The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

September 16, 2021












http://www.brokeandbroker.com/6063/finra-awc-bus/
In today's blog we come upon an all-too common bit of Wall Street misconduct: fudging personal expenses so as to make them look like reimbursable business expenses. Some of the machinations that we've reported about come off as piggish, pathetic, and, okay, perhaps a bit laughable despite it all. What is no joke are the consequences after getting caught. More often than not, you get fired. More often than not, a devastating disclosure is placed on your industry record. More often than not, a regulator will fine and suspend (or bar) you. All of which leaves us wondering why you did it; and, frankly, I suspect that you're left to wonder the same thing for the rest of your life.

http://www.brokeandbroker.com/6062/sec-frivolous-whistleblower/
Among the explanations/excuses offered by the SEC's Office of the Whistleblower ("OWB") for the delays in processing claims for whistleblower awards is that the regulator's docket is rife with filings by serial filers of frivolous claims. The SEC would have us believe that such frivolity overwhelms the regulator's resources. Of course, one might fairly wonder about the apparent lack of managerial protocols to quickly re-route such serial abusers onto an administrative off-ramp, where they might be expeditiously reviewed and prevented from jamming up the timely processing of the meritorious WB-APPs that are now rotting away. Yet again, Big Government proves more adept at presenting excuses than providing solutions.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-92985; Whistleblower Award Proc. File No. 2021-91)
https://www.sec.gov/rules/other/2021/34-92985.pdf
The SEC's Claims Review Staff ("CRS") issued Preliminary Determinations recommending a Whistleblower Award for the Covered Action and Related Actions of about $110,000,000 million to Claimant 1; an Award of about $4,000,000 for the Covered Action to Claimant 3; and the denial of an Award for the Covered and Related Action to Claimant 2. The Commission ordered that CRS' recommendations be approved. The Order asserts in part in Footnote 8 that:

Claimant 1's information was based on Claimant 1's "independent analysis," a constituent element of "original information." Specifically, Claimant 1 utilized publicly available information in a way that went beyond the information itself and afforded the Commission with important insights into the extent of Company 1's misconduct as well as other relevant conduct. Additionally, Claimant 1's information was derived from multiple sources that were not readily identified and accessed by members of the public without specialized knowledge, unusual effort, or substantial cost. Moreover, the sources that Claimant 1 cultivated collectively raised a strong inference of securities law violations that was not otherwise reasonably inferable from any of the sources individually. In all, Claimant 1's own examination, evaluation, and analysis contributed significant independent information that bridged the gap between certain publicly available information and the possible securities violations that the Commission and the Other Agency were investigating. 

In offering further context for Claimant 1's role, the Order asserts in part that:

[(1)] Claimant 1's information, which included a detailed suggested witness list and other charts reflecting REDACTED, was important in connection with the Commission's allegations  REDACTED involving Company 1 REDACTED; (2) Claimant 1's information and supporting documents saved the Commission significant time and resources; (3) Claimant 1 provided substantial, ongoing assistance to staff in the Division of Enforcement (the "Staff"), which included multiple written submissions and communications, including in-person meetings; and (4) Claimant 1 suffered personal and professional hardships as a result of Claimant 1's whistleblower activities. 

However, while Claimant 1's information was important, it was submitted after the Staff had already opened an investigation and after the Staff had already become aware of potential misconduct by Company 1 REDACTED . Furthermore, Claimant 1's information assisted the Staff in connection with only some of the misconduct that the Staff was investigating and which the Commission ultimately charged in the Covered Action. 

https://www.justice.gov/usao-ndga/pr/reality-tv-star-sentenced-ppp-fraud-and-operating-multimillion-dollar-ponzi-scheme
Maurice Fayne, a/k/a Arkansas Mo, 38, (who starred in "Love & Hip Hop: Atlanta") pled guilty in the United States District Court for the Northern District of Georgia to  bank fraud and making false statements to a financial institution in connection with a fraudulent Paycheck Protection Program ("PPP") loan application; and to wire fraud and conspiracy in connection with a Ponzi scheme. Fayne was sentenced to 17 years and six months in prison plus five years of supervised release and ordered to pay restitution in the amount of $4,465,865.55 to the victims.  As alleged in part in the DOJ Release:

