Securities Industry Commentator by Bill Singer Esq

SEC Announces Three Actions Charging Deficient Cybersecurity Procedures (SEC Release)

SEC Obtains Judgment Against California Trader Charged with Posting False Stock Tweets (SEC Release)

SEC Charges Mississippi Company and Its Principal in Multi-Million Dollar Ponzi Scheme (SEC Release)

South Florida Lawyer Charged with Fraud Related to 1 Global Capital Investment Scheme (DOJ Release)

SEC Charges South Florida Lawyer with Securities Fraud (SEC Release)

Two South Florida Lawyers and Former Chief Operating Officer Sentenced for Roles in Massive 1 Global Capital Investment Scheme (DOJ Release)

Judge sentences Tennessee man to 27 months for wire fraud in investment fraud scheme (DOJ Release)

Federal Court Orders Ohio Resident and Multi-Million Dollar Ponzi Scheme Fraudster Permanently Banned from Trading and Registering with the CFTC (CFTC Release) a>

Request for Information and Comments on Broker-Dealer and Investment Adviser Digital Engagement Practices, Related Tools and Methods, and Regulatory Considerations and Potential Approaches; Information and Comments on Investment Adviser Use of Technology to Develop and Provide Investment Advice (SEC Release)

Statement on Request for Information and Comments on Broker-Dealer and Investment Adviser Digital Engagement Practices, Related Tools and Methods, and Regulatory Considerations and Potential Approaches by SEC Chair Gary Gensler (SEC Release)

SEC Orders $1.2 Million Award to Whistleblower But Denies Related Action Award

Order Determining Whistleblower Award Claim 

SEC Orders Over $1 Million In Awards to Three Whistleblowers

Order Determining Whistleblower Award Claim

SEC Orders Award Of Over $350,000 to Whistleblower

Order Determining Whistleblower Award Claim

SEC Orders 30% Award to Whistleblower 

Order Determining Whistleblower Award Claim

FINRA Fines and Suspends Rep for Outside Brokerage Account and Untimely Responses

In the Matter of Julio Cesar Lage, Respondent (FINRA AWC)

used the Twitter pseudonym @OCMillionaire to tweet false statements about a defunct Nevada company to inflate the value of the company's stock. Specifically, the complaint alleges that, on December 9, 2020, Fassari began purchasing over 41 million shares of Arcis Resources Corporation (ARCS) stock shortly before tweeting false information about ARCS to his thousands of Twitter followers, including falsely claiming that ARCS was reviving its operations and expanding its business. The complaint further alleges that, over the next several days, ARCS's share price skyrocketed, ultimately increasing over 4,000 percent. As alleged, Fassari also made false statements about his own trading in ARCS.

McHenry and First South Investments sold at least $31 million of Madison Timber's unregistered securities to at least 28 retail investors. The complaint also alleges that the defendants reaped millions of dollars in commissions and other payments on their sales of Madison Timber's securities, even though the securities were not registered with the Commission and defendants were not registered as broker-dealers. According to the complaint, the defendants told investors that their money would be used to finance the right to harvest timber and promised annual returns of 12 to 15 percent. In truth, the complaint alleges, Madison Timber never obtained any harvesting rights. Instead, Madison Timber's principal, Arthur Lamar Adams, allegedly forged deeds and cutting agreements and used the investors' funds for personal expenses and to develop an unrelated real estate project.

The complaint charges McHenry and First South Investments with violating the securities registration provisions of Sections 5(a) and (c) of the Securities Act of 1933 and the broker-dealer registration provision of Section 15(a) of the Securities Exchange Act of 1934.

Previously, in addition to charging Madison Timber and Adams, the SEC charged Terry Wayne Kelly and Kelly Management, LLC and Michael Douglas Billings and MDB Group, LLC for their role in the Madison Timber scheme.

The court overseeing the SEC's ongoing litigation against Madison Timber, Adams, Kelly Management, Kelly, MDB Group, LLC, and Billings appointed a receiver to marshal funds and distribute them to harmed investors. The receiver has established a website, which contains information on the receiver's progress and on relevant federal and state proceedings.

