Securities Industry Commentator by Bill Singer Esq

Cryptocurrency Trader Pleads Guilty (DOJ Release)

CEO of Purported Global Biomedical Company Charged With Stealing Over $1 Million Of Victim's Money Through False Promises Of Investment Opportunities (DOJ Release)

International Hacking Group Members Sentenced for SIM Hijacking Conspiracy That Resulted in the Theft of Millions in Cryptocurrency (DOJ Release)

Individual Who Portrayed Himself as Experienced Stock Trader Pleads Guilty to Defrauding Investor / Defendant Solicited Investments, Then Stole the Money for Himself (DOJ Release)

Former South Bay Executive Sentenced to Nearly Three Years in Federal Prison for Insider Trading and Securities Fraud (DOJ Release)

Federal Court Orders California Forex Firm and Its Owners to Pay Over $4 Million for Pool Fraud and Registration Violations (CFTC Release)

SEC Staff Issues Accounting Guidance on "Spring-Loaded" Compensation Awards to Executives (SEC Release)

FINRA Sanctions Traderfield and Principal for Supervision of Excessive Trading and Complaint Reporting

In the Matter of Traderfield Securities,Inc. and Mario Divita, Respondents (FINRA AWC)

From November 2017 through April 2019, SPENCE solicited investors in various cryptocurrency investment pools that SPENCE had created and managed (the "Funds"). SPENCE solicited investments for several Funds, the largest and most active of which were the Coin Signals Bitmex Fund, a/k/a the "CS Mex Fund," the Coin Signals Alternative Fund, a/k/a the "CS Alt Fund," and the Coin Signals Long Term Fund. Investors who wanted to participate in a Fund would transfer cryptocurrency, such as Bitcoin and Ethereum, to SPENCE in order for SPENCE to invest it. 

SPENCE solicited these investments through false representations, including that SPENCE's crypto trading had been extremely profitable when, in fact, SPENCE's trading had been consistently unprofitable.  For example, on January 28, 2018, SPENCE posted a message in an online chat group falsely claiming that his trading of investor funds over the past month had generated a return of more than 148%. As a result of this misrepresentation, investors transferred additional funds to SPENCE. In fact, over that same period of approximately one month, SPENCE's trading resulted in net losses in the accounts in which he traded investor funds.

To forestall redemptions by investors, and to continue to raise money from investors to fund his scheme, SPENCE generated fictitious account balances, which he made available to investors online. Instead of accurately reporting the trading losses SPENCE was incurring, the account balances falsely indicated to investors that they were making money by investing with SPENCE. To hide his trading losses, SPENCE used new investor funds to pay back other investors in a Ponzi-like fashion. In total, SPENCE distributed cryptocurrency worth approximately $2 million to investors substantially from funds previously deposited by other investors. 

GRAY is the CEO of the Biomedical Company, which is headquartered and incorporated in Hamden, Connecticut.  In or about August 2020, GRAY induced Victim-1 to give him $250,000, supposedly as an equity investment in the Biomedical Company.  In reality, nearly all of the $250,000 was paid out to a company with no apparent affiliation with the Biomedical Company, and Victim-1 received no equity in the Biomedical Company. In the ensuing months, GRAY further solicited a total of approximately $1,200,000 from Victim-1, representing that he would invest those funds in deals involving the procurement of PPE for two major universities in the tristate area.  GRAY represented that the necessary contracts for those deals were in place and that the risk involved with those deals was "virtually zero."  In reality, the necessary contracts did not exist, and GRAY caused substantially all of Victim-1's funds to be spent on the Biomedical Company's general operating expenses, as well as products and services having nothing to do with the Biomedical Company or the procurement of personal protective equipment, including, for example, the cash purchase of an approximately $50,000 luxury SUV. 

As part of his scheme to fraudulently solicit funds from Victim-1, and as a means of dispelling Victim-1's concern that an investment with GRAY would require Victim-1 to forego the purchase of a home, GRAY offered Victim-1 a mortgage from the "Tranctus Group." GRAY claimed that "Tranctus Group" was a boutique mortgage company of which he was the sole investor. GRAY directed Victim-1 to his supposed mortgage broker "Benjamin Mabry."  In fact, "Benjamin Mabry" was a false persona invented by GRAY, and GRAY registered the internet domain associated with the "Tranctus Group" on the very same day that Victim-1 received a purported mortgage commitment letter from "Mabry."  Ultimately, Victim-1 received no return on Victim-1's investments, GRAY refused to return Victim-1's money to Victim-1, and the purported "Tranctus Group" mortgage failed to materialize.    