From March 2013 through May 2020, Fayne ran a multistate Ponzi scheme that defrauded more than 20 people who invested in his trucking business. Fayne promised that he would use the investors' money to operate the business. Instead, he used the money to pay his personal debts and expenses and to fund an extravagant lifestyle for himself. During the scheme, Fayne spent more than $5 million at a casino in Oklahoma.

In April 2020, Fayne submitted a $3.7 million PPP loan application to United Community Bank, falsely claiming that his trucking business had 107 employees and an average monthly payroll of $1,490,200. Fayne promised to use the PPP loan proceeds to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments related to his trucking business. Instead, Fayne used the PPP loan proceeds for improper purposes, including the following:
  • $40,000 for past-due child support;
  • $50,000 for restitution owed in a previous fraud case;
  • $65,000 in cash withdrawals;
  • $85,000 for custom-made jewelry;
  • $136,000 to lease a Rolls-Royce;
  • $230,000 to associates who helped him run a Ponzi scheme;
  • $907,000 to start a new business in Arkansas.

https://www.justice.gov/usao-ma/pr/swampscott-financial-advisor-sentenced-stealing-former-clients-retirement-assets
Felix Gorovodsky, 29, pled guilty in the United States District Court for the District of Massachusetts to one count of bank fraud, and he was sentenced to 33 months in prison plus two years of supervised release, and ordered to pay $310,492 in restitution. As alleged in part in the DOJ Release:

Gorovodsky served as a financial advisor for the victim. In or about July 2019, the victim terminated that advisor relationship and revoked the power of attorney she had previously granted Gorovodsky. Approximately nine months later, Gorovodsky accessed and liquidated the victim's bank account, transferring more than $250,000 into his own bank account. Gorovodsky then used the victim's stolen retirement funds for personal expenses, including paying off more than $100,000 in federal student loans. As part of the scheme, Gorovodsky forged the victim's signature on a purported "gift letter," which he sent to the bank in an attempt to legitimize the fraudulent transfer.

https://www.sec.gov/litigation/litreleases/2021/lr25205.htm
In a Complaint filed in the United States District Court for the District of Puerto Rico
https://www.sec.gov/litigation/complaints/2021/comp25205.pdf, the SEC alleged that Eliseo Acosta had solicited at least 16 Puerto Rico government entities to invest in Kinetic Funds I LLC; and, in so doing, Acosta raised $22 million on which he received $105,300 in commissions. The Complaint alleges that Acosta was not registered as a broker-dealer or associated with a registered broker-dealer in violation of Section 15(a)(1) of the Securities Exchange Act. Without admitting or denying the allegations in the SEC Complaint, Acosta agreed to entry of a civil court judgment permanently enjoining him from violating the charged provision and ordering him to pay disgorgement, prejudgment interest thereon, and a civil penalty in amounts to be determined .

https://www.justice.gov/usao-sdny/pr/founder-90-million-cryptocurrency-hedge-fund-sentenced-more-seven-years-prison
Stefan He Qin, 24, founder of the cryptocurrency hedge funds Virgil Sigma Fund LP and the VQR Multistrategy Fund LP pled guilty in the United States District Court for the Southern District of New York to one count of securities fraud, and he was sentenced to 90 months in prison plus three years of supervised release, and ordered to forfeit $54,793,532. As alleged in part in the DOJ Release:

