Securities Industry Commentator by Bill Singer Esq

Nicole Creola Kelly Named Chief of SEC Whistleblower Office

SEC Charges Michigan Investment Adviser with Fraud

SEC Wins Jury Trial Against Hedge Fund Adviser Who Ran Manipulative Short Scheme (SEC Release)

Rochester Man Going To Prison And Ordered To Pay Millions In Restitution For His Role In Ponzi Scheme That Bilked Investors Out Of Millions Of Dollars (DOJ Release)

Executive Charged by SEC for Financial Fraud Scheme Sentenced to 13 Years in Prison in Parallel Criminal Case (SEC Release)

Two New Jersey, One New York Securities Claims Aggregators Arrested and Charged with $40M Fraud (DOJ Release)

SEC Obtains Emergency Relief in Case Charging Claims Aggregator and Principals with Multi-Million Dollar Fraud (SEC Release)

Prepared Remarks At the Securities Enforcement Forum by SEC Chair Gary Gensler

FINRA Chair Murray Ironically Argues Against Self Regulation (BrokeAndBroker.com Blog)

Postponement Request for Illness in FINRA Customer Arbitration Prompts Covid Testing (BrokeAndBroker.com Blog)

No-Show FINRA Member Firm Loses Customer Arbitration But Where is FINRA When It Comes To Collecting on the Award? (BrokeAndBroker.com Blog)

No Margin For Error With Options Expiration (BrokeAndBroker.com Blog)

The Securities and Exchange Commission today announced the appointment of Nicole Creola Kelly as Chief of the SEC's Office of the Whistleblower.

Ms. Kelly, who goes by Cree, is currently Senior Special Counsel in the Office of the General Counsel and has more than 20 years of experience with the SEC. Among her other roles were Counsel to former SEC Chair Mary Jo White, Counsel to former SEC Commissioner Kara M. Stein, and stints in the Enforcement Division's Complex Financial Instruments Unit as well as the Whistleblower Office.

"Cree's wealth of experience at the SEC makes her well-qualified to serve as Chief of the SEC Whistleblower Office. The whistleblower program has been tremendously valuable, and I look forward to working with Cree on its continued success," said Gurbir S. Grewal, the SEC's Director of Enforcement. "I also would like to thank Emily Pasquinelli for serving as Acting Chief of the Whistleblower Office. The enforcement program has benefited enormously from Emily's steady leadership during this past year."

Ms. Kelly said, "I am grateful for the opportunity to work once again with the talented and dedicated staff of the Office of the Whistleblower. Over the course of my career, I have witnessed firsthand both the critical impact that whistleblowers can have on our investigations and the many sacrifices they make in shining light on misconduct."

Ms. Kelly has a B.A. from Amherst College and a J.D. from Tulane Law School. 

[M]untin worked for an SEC-registered investment adviser and also managed certain investments for his clients outside of that adviser through his own company, Executive Asset Management, Inc. According to the complaint, Executive Asset Management was previously registered as an investment adviser with the state of Michigan. As alleged, between March 2016 and February 2020, Muntin solicited one of his elderly advisory clients to write checks totaling $305,750 to Executive Asset Management for purported investments in securities. However, according to the complaint, Muntin did not invest the client's money in securities, but spent it for his own benefit, including to pay his mortgage, real estate taxes, health insurance, boat and car loans, and credit card bills. The complaint further alleges that Muntin also overcharged the client for at least $9,000 in assets under management fees.

[A]fter establishing a short position in Ligand through his hedge fund, Lemelson made a series of false statements to shake investor confidence in Ligand and lower its stock price, increasing the value of his fund's position.  The false statements included assertions that Ligand's investor relations firm had agreed that Ligand's most profitable drug was on the brink of obsolescence and that Ligand had entered into a sham transaction with an unaudited shell company in order to pad its balance sheet.  The evidence also showed that Lemelson had boasted about bringing down Ligand's stock price through his "multi-month battle" against the company.

[B]etween 2017 and June 2018, the defendant conspired with co-defendants Perry Santillo, Christopher Parris and others, to obtain money through an investment fraud commonly known as a Ponzi scheme. The scheme, which was conducted under the umbrella of a business entity called Lucian Development, involved the sale of fraudulent promissory notes that were issued under the names various entities that Santillo and Parris controlled, including Lucian Development. The issuers received money from new investors, and then redistributed that money to repay earlier investors, to pay the expenses of the scheme, and to finance the lifestyles of Santillo, Parris and others involved in the scheme. Piccarreto was initially unaware that the business was a Ponzi scheme when he began working for Lucian Development in March 2012. As he gained experience with investments and obtained a securities license, Piccarreto's responsibilities increased. By January 2017, the defendant realized that the Lucian Development business was, indeed, a Ponzi scheme after the company stopped paying promised returns to client investors whom he serviced. However, rather than severing his association with Lucian Development, Piccarreto continued to work for Santillo and Parris, knowingly lying to investors by falsely reassuring them that their investments were safe and secure, even though he knew this was not true, and encouraging investors to "reinvest" their fraudulent investments by signing new promissory notes. 