According to the allegations in the information, 1 Global was a commercial lending business based in Hallandale Beach, Florida, that made the equivalent of "pay day" loans with high interest rates to small businesses, termed merchant cash advance loans (MCAs). To fund these loans, 1 Global obtained funds from investors nationwide, offering short-term investment contracts that promised to "place" the investors' money onto MCAs. The investors would supposedly receive a proportionate share of the principal and interest payments as the loans were repaid. 1 Global raised money using investment advisors and other intermediaries, with promises to these advisors of significant commissions. In many cases, according to court documents, the commissions were not fully disclosed to investors. Ledbetter was an attorney licensed in the State of Florida who worked at Law Firm #1 and acted in a fundraising capacity at 1 Global beginning in or around 2015.

Substantial questions arose during the operation of the business as to whether 1 Global was offering or selling a security and whether the investment offering was required to be registered with the U.S. Securities and Exchange Commission. These questions were raised by investors, investment advisors, and regulators. Ledbetter and Jan Douglas Atlas, a partner at Law Firm #1 who also acted as outside counsel for 1 Global, knew that if 1 Global's investment offering were determined to be a security, it would undermine the ability of 1 Global to raise funds from retail investors and to continue to operate without substantial additional expenses and reporting requirements. Such a classification would undermine the profits and fees that Ledbetter and other principals at 1 Global would be able to obtain from 1 Global's operations.

The information alleges that at the request of 1 Global's principals, Atlas authored two opinion letters in 2016 containing false information that Atlas knew would be used by 1 Global to operate the business unlawfully. The opinion letters falsely described the duration of the investment, among other things, omitting the automatic renewal aspect and that the investment was being targeted toward retail, non-sophisticated investors (such as IRA account holders).  According to the information, Ledbetter used and relied on Atlas's opinion letters to continue to raise money illegally, knowing that the opinion letters falsely described the investment opportunity and were thus misleading.  Ledbetter cited and used the false letters in numerous pitches and communications to investment advisors and investors.

According to the information, Ledbetter was personally involved in raising more than $100 million in investor funds that went to 1 Global, through his own pitches as well as through investment advisors he attracted to 1 Global. Over the years, Ledbetter received approximately $3 million from 1 Global, the majority of which was for commissions.  Ledbetter routinely held himself out to investors and investment advisers as outside counsel to 1 Global, and also personally vouched for 1 Global in pitches and marketing materials.  However, Ledbetter did not disclose the commissions that he received from 1 Global to investors, according to the information. Ledbetter also made misrepresentations to investors regarding the involvement of an outside auditing firm. 

Ledbetter, while an attorney at a Fort Lauderdale law firm that was counsel to 1 Global, falsely told investors and the network of sales agents he recruited to offer and sell 1 Global's notes nationwide that 1 Global's notes were not securities despite knowing that they were securities and that the offering violated the securities laws. In the process, he reaped approximately $2.9 million in commissions from the sale of 1 Global's notes.

According to court documents, 1 Global was a commercial lending business based in Hallandale Beach, Florida, that made the equivalent of "pay day" loans to small businesses at high interest rates, termed merchant cash advance loans ("MCAs").  Schwartz was a director and consultant at 1 Global, and also held out as a Chief Operating Officer in the company's marketing materials.  Ledbetter was an attorney licensed in the State of Florida who had an of counsel position at Law Firm #1 and acted in a fundraising capacity at 1 Global beginning in or around 2015.  Atlas was a partner at Law Firm #1 and acted as outside counsel for 1 Global.

Substantial questions arose during the operation of the business as to whether 1 Global was offering or selling a security and whether the investment offering was required to be registered with the U.S. Securities and Exchange Commission. These questions were raised by investors, investment advisors, and regulators. Ledbetter and Atlas knew that if 1 Global's investment offering were determined to be a security, it would undermine the ability of 1 Global to raise funds from retail investors and to continue to operate without substantial additional expenses and reporting requirements.  Such a classification would undermine the profits and fees that Ledbetter and other principals at 1 Global would be able to obtain from 1 Global's operations.      