[B]etween 2017 through 2020, QIN owned and controlled two cryptocurrency investment funds, Virgil Sigma and VQR, both of which were located in New York, New York.   Since its creation, Virgil Sigma purported to employ a strategy to earn profits from arbitrage opportunities in the cryptocurrency market.   This strategy was touted by QIN to the investing public as "market-neutral," meaning the fund was not exposed to any risk from the price of cryptocurrency moving up or down and therefore provided a relatively safe and liquid investment. Until recently, Virgil Sigma purported to have over $90 million under management from dozens of investors, including many in the United States.  According to its public marketing materials, Virgil Sigma has been profitable in every month from August 2016 to the present, with the sole exception of March 2017.  QIN also regularly participated in calls with Virgil Sigma investors and other forms of public communication where he touted the growth and success of Virgil Sigma.  For example, in February 2018, QIN and his fund were profiled in the Wall Street Journal.

In or about February 2020, QIN founded VQR. VQR employed a variety of trading strategies and was poised to make or lose money based on the fluctuations in the value of cryptocurrency and was not market neutral.  QIN was the sole owner of VQR's general partner, but was not involved in VQR's day-to-day operations.  Instead, VQR had its own trading staff, including a head trader (the "Head Trader") and other investment professionals.  Until recently, VQR had at least approximately $24 million under management from investors. 

Qin's Scheme to Steal Assets from Virgil Sigma

Since 2017, QIN engaged in a scheme to steal assets from Virgil Sigma and defraud its investors.  Rather than investing the fund's assets in a cryptocurrency arbitrage trading strategy as advertised, QIN embezzled investor capital from Virgil Sigma and used the funds for purposes other than the purported arbitrage trading strategy, including: (a) using a substantial portion of investor capital stolen from Virgil Sigma to pay for personal expenses such as food, services, and rent for a penthouse apartment in New York City; (b) using a substantial portion of investor capital from Virgil Sigma to make personal, often illiquid investments in other entities that had nothing to do with cryptocurrencies.  For example, in or about October 2018, QIN invested hundreds of thousands of dollars stolen from Virgil Sigma into a real estate investment; and (c) using a substantial portion of investor capital from Virgil Sigma to invest in crypto-assets that had nothing to do with the fund's stated arbitrage strategy.  For example, in or about 2018, QIN invested funds from Virgil Sigma into certain initial coin offerings, a speculative form of investing in new issues of cryptocurrency.  As a result of these and other fraudulent activities, QIN dissipated nearly all of the investor capital in Virgil Sigma.  QIN also regularly lied to the fund's investors about the value, location, and status of their investment capital, including through false account statements that QIN prepared and bogus tax documents that he circulated to his investors. 

Qin Attempts to Steal Assets From VQR to pay Virgil Sigma Investors

In or about December 2020, faced with redemption requests from the Virgil Sigma fund that he could not meet, QIN demanded that the Head Trader at VQR wind down all trading positions at VQR and transfer a portion of the funds to QIN so that QIN could use that money to pay off these redemptions to Virgil Sigma investors.  QIN issued the demand even though the Head Trader advised QIN that closing out VQR's then-current trading positions, rather than holding those positions in accordance with VQR's directional trading strategy, would result in losses to VQR's investors.  At QIN's direction, the Head Trader accordingly closed out VQR's positions and turned over access to VQR's trading accounts to QIN.  QIN subsequently attempted to take control of VQR's assets in order to enable QIN to meet certain Virgil Sigma investor redemption requests.

The Virgil Sigma fund and VQR have ceased operations and the liquidation and distribution of assets is being handled by a court-appointed receiver in the matter of S.E.C. v. Qin, 20 Civ. 10849. 