Between January 1, 2017, and June 19, 2018, Piccarreto was involved in defrauding approximately 400 investors out of approximately $18,081,556, which resulted in financial hardship to more than 25 of its investor victims. Piccarreto also admitted that, while working in Texas, he personally solicited and defrauded at least eight investors out of approximately $598,695. In addition, on his 2017 tax return, the defendant claimed a taxable income of $6,576.  In fact, Piccarreto's taxable income was approximately $538,548, which resulted in the defendant avoided paying income taxes to the IRS in the amount of approximately $159,423.

Perry Santillo and Christopher Parris were previously convicted and are awaiting sentencing.

Read: "2 Pleas, 2 Federal Courts,1 Horrific Ponzi Scheme, And Lots Of Lousy Wall Street Regulation" (BrokeAndBroker.com Blog /  November 6, 2019)

The criminal charges against Godwin stem, in part, from the same misconduct alleged in the SEC's complaint, which was filed in federal district court in Peoria, Illinois. The SEC's complaint alleges that Godwin, ContinuityX's former CEO, engineered a scheme to inflate the company's revenues with a co-defendant who served as ContinuityX's former CFO. The complaint also alleges that while ContinuityX reported revenues of $27.2 million from April 2011 to September 2012, 99 percent of the reported revenue came from fraudulent and fictitious sales. According to the complaint, Godwin used the allegedly fraudulent SEC filings to raise millions of dollars from investors in a private offering of ContinuityX securities and Godwin enriched himself with $1.3 million in compensation from ContinuityX.

[T]he three defendants were the principals of Alpha Plus Recovery, a claims aggregator firm based in Old Bridge, New Jersey. The Indictment further alleges that the defendants used Alpha Plus Recovery to make false and fraudulent claims, including claims made in the Eastern District of Pennsylvania, to the proceeds of securities fraud class action and SEC enforcement action settlements. The defendants falsely claimed that corporate clients of Alpha Plus Recovery had purchased shares of securities that were the subject of the lawsuits and enforcement actions. In reality, the clients, which were entities actually controlled by the defendants, had not purchased the subject securities. To substantiate the false claims, the defendants created fraudulent brokerage and other financial documents to provide to claims administrators. The defendants then allegedly transferred the fraudulently obtained funds into accounts they controlled. The Indictment alleges that between 2014 and 2021, the defendants received approximately $40 million from these false claims.

[J]oseph Cammarata, Erik Cohen, and David Punturieri, and two entities that they control, AlphaPlus Portfolio Recovery Corp. and Alpha Plus Recovery LLC (collectively AlphaPlus), stole at least $40 million from approximately 400 distribution funds, including more than $3 million from settlement funds arising from SEC enforcement actions. The complaint alleges that, starting in 2014, AlphaPlus engaged in a serial scheme to fraudulently obtain money by submitting false claims to settlement fund administrators - purporting to represent clients who had traded the securities that were the subjects of the underlying settlements. The complaint further alleges that defendants used false trading data and broker-dealer letterhead they misappropriated from other companies to "document" the purported trades and provide an air of legitimacy to their fake claims. According to the complaint, Cammarata, Cohen, and Punturieri funneled the fraudulently obtained distributions through a web of accounts they controlled and used the stolen money to pay for numerous personal expenses, such as jewelry, home renovations, luxury automobiles, watercraft, and real estate.

Thank you for having me here today. As is customary, I'd like to note that my views are my own, and I'm not speaking on behalf of the Commission or SEC staff.

In 1934, in his first speech as the SEC's first Chair, Joseph Kennedy told the National Press Club, "The Commission will make war without quarter on any who sell securities by fraud or misrepresentation."[1]

Though much has changed since then - technology, financial products, and business models are always evolving - Kennedy's words still ring true today.

Enforcement is one of the fundamental pillars in achieving the SEC's mission.

One pillar is the policy framework - the laws set by Congress, and the rules enacted by the Commission.

But you've also got to examine against those laws and rules, and enforce those rules. That oversight and enforcement are the other two critical pillars.

Think about a football game without referees. Teams, without fear of penalties, start to break the rules. The game isn't fair, and maybe after a few minutes, it isn't fun to watch.