"SIM Hijacking" or "SIM Swapping" is an identity theft technique that exploits a common cyber-security weakness-mobile phone numbers. This tactic enabled The Community to gain control of victims' mobile phone number, resulting in the victims' phone calls and short message service (SMS) messages being routed to devices controlled by The Community. SIM Hijacking was often facilitated by bribing an employee of a mobile phone provider. Other times, SIM Hijacking was accomplished by a member of The Community contacting a mobile phone provider's customer service-posing as the victim-and requesting that the victim's phone number be swapped to a SIM card (and thus a mobile device) controlled by The Community.

Members of The Community engaged in Sim Hijacking to steal cryptocurrency from victims across the country, including California, Missouri, Michigan, Utah, Texas, New York and Illinois.  Cryptocurrencies, also known as virtual currencies or digital currencies, are online media of exchange. The most famous of these is Bitcoin. Like traditional currency, they act as a store of value and can be exchanged for goods and services. They can also be exchanged for dollars.

Once "The Community" had control of a victim's phone number, the phone number was leveraged as a gateway to gain control of online accounts such as a victim's email, cloud storage, and-ultimately-cryptocurrency exchange accounts. The Community would use their control of victims' phone numbers to reset passwords on online accounts and/or request two-factor authentication (2FA) codes that allowed them to bypass security measures. 

In total, The Community's scheme resulted the theft of tens of millions of dollars' worth of cryptocurrency. Individual victims lost cryptocurrency valued, at the time of theft, ranging from under $2,000 to over $5 million. The sentenced defendants were involved in total thefts ranging from approximately $50,000 to over $9 million.

The following defendants have been previously sentenced in the Eastern District of Michigan, all after pleading guilty:

Ricky Handschumacher, 28, of Pasco Country, Florida, was sentenced to 48 months in prison and ordered to pay restitution in the amount of $7,681,570.03.

Colton Jurisic, 22, of Dubuque, Iowa was sentenced to 42 months in prison and ordered to pay restitution in the amount of $9,517,129.29.

Reyad Gafar Abbas, 22, of Charleston, South Carolina, was sentenced to 24 months in prison and ordered to pay restitution in the amount of $310,791.90

Two defendants charged in the indictment were previously sentenced in other courts.  Conor Freeman, 22, of Dublin, Ireland, pleaded guilty to parallel charges in Ireland and was sentenced to three years in prison by an Irish court. Ryan Stevenson, 29, of West Haven, Connecticut, pleaded guilty and was sentenced to probation in the District of Connecticut. Both of these defendants were also ordered to pay restitution. 

Between approximately April 2015 and May 2017, Ortiz falsely represented himself to an investor (the "Victim") as a successful investment adviser who had made profits for other individuals by trading stocks on their behalf.  Ortiz convinced the Victim to allow him to invest the Victim's money, promising significant returns.  Based on those misrepresentations, the Victim made successive investments with Ortiz over a period of years.  During this time, Ortiz falsely told the Victim that the investments were profitable and sent the Victim a false account statement to support these claims.  In reality, Ortiz made poor trading decisions that resulted in the loss of a portion of the Victim's money, and also stole some of the Victim's money for himself, siphoning off portions of the investments to pay for personal expenses including clothing, food and car payments.  Ortiz controlled nearly $600,000 of the Victim's money, stole approximately $224,500 for himself and lost a significant amount of the Victim's money to unprofitable trades. 

Loman was a vice president of finance and the corporate controller for OSI Systems Inc., a publicly traded security, health care and electronics manufacturing company, from 2006 until 2018. In these roles, Loman had advance knowledge of OSI's revenue and earnings and, as corporate controller, was responsible for compiling and internally reporting the company's confidential financial results.

In December 2015, Loman received confidential information that OSI was financially underperforming and would fall far short of its earnings and revenue forecast for its second quarter of its fiscal year 2016. Acting on this information in December 2015, Loman purchased a series of options contracts with the intent of profiting when OSI's stock price fell.

On January 27, 2016, OSI announced its disappointing second-quarter earnings, and lowered its sales and earnings guidance for the remainder of its fiscal year. On the day of this announcement, OSI shares plunged approximately 30 percent in value from their previous closing day price. As a result, Loman gained approximately $355,000 in illegal profits from this scheme.

In March 2016, Loman misused nonpublic information by purchasing stock of American Science & Engineering Inc., a Billerica, Massachusetts-based manufacturer of security screening equipment that OSI had targeted for acquisition. Once OSI publicly announced in June 2016 its agreement to acquire AS&E, Loman immediately sold his shares in AS&E and made approximately $120,000 in illegal gains. In September 2016, OSI formally acquired AS&E for approximately $270 million.

Loman made a total of approximately $475,000 in illicit gains through this scheme. 

