal securities laws, FINRA rules and other bodies of laws to digital assets, digital asset securities and related innovative technologies raise novel and complex regulatory and compliance questions and challenges."[2] The statement conceded that there were fewer complexities for noncustodial activities, including ATSs matching buyers and sellers of digital asset securities, but operation by an ATS in the manner envisioned in the statement would have given rise to operational and settlement risks.[3] Accordingly, in September 2020, the SEC staff approved a more streamlined three-step process by which ATSs could facilitate transactions in digital asset securities.[4] In December 2020, the Commission issued a narrow, time-limited no-action position allowing broker-dealers to custody digital asset securities, but again strict conditions-such as restricting the broker-dealer to transactions in digital asset securities-limit its usefulness.[5] These are all small steps, but good steps, and I am hopeful that more significant steps are on the horizon.[6] Given how slow we have been in determining how regulated entities can interact with crypto, market participants may understandably be surprised to see us to come onto the scene now with our enforcement guns blazing and argue that Poloniex was not registered or operating under an exemption as it should have been.

Assuming Poloniex or another crypto trading platform determines to register with us as an exchange or an ATS, we need to answer a number of questions, including:

• Can the platform custody client assets, a feature typical of centralized crypto trading platforms? If so, how, given our concerns about custody of digital asset securities?
• If not, could a sufficient number of broker-dealers navigate the registration process to make a liquid market?
• Would the conditions placed on their registration permit them to function as market makers or to facilitate trading on behalf of retail investors?
• Can the platform trade non-securities alongside securities? If not, how can the platform, using two entities-a broker-dealer entity for digital asset securities, and an affiliated non-broker-dealer entity for non-securities, offer a seamless, or at least serviceable, trading platform to customers, who are likely, for example, to want to trade both digital assets and digital asset securities and pay for transactions in digital asset securities using non-security digital assets?
• How can a trading platform and its customers determine whether a particular digital asset is a security?[7]
• If a token was sold in a securities offering as part of an investment contract, how long must secondary transactions in that token be deemed to be securities transactions by platforms trading the tokens?
• What are the mechanics of registering tokens sold as part of an investment contract as a class of "equity security" under the Exchange Act?

I hope we address these and other issues raised by entities that want to participate in this area expeditiously and in a way that acknowledges the need to come up with sensible solutions.

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[1] Public Statement, Division of Trading and Markets, SEC, and Office of General Counsel, FINRA, Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities (July 8, 2019), https://www.sec.gov/news/public-statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities.

[2] Id.

[3] FINRA, SEC No-Action Letter at 2 (Sept. 25, 2020), https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf ("Since the issuance of the Joint Staff Statement, several broker-dealers seeking to operate an ATS that trades digital asset securities have asserted that the four-step process described above increases operational and settlement risks.").

[4] Id.

[5] Custody of Digital Asset Securities by Special Purpose Broker-Dealers, Exchange Act Release No. 34-90788, 86 Fed. Reg. 11,627 (effective Apr. 27, 2021), https://www.sec.gov/rules/policy/2020/34-90788.pdf.

[6] Chair Gensler warned last week that "the probability is quite remote that, with 50 or 100 tokens, any given platform has zero securities" and invited digital asset trading platforms to "come in, register, work with the SEC." Public Statement, Chair Gary Gensler, SEC, 2021 Aspen Security Forum: The View from the SEC: Cryptocurrencies and National Security (Aug. 3, 2021), https://www.youtube.com/watch?v=tusQLLCgrDs (around the 15 and 30 minute marks).

[7] The Commission has been reluctant to help provide clarity, even, as evidenced by today's action, refusing to alert the market to securities determinations it has made in connection with enforcement actions like this one. For a discussion of this issue see Public Statement, Commissioner Hester Peirce and Commissioner Elad Roisman, SEC, In the Matter of Coinschedule (July 14, 2021), https://www.sec.gov/news/public-statement/peirce-roisman-coinschedule.

[F]rom April 2016 to July 2019, Amah raised approximately $700,000 from his advisory clients using materially false and misleading statements about his investment performance, telling them that he had generated modest returns on their investments when, in reality, he had already lost virtually all of their money. According to the complaint, Amah also fabricated at least two performance statements to perpetuate his fraudulent scheme and conceal his misconduct. Amah also allegedly violated the fiduciary duties he owed to his individual clients by favoring another client, a fund, over them, using the individual clients' assets to pay expenses owed by the fund.

[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.

In reaching this determination, the Commission considered that Claimant alerted Commission staff of alleged securities laws violations, prompting Enforcement staff to expand an existing investigation into an additional geographic area. Claimant, a foreign national, also provided significant assistance to Commission staff by traveling to meet in person with staff, identifying an important witness, and providing multiple supplemental submissions that assisted the Commission in bringing the charges in the Covered Action. 

In reaching this determination, the Commission considered that Claimant alerted Commission staff of alleged securities laws violations after initially reporting Redacted Redacted Redacted concerns internally to Claimant's employer, prompting staff to open an investigation that led to the Covered Action. Claimant also provided significant assistance by meeting in person with Commission staff, providing documents, and identifying potential witnesses.

In reaching this determination, the Commission considered that Claimant alerted the Commission to an ongoing fraudulent scheme, which, in part, prompted the opening of the investigation, participated in several interviews with Commission staff, identified witnesses, and provided documents that provided important evidence of misrepresentations.  

[F]rom at least August 2016 through October 2017, the defendants and others falsely represented to actual and potential customers that their business, Global Trading Club (GTC), employed "master traders" who had years of experience trading "crypto currency," and used "cutting edge trading robots" to trade Bitcoin for customers "24 hours a day, 7 days a week." The defendants further falsely represented that customer earnings would increase based on the amount of their deposit and that GTC would award bonuses to customers who referred others to the GTC business. Additionally, to conceal their fraud, the defendants caused misleading trading statements to be posted online.

The complaint further alleges that during the same period, at least 27 individual customers deposited at least $989,000 with one or more representatives of GTC. 

• Securities Industry Commentator
• Bill Singer