At the request of 1 Global's principals, Atlas authored two opinion letters in 2016 containing false information that Atlas allegedly knew would be used by 1 Global to operate the business unlawfully.  The opinion letters falsely described the duration of the investment, among other things, omitting the automatic renewal aspect and that the investment was being targeted toward retail, non-sophisticated investors (such as IRA account holders).   Ledbetter used and relied on Atlas's opinion letters to continue to raise money illegally, in numerous pitches and communications to investment advisors and investors.

According to court documents, Ledbetter was personally involved in raising more than $100 million in investor funds that went to 1 Global, through his own pitches as well as through investment advisors he attracted to 1 Global.  Over the years, Ledbetter received approximately $3 million from 1 Global, the majority of which was for commissions.  Atlas received approximately $627,000 from Ledbetter's commissions.  Neither attorney disclosed these commissions to Law Firm #1.  Ledbetter routinely held himself out to investors and investment advisers as outside counsel to 1 Global, and also personally vouched for 1 Global in pitches and marketing materials, without disclosing his extravagant commissions.

In addition, in order to attract investments, Individual #1 (the de facto owner of 1 Global), Schwartz, Ledbetter, and others, made false and misleading representations to investors and potential investors as to the profitability of 1 Global's business in marketing materials and periodic account statements. 

Beginning in November 2017 and continuing to June 2019, McDonald devised a scheme to defraud and to obtain money by means of materially false and fraudulent pretenses, representations and promises.  McDonald falsely told prospective clients that he would provide a minimum of 20% to 50% return per month on their Forex investments.  McDonald further falsely told investors that they had made substantial gains in their Forex investments with him when, in fact, he had used their funds on his own personal expenses and, without their knowledge or consent, invested and lost their funds in cryptocurrency. McDonald directed investors to deposit their Forex investments funds, primarily through wire transfers, into his personal bank account or the Perfection PR bank account.  McDonald caused over $350,000 in loss to numerous victims of his scheme.

[G]alemmo admitted in his plea agreement in a separate, parallel criminal action, from February 18, 2010 through at least July 17, 2013, Galemmo, through his firm, QFC, LLC, made material misrepresentations to commodity pool participants, including falsely illustrating that the pool generated returns of 17 to 40 percent from 2008 through 2012. Galemmo also failed to disclose that he failed to trade pool participants' funds for a substantial period, and sent investors fraudulent account statements showing false purported trading profits. Through his scheme, Galemmo solicited more than $116 million from pool participants, which he represented would be used for trading futures, commodities and other financial products. In fact, Galemmo only deposited approximately $4.7 million of over $116 million solicited from pool participants into futures accounts that he controlled and sustained total trading losses of approximately $1.2 million. Galemmo also allegedly withdrew or caused to be withdrawn $2.7 million in pool participants' funds from these futures accounts. Galemmo misappropriated the vast majority of the remaining funds for personal and other business uses.

The Securities and Exchange Commission (the "Commission" or the "SEC") is requesting information and public comment ("Request") on matters related to: broker-dealer and investment adviser use of "digital engagement practices" or "DEPs", including behavioral prompts, differential marketing, game-like features (commonly referred to as "gamification"), and other design elements or features designed to engage with retail investors on digital platforms (e.g., websites, portals and applications or "apps"), as well as the analytical and technological tools and methods used in connection with these digital engagement practices; and, investment adviser use of technology to develop and provide investment advice. In addition to or in place of responses to questions in this release, retail investors seeking to comment on their experiences may want to submit a short Feedback Flyer.

Today, the Commission published a request for public comment on the use of new and emerging technologies by financial industry firms.[1] 

While these new technologies can bring us greater access and product choice, they also raise questions as to whether we as investors are appropriately protected when we trade and get financial advice.  These apps use a host of features that have come to be familiar in our increasingly online world. Digital engagement practices (DEPs), including predictive data analytics, differential marketing, and behavioral prompts (such as gamification), are integrated not only into streaming platforms and fitness apps, but also in robo-advising, wealth management platforms, brokerage platforms, and other financial technologies.

Many of these features encourage users to engage more with a digital platform. In the last few years we've seen a proliferation of trading apps, wealth management apps, and robo-advisers that use these practices to develop and provide investment advice to retail investors.  In many cases, these features may encourage investors to trade more often, invest in different products, or change their investment strategy.  Predictive analytics and other DEPs often are designed, in part, with optimization functions to increase platform revenues, data collection, and customer engagement, leading to potential conflicts between the platform and investors.