Without examination against and enforcement of our rules and laws, we can't instill the trust necessary for our markets to thrive. Stamping out fraud, manipulation, and abuse lowers risk in the system. It protects investors and reduces the cost of capital. The whole economy benefits from that.

At the SEC, we follow the facts and the law, wherever they may lead, on behalf of investors and working families. That means holding individuals and companies accountable, without fear or favor, across the approximately $100 trillion capital markets we oversee.

It is critical that our enforcement program have tremendous breadth, be nimble, and penalize bad actors so we discourage misconduct before it happens.

That means bringing cases that matter to our three-part mission - whether deceptive conduct in the private funds space, offering frauds, accounting frauds, insider trading, market manipulation, Foreign Corrupt Practices Act cases, reporting violations, or fiduciary violations.

Today, I'd like to discuss some principles I have asked our Enforcement Division to consider as they investigate misconduct and make recommendations to the Commission.

Economic Realities

The first principle is economic realities.

Arbitrage has been a longtime feature of finance. Maybe we buy something in Paris and sell it for a profit in London. All too often, though, some folks try to arbitrage the rules and laws - between jurisdictions, within borders, across legal entities, or among technologies.

Activities should be subject to consistent regulation, though, regardless of the entity, the technology, or the business model.

If a driver is pulled over for speeding, it doesn't really matter if she's driving an electric vehicle or a gas-powered one.

There's an old saying: "When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck."

Sometimes, people focus on labels. For example, we hear terms like "decentralized finance" (DeFi), "currency," or "peer-to-peer lending." It can seem easy to take these words at face value.

Make no mistake: regardless of the label or purported mission, we will be looking at the economic realities of a given product or arrangement to determine whether it complies with the securities laws.

History tells us that when a group of people try to mask the underlying economic realities of a certain product or instrument, investors can get hurt. Further, their pain can spread from the financial system to the real economy.

So if you're asking a lawyer, accountant, or adviser if something is over the line, maybe it's time to step back from the line. Remember that going right up to the edge of a rule or searching for some ambiguity in the text or a footnote may not be consistent with the law or its purpose.

Again, think about the spirit of the law. It's about protecting investors.

Accountability

The next principle is accountability.

Accountability - whether individual or institutional - is an important part of the SEC's enforcement agenda.

We'll use all of the tools in our toolkit to investigate wrongdoing and hold bad actors accountable - including administrative bars, penalties, injunctions, or undertakings, where appropriate. We'll be prepared to litigate or seek a robust finding of facts if we settle. The public benefits, and justice benefits, from the robust finding of facts.

It instills confidence in our financial markets when bad actors are held accountable. Moving efficiently and bringing bad actors to justice promotes confidence in our system.

Remedies, such as penalties and admissions, need to be carefully calibrated to have a specific and general deterrent effect. We need to leverage prophylactic remedies - like bars and injunctions - that protect investors from future harm.

When it comes to accountability, few acts rival admissions of misconduct by wrongdoers. When appropriate, and when the conduct warrants it, we may seek admissions in certain cases where heightened accountability and acceptance of responsibility are in the public interest.

High-Impact Cases

Next, I'll turn to high-impact cases.

Unfortunately, I've learned in my first six months here that there are all too many fraudsters, penny stock scammers, Ponzi scheme architects, and pump-and-dump cons taking advantage of investors. We have to protect the public from as many of these scams as possible.

We will continue to pursue misconduct wherever we find it. That will include the hard cases, the novel cases, and, yes, the high-impact cases - whether in special purpose acquisition companies; cyber; crypto; or private funds; whether accounting fraud, insider trading, or recordkeeping violations. I know, recordkeeping violations might come as a surprise. While these may not grab the headlines, the underlying obligations are essential to market integrity, particularly given technological developments.

A cop on the beat has to balance both the high-impact cases and the everyday fraudsters. A high-impact case pulls many other actors back from the line.

This prompts legal alerts, client letters, and bulletins to go out. Compliance departments, lawyers, and accountants change internal procedures as well.

Such high-impact cases are important. They change behavior. They send a message to the rest of the market, to participants of various sizes, that certain misconduct will not be permitted.

Some market participants may call this "regulation by enforcement."

I just call it "enforcement."  

Process

Next, I wanted to share some thoughts on process.

There are a few process matters I've emphasized to our Divisions of Enforcement and Examinations, which make up half of the remarkable SEC staff.

Timeliness

First, I think we should focus on bringing matters to resolution swiftly.

As the old legal saying goes, justice delayed is justice denied.

The defense bar often makes a strategic decision to burn clock. Memories fade; following evidentiary trails can get more difficult. I understand the bar's incentives, but we at the SEC have a different mission to fulfill.