The order requires Capson and Sarkar to pay civil monetary penalties of $250,000 and $166,000, respectively. In addition, they and their company, Denari, are required to pay restitution of $3,663,282 to victims of their scheme. The order also imposes a permanent injunction prohibiting the defendants from further violations of the Commodity Exchange Act and CFTC regulations, as charged, permanent registration bans, and five-year trading bans.

Case Background

The order finds that from at least August 2012 to December 2019, the defendants fraudulently solicited participants to invest with Denari, misrepresenting the past profitability of Denari's forex trading. The order also finds the defendants issued false account statements to participants that misrepresented the profitability of their respective interests in the pool; failed to receive pool funds in the pool's name; improperly commingled pool funds; and failed to provide required commodity pool disclosures. Further, the order finds the defendants failed to register with the CFTC as required. The order also finds that Capson made false representations to NFA during an examination conducted on July 15, 2019, when he told NFA representatives that Denari had been trading forex with proprietary funds since 2015, and that Denari did not trade forex for third parties until 2019.

The order appoints Kathy Bazoian Phelps as Permanent Receiver for Denari, to collect and distribute restitution. Phelps has collected and distributed more than $700,000 of funds and more than $2.5 million of securities to satisfy allowed participant claims. However, the CFTC continues to caution victims that restitution orders may not always result in the recovery of money lost, because wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure wrongdoers are held accountable.

Spring-loaded awards are share-based compensation arrangements where a company grants stock options or other awards shortly before it announces market-moving information such as an earnings release with better-than-expected results or the disclosure of a significant transaction.

According to Staff Accounting Bulletin (SAB) No. 120 prepared by the SEC's Office of the Chief Accountant and the Division of Corporation Finance, non-routine spring-loaded grants merit particular scrutiny by those responsible for compensation and financial reporting governance at public companies.

SEC staff believes that as companies measure compensation actually paid to executives, they must consider the impact that the material nonpublic information will have upon release.

In other words, companies should not grant spring-loaded awards under any mistaken belief that they do not have to reflect any of the additional value conveyed to the recipients from the anticipated announcement of material information when recognizing compensation cost for the awards.

Between December 2016 and June 2018, Traderfield failed to establish and maintain a supervisory system, including WSPs, reasonably designed to identify and prevent excessive trading. For example, the WSPs listed designated supervisors for certain representatives at the firm, hut did not list a designated supervisor for all representatives, including Broker A. The WSPs tasked supervisors with reviewing trade blotters, account statements. exception reports. and commission reports to monitor for excessive trading. but did not explain how to identify such trading or how supervisors should respond to such trading. Additionally. Traderfield's supervisors did not review exception reports. as required by the WSPs. in the exercise of their supervisory obligations.

. . .

Between December 2016 and June 2018, Traderfield failed to reasonably supervise Broker A, who was excessively trading his customers' accounts. Between December 2016 and May 2017, the WSPs did not designate a supervisor for Broker A, and no supervisor was reviewing Broker A's trading activity for excessive trading. Although the firm's WSPs still did not designate a supervisor for Broker A, Divita began directly supervising Broker A in September 2017. However, between September 2017 and June 2018. Divita failed to reasonably supervise Broker A. 

Divita did not take reasonable steps to monitor for excessive trading in Broker A's customer accounts. Although Divita knew that Broker A's customers were responsible for a large volume of trades at the firm, Divita did not review exception reports for potential excessive trading. Instead Divita reviewed daily trade reports and simply focused on trading volume. Divita failed to monitor the losses in Broker A's customer accounts, which were significant. Although Divita reviewed certain commission information, he failed to recognize Broker A's high commissions as a red flag. Further, Divita did not consider costs when reviewing Broker A's trading activity and did not consider, or even understand, turnover rates and cost-to-equity ratios.

Traderfield's and Divita's failure to supervise Broker A permitted his excessive trading in Customer accounts to continue. Broker A's trading in l6 customer accounts resulted in annualized turnover ratios ranging from seven to 40, and annualized cost-to-equity ratios ranging from 27% to 173%. Traderfield and Divita did not investigate or otherwise respond reasonably to these red lags of excessive trading. Broker A's trading in the 16 accounts, which was inconsistent with these customers' investment needs and objectives, caused them to be charged a total of $451,057 in commissions and incur a total of $538,057 in losses. 

. . .

Between June 2017 and April 2018, Traderfield failed to comply with its reporting obligations under FINRA Rule 4530. The firm failed to report to FINRA statistical and summary information regarding five customer complaints pertaining to Broker A's trading activity in accounts that were excessively traded. The complaints pertained to commissions charged, account losses, and alleged unauthorized trading. . . .  

• Securities Industry Commentator
• Bill Singer