I'm interested in the answers to the many questions included in the request for comment, but I'm particularly focused on policy questions about how we protect investors engaging with technologies that use DEPs:

1. How might we protect investors in light of the potential conflicts of interest that may exist when DEPs' optimization practices have a statistically significant impact on platform revenues, data collection, or investor behavior?
   
   
2. To the extent that DEPs' underlying predictive data analytics use "optimization functions" that, at least in part, optimize on revenues, data collection, or investor engagement - and to the extent that optimization leads to statistically significant changes in investor behavior - how does that affect the determination of whether DEPs are making a recommendation or providing investment advice?

With all this in mind, the Commission would like to hear from you about your experiences with these platforms and their digital engagement practices.  Your comments will help us better understand how firms are approaching new technologies and how these practices affect retail investors.  Thank you for your feedback.  

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[1] https://www.sec.gov/rules/other/2021/34-92766

Claimant provided new and useful information to Commission staff based on Claimant's "independent analysis," by creating and applying a complex algorithm to publicly available data and sharing Claimant's own knowledge and experience using the publicly available data. Claimant's information, provided early in the investigation, allowed the staff to conserve time and resources and assisted the staff during settlement negotiations with the company, which significantly contributed to the success of the Covered Action. Claimant also provided ongoing assistance to the staff during the investigation through multiple phone calls and emails. 

[C]laimant 1 provided the most significant and comprehensive information about the conduct to staff that proved vital to the success of the Covered Action. Claimant 1 also provided extraordinary assistance during the course of the investigation. In determining that Claimant 2 should receive an award of *** % of monetary sanctions collected or to be collected in the Covered Action, we considered that Claimant 2 was the first claimant to report to the Commission, and Claimant 2's information provided a framework for developing information requests. Claimant 2 also provided continuing assistance. In determining that Claimant 3 should receive an award of ** % of monetary sanctions collected or to be collected in the Covered Action, we considered that while helpful, Claimant 3's information was not as significant to the overall success of the Covered Action as the information submitted by Claimants 1 and 2. Claimant 3 also provided continuing assistance. 

[C]laimant voluntarily provided original information to the Commission that caused Enforcement staff to inquire concerning different conduct as part of a current investigation, and the Commission brought the Covered Action based in part on conduct that was the subject of Claimant's information. Claimant satisfied the original information requirement by providing independent analysis based on publicly available information. Claimant identified a microcap company (the "Company") whose stock was the subject of a suspicious promotional campaign. Claimant's information, including a comparison of the language in touting emails with emails in other promotional campaigns, was the product of unusual effort and expertise developed over many years and helped establish the connection between the Company and previous or ongoing promotional campaigns that were suspicious in nature. . . .

When Lage became registered with FINRA through his association with BLV Securities in May 2019, Lage had two securities accounts in his own name at another member firm. Lage did not seek written consent from BLV Securities at any time to maintain those outside securities accounts and did not notify the firms at which those accounts were held of his association with BLV Securities. Furthermore, while he was registered through BLV Securities, Lage opened one additional securities account in which he had a beneficial interest at another member firm without seeking prior written approval from BLV Securities and without notifying that financial institution of his association with BLV Securities.

Therefore, Lage violated FINRA Rules 3210 and 2010. . . .

In April 2020, as part of its examination of BLV Securities, FINRA sent Lage a request pursuant to FINRA Rule 8210 for account statements for three securities accounts held away from BLV Securities that he controlled. In May 2020, Lage provided the requested account statements for two accounts, but he did not provide the requested documents for the third account. In June 2020, FINRA sent a second written request, also pursuant to FINRA Rule 8210, again seeking the requested account statements for the third securities account. Lage did not provide the requested documents in response to that request. In August 2020, FINRA sent Lage a third written request, also pursuant to FINRA Rule 8210, seeking the same documents. Lage did not provide the requested documents until October 2020. 

By failing to timely produce documents requested pursuant to FINRA Rule 8210, Lage violated FINRA Rules 8210 and 2010.

• Securities Industry Commentator
• Bill Singer