Thus, I've asked staff to cut back on meetings with entities that want to discuss arguments in their Wells submissions.

I believe it's important for the people closest to these cases to be making decisions and eliminating unnecessary process. So if you request a meeting, please make it targeted.  Don't expect multiple, repetitive meetings on the same issues.

We've got precious resources, we need to move the docket, and we will be bringing cases expeditiously.

With respect to our Examinations Division, we expect registrants to produce materials and respond to requests promptly. An examination is not an enforcement action. Thus, firms should not use lengthy privilege reviews to delay responding to routine document requests. This would speed up the examination process for everybody.

Furthermore, responding to issues raised in an examination and curing any deficiencies is a good way to avoid possible enforcement action.

Other Law Enforcement Agencies

Next, I think we benefit from working in parallel with our fellow federal agencies, law enforcement authorities at the state level, international regulators, and self-regulatory organizations.

For example, last week, Deputy Attorney General Lisa Monaco announced changes to several Department of Justice (DOJ) policies regarding corporate criminal enforcement.[2]

Among the changes, DOJ has instructed prosecutors to consider a corporation's entire history of misconduct in making determinations about criminal charges and resolutions.

The agency also strengthened prior guidance that, to qualify for cooperation credit, corporations must provide the Department with all relevant facts relating to individuals responsible for the misconduct.

In addition, DOJ is considering whether resolutions such as non-prosecution and deferred-prosecution agreements are appropriate for certain recidivist companies.

While our organizations are independent, and our enforcement tools, authorities, and missions are distinct, these changes are broadly consistent with my view of how to handle corporate offenders.

Sourcing of Cases

Those other law enforcement agencies and self-regulatory organizations are a valuable source of cases for us.

Of course, our Enforcement staff themselves are a great source of cases. They're the ones closest to the market. They might read a news story, find something curious, and open up a case. They're the real cops on the beat. I can't thank them enough for their dedication to the public. 

There are also internal referrals from across our whole agency to the Enforcement Division. When it comes to enforcement referrals, I've asked Acting Director Dan Kahl of the Examinations Division and Director Gurbir Grewal of the Enforcement Division to evaluate existing practices and see how we can make improvements.

Moreover, we benefit greatly from the tips, complaints, and referrals of our robust whistleblower program. The program this year exceeded $1 billion in payouts since the passage of the Dodd-Frank Act in 2010.

Another source of cases is self-reporting. Look, if you mess up, and people do mess up sometimes, please, come talk to us. All things being equal, if you work cooperatively to bring wrongdoing to light, you fare better than if you try to mask it.

Cooperation - at least the type that gets credit - means more than meeting your legal requirements, such as responding to lawful subpoenas or making witnesses available for lawfully-compelled testimony. It means doing more than the bare minimum, like conducting a self-serving, independent investigation. It means taking steps that enhance our investigation, allow us to move quickly, and, if appropriate, help us to identify additional misconduct.

Positions of Trust

Before I close, I'd like to address the audience directly - those of you who are lawyers, auditors, accountants, bankers, and investment advisers. You all play an important role in our capital markets. Market participants rely on you for advice and counsel on a daily basis.

Within our securities laws, you are entrusted with certain responsibilities and take on certain obligations as well.

Thus, you occupy positions of trust. Though you represent your clients, you also have an important role in upholding the law, which protects investors and our markets.

You can often be the first lines of defense. That's particularly true when a client is getting close to crossing the line. I ask you to think about the economic realities, to think of the duck test, and not to help paper over the cracks.

In opening my remarks, I quoted Joseph Kennedy. But three months earlier, William O. Douglas, the future SEC Chair (and later a Supreme Court Justice), spoke to a roomful of lawyers, just like this one. (Well, maybe they were in person.)

Times were different. We were in the depths of the Great Depression. The '34 Act establishing the SEC had not yet been signed into law.

Douglas told the audience, "Service to the client has been the slogan of our profession. And it has been observed so religiously that service to the public interest has been sadly neglected."[3]

As with Kennedy, I find myself thinking that what Douglas said still rings so true.

You all have our own clients, to be sure. Working in a field such as finance that touches so many lives, though, you also have another responsibility: a responsibility to the public.

The public is the SEC's client. They're the ones I think of every morning when I go to work. I hope you do, too.

Thank you.

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[1] See https://www.sec.gov/news/speech/1934/072534kennedy.pdf.

[2] See https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-o-monaco-gives-keynote-address-abas-36th-national-institute.

[3] See https://www.sec.gov/news/speech/1934/042234douglas.pdf.

• Securities Industry Commentator
• Bill Singer