Securities Industry Commentator by Bill Singer Esq

Morgan Stanley Raises Serious Questions in Failed TRO Against Former Employee (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 Former CEO of Milwaukee-Area Company with Fraud (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)

FINRA Targeted Examination Letter on Option Account Opening, Supervision and Related Areas (FINRA August 2021 Guidance)

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

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.

 "2 Pleas, 2 Federal Courts,1 Horrific Ponzi Scheme, And Lots Of Lousy Wall Street Regulation" (BrokeAndBroker.com Blog / November 6, 2019) 
http://www.brokeandbroker.com/4895/perry-santillo-ponzi/

I have provided the extensive above quotes from the two DOJ Release because of my familiarity with the cases and my personal interaction with several victims. Frankly, the stories of the families defrauded by the participants in this scheme are horrendous. I spoke with family-members and caregivers who related stories of victims who were lured into these bogus investments at times when they were suffering from terminal cancer, dementia, or severe disabilities. Unfortunately, it was my experience that the victims and their families were not afforded timely, substantive, or compassionate assistance by many of the regulators and prosecutors involved. 

In some instances, I personally spoke with the regulatory community and I too came away with the sense that no one wanted ownership of the fraud -- or responsibility for allowing it to persist for a decade. For some victims, their experience was the frustration of being shuttled from FINRA to the SEC to the FBI to the Department of Justice and back into that endless loop of useless referrals to nowhere. Moreover, frequent pleas for information and guidance were responded to with what was often viewed as disinterest or a shocking lack of empathy. 

"FINRA Buries The Lede With FAS Rep Settlement" (BrokeAndBroker.com Blog / June 26, 2017)
http://www.brokeandbroker.com/3510/fas-finra-awc/

[B]etween August 2016 and March 2020, Egbon offered and sold $6.47 million in securities to at least 14 investors in Exit 7C. Egbon allegedly provided the investors with fictitious revenue and profit figures and forged bank statements showing that Exit 7C was a profitable, growing company, when in fact the company had never made a profit. In addition, shortly after receiving the investors' funds, Egbon allegedly began misappropriating the money and spending it on various personal expenses, including visits to nightclubs, chartered jets, villa rentals, and tickets to sporting events. According to the complaint, Egbon misappropriated approximately $2.15 million from Exit 7C's investors.

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.  

Consent Order against Mayco Alexis Maldonado Garcia 
Consent Order against Cesar Castaneda and Joel Castaneda Garcia

$989,550 in restitution, 
Mayco Alexis Maldonado Garcia to pay a civil monetary penalty of $400,000, and
Cesar Castaneda and Joel Castaneda Garcia to each pay a civil monetary penalty of $180,000.   T

[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. 

FINRA is conducting a review of Firm Name practices and controls related to the opening of options accounts and related areas, including account supervision, communications and diligence. 

The requests below pertain to both self-directed accounts and accounts in which registered representatives recommended options but excludes both institutional1 and managed accounts and covers the period from January 1, 2020 to the date of this letter. To the extent your response to any request differs depending on whether accounts were self-directed or were instead ones in which registered representatives recommended options, please describe those differences in detail. To the extent records requested have previously been provided to FINRA for the specified time period, you may identify such production in lieu of providing duplicative materials. We request production of the information by no later than Date. 

The firm's Written Supervisory Procedures (WSP), compliance manuals and any other written guidance pertaining to the firm's processes and procedures regarding the firm's options account opening and due diligence activities specific to each level of trading permission, including but not limited to: (i) criteria for customers eligibility; (ii) the features and privileges available; (iii) the nature and types of options transactions (e.g., covered options, spreads, uncovered short options) permissible for trading; (iv) the process (automated or manual) and material used  in the review and approval/denial of customer applications (include any processes the firm uses to compare information provided by customers during the options application process to other information in the customers' account records); and (v) any limitations, such as trading limitations, that the firm imposed on customers.
The firm's compliance manuals and any other written guidance pertaining to the firm's process for supervision of options trading in customer accounts.
State whether the firm surveils or reviews its existing options customers to determine whether accounts that had already been approved for options trading should be: (i) changed to more restrictive options account level and/or (ii) deemed ineligible or denied for further options trading. If so, describe the types of surveillance or review(s) and frequency. 
Describe whether the firm has any technology and/or process for systematic approval or denial of customer options account applications, along with the supervisory review of such systems, including both operational oversight and supervision of account approvals or denials.
State whether the firm required customers to open margin accounts or otherwise be approved for margin in connection with the options activity. Describe whether the firm has any technology and/or process for systematic approval or denial of margin accounts.
Describe instances identified by the firm where options limitations (account approval or transactions in options accounts) were not appropriately applied, and any steps taken to date to prevent future breaches of requirements. 
State whether the firm reviewed its customer base to: (i) identify non-options customers for promotion or recommendation of an options account and/or (ii) identify existing options customers for promotion or recommendation of more advanced options account level. To the extent that the firm undertook such efforts, describe the types of review(s) including how often each occurred. 
Describe if and by which means the firm advertised or otherwise made known to customers the availability of option account applications; the mechanics by which the firm made available or provided to customers such applications and how those applications were submitted by customers.
Produce sample options account applications or similar records used to collect information from customers that facilitate the firm's options account approval process. 
Produce sample options-related disclosure materials or other communications provided to customers that explain firm practices and polices related to: (i) expiring options; (ii) exercising of options contracts both automatically and customer initiated. Include materials that describe the risks associated with options trading, including risks associated with complex strategies (e.g. spreads) and risks related to expiration of options.
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Footnote 1 As defined in FINRA Rule 4512(c).

• Securities Industry Commentator
• Bill Singer