https://www.sec.gov/litigation/litreleases/2021/lr25207.htm
In a Complaint filed in the United States District Court for the Southern District of New York
https://www.sec.gov/litigation/complaints/2021/comp25207.pdf, the SEC alleged that Simon Piers Thurlow, Roger Leon Fidler, Bradley Fidler, Richard Oravec, and Bryce Emory Boucher violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and with aiding and abetting each other's violations; and further, the Complaint charges all the aforementioned and Joseph D. Jordan and Western Bankers Capital Inc. with violating the prohibitions of Sections 5(a) and (c) of the Securities Act against the offer and sale of unregistered securities. In a separate administrative cease-and-desist proceeding, the SEC charged attorney Charles Parkinson Lloyd with violating the securities registration provisions of Sections 5(a) and (c) of the Securities Act for issuing opinion letters despite several red flags in the transaction documents that signaled an illegal offering-including indicia that the documents were forged or not accurately dated and that the accompanying representations by the sellers were false. Without admitting or denying the SEC's findings, Lloyd agreed to a cease-and-desist order, disgorgement of $3,150 and prejudgment interest of $501, and a civil monetary penalty of $40,000. As alleged in part in the SEC Release:

[I]n 2016, Roger Fidler, Thurlow, and Oravec engineered a reverse merger between Dolat Ventures, Inc. (DOLV) and a Chinese company that purportedly manufactured electric cars and batteries, and then undertook a fraudulent scheme to create false and backdated documents to make it appear that shares could be immediately sold to the investing public without filing the required registration statements with the SEC. Between March and December 2017, Thurlow's associates, Boucher and Jordan (through Western Bankers Capital), allegedly purchased tranches of the convertible debt, converted the debt to DOLV shares, and sold the shares to the public without filing the required registration statements. In addition, Thurlow and Fidler arranged for Fidler's son, Bradley, to purchase DOLV debt, convert the debt to shares, and sell them to investors without filing the required registration statements. The proceeds from the unregistered offerings was approximately $5.9 million.

The SEC further alleges that, in order to ensure that DOLV's transfer agent and the brokerage firm used by Boucher and Bradley Fidler would permit the transfer and sale of the shares, the defendants obtained opinion letters from attorneys that the conversions and sale of shares would not violate the law. Thurlow, the Fidlers, Oravec, and Boucher allegedly provided false and misleading information and documents to the attorneys in order to obtain the opinion letters.

https://www.sec.gov/litigation/litreleases/2021/lr25206.htm
In a Complaint filed in the United States District Court for the Central District of California
https://www.sec.gov/litigation/complaints/2021/comp25206.pdf, the SEC charged Lupe L. Rose, Sonja F. Shelby, and Katherine E. Dirden with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, as well as the offering registration provisions of Sections 5(a) and (c) of the Securities Act. As alleged in part in the SEC Release:

[SHE] Beverage produces beverages targeting female customers. The complaint alleges that between 2017 and 2019, SHE Beverage and its principals raised over $15 million from stock sales to more than 2,000 investors by falsely representing that they would use 30% of the offering proceeds to purchase beverage inventory. In fact, they allegedly spent only approximately 2% on inventory, and instead spent more than $7.5 million on personal expenses and unexplained cash transactions. The complaint further alleges that, lacking significant beverage sales, the company and its principals continued to raise money from investors by falsely promoting the company as being successful in a variety of ways.
The order finds that Montano used fraudulent solicitations in emails, websites, and video sales letters promising free access to purportedly successful automated trading systems that traded on behalf of clients in binary options involving commodity interests. These solicitations misrepresented hypothetical and fictitious trading results as real results, used fabricated customer testimonials, and misstated the experience, background, and skill of the "creators" of these automated trading systems.

http://www.brokeandbroker.com/6061/spoofing-treasuries/
In keeping with Wall Street's ever-changing guard, we come upon a young Merrill Lynch trader in his 20s. He has the pedigree. He has the chops. He even seems to have a few tricks up his sleeve. Unfortunately, as FINRA sees it, he's got several Aces of Spades hidden above his wrist and is rigging the game -- sure, let's call it as it is: He's cheating. Not there there's really anything amounting to a fair shuffle of the cards or a fair deal on the Street, but, hey, if it makes you feel better, we can all wink and nod knowingly.

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