Securities Industry Commentator by Bill Singer Esq

SEC Obtains Final Judgment Against Kirk Sperry and Sperry and Sons Capital Investments, LLC in Offering Fraud (SEC Release)

Former CEO Of Real Estate Private Equity Investment Firm Sentenced To 5 Years In Prison For $58 Million Securities Fraud (DOJ Release)

Texas Man Sentenced to 12 Years in Prison for Defrauding Business Opportunity Buyers of More Than $5 Million (DOJ Release)

Two Iranian Nationals Indicted in Local Cryptojacking Case (DOJ Release)

Former Chief Financial Officer and Former Head of Corporate Communications of $21 Billion Biopharmaceutical Company Arrested for Insider Trading (DOJ Release)

SEC Charges Pharma CFO and Former Partner with Insider Trading (SEC Release)

SEC Charges Latvian Citizen With Digital Asset Fraud (SEC Release)

SEC Charges Two in Fraudulent Microcap Scheme (SEC Release)

Holding Foreign Companies Accountable Act Disclosure (SEC Release)

Remarks before the Investor Advisory Committee by SEC Chair Gary Gensler

Remarks before the Investor Advisory Committee by SEC Commissioner Hester M. Peirce

The European-Style Consolatory Cheek Kiss, the UBS Lawsuit, and the Certified Question (BrokeAndBroker.com Blog)

Did You Hear About The FINRA Arbitration Against Fidelity For Dental Pain and Suffering? (BrokeAndBroker.com Blog)

On December 1, 2021, the U.S. District Court for the Western District of Washington entered final judgment as to monetary relief against Washington resident Kirk Sperry and his company, Sperry and Sons Capital Investments, LLC, whom the SEC previously charged with defrauding investors by making false and misleading statements about a failing real estate investment project.

The final judgment finds Sperry and Sons liable for $125,000 in disgorgement, $34,480 in prejudgment interest, and a $125,000 civil penalty, for a total of $284,480, and Kirk Sperry liable for a $125,000 civil penalty.

The SEC's complaint, filed on September 9, 2020, [see Litigation Release No. 24889], alleged that Kirk Sperry and Sperry and Sons defrauded two investors by providing them with misleading statements regarding their investments, and that Sperry and Sons used part of the money received from the investors to pay back investors in unrelated Sperry and Sons projects.

Kirk Sperry and Sperry and Sons previously agreed to a bifurcated settlement, entered by the Court on May 5, 2021, [see Litigation Release No. 25090], whereby, without admitting or denying the SEC's allegations, the defendants consented to the entry of judgments that permanently enjoined them from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

MALLEY founded MG Capital Management L.P. ("MG Capital") in approximately January 2013, and served as its chief executive officer and chief investment officer from that time until approximately December 2019.  During that time, MALLEY formed two real estate investment funds (collectively, "the Funds") - MG Capital Management Residential Fund III ("Fund III"), in approximately February 2014, and MG Capital Management Residential Fund IV ("Fund IV"), in approximately September 2017.

MALLEY promised, when soliciting investors and throughout the life of the Funds, that the Funds represented an opportunity to own an equity interest in hundreds of luxury income-producing properties across Manhattan, following a debt-free investment strategy purportedly informed by sophisticated proprietary analytics that MALLEY had developed over the course of his career in real estate.  MALLEY touted two purportedly extremely successful prior funds he had formed, Fund I and Fund II; assured investors that the Funds would be and were debt-free; and represented that the properties held by the Funds would be and were leased primarily to corporate tenants, including, among others, well known technology companies and a prominent university based in New York City with which Malley had pre-existing agreements.  But MALLEY's representations were false.  Funds I and II did not exist.  The Funds were not debt-free, but instead held mortgaged properties. The properties that made up the Funds were almost entirely leased to individual, not corporate, tenants.  Malley did not have the corporate relationships or pre-existing agreements he touted.  The Funds held far fewer properties than MALLEY had represented.  And although Malley promised the investments were fully protected from loss, they were not.

MALLEY induced approximately 335 investors to invest a total of approximately $58 million in the Funds through these and other fraudulent misrepresentations.  The Funds together incurred millions of dollars in losses and are currently being liquidated.

From December 2015 through November 2020, Weinstein and his conspirators, Vijay Reddy and Kevin Brown, advertised business opportunities for sale on various websites. They purported to sell "blocks" of contracts with medical providers who allegedly wanted to outsource their medical billing, collections, appeals, answering, credentialing, or transcription functions. The buyers would then provide the contracted services to the medical providers and earn a profit. The conspirators promised to deliver a specified number of providers and pledged that their proprietary marketing efforts would provide a guaranteed client base to the buyers.

To induce buyers to purchase the business opportunities, the conspirators created fake references purporting to be buyers who vouched for their prior business purchases from the conspirators. In fact, the references were Weinstein, Reddy, and their friends and family members, and they used aliases and disguised phone numbers to speak with potential buyers.

After agreeing to purchase the blocks of medical providers, victims entered contracts with companies represented by Weinstein or Reddy and wired down payments ranging from $15,000 to $240,000 to accounts controlled by Weinstein or Brown. The remainder of each purchase price was payable when the conspirators fulfilled the contract by delivering the agreed-upon number of providers.

After receiving the down payments, Weinstein and Reddy typically delivered to each victim only a small number of medical providers. Despite not fulfilling the contracts of any of the buyers identified by law enforcement, the conspirators continued to sell blocks of medical providers to new buyers and refused to provide refunds for their failures to satisfy the terms of the contracts. The conspirators also periodically sold batches of previously signed contracts and disclaimed further responsibility for those contracts to insulate themselves from complaints or legal action from disgruntled buyers.

Brown acted as the business broker for most of the transactions and received a commission for the sales he brokered. Reddy or Weinstein acted as the seller and signed the contracts with the victims. Approximately 90 victims sent more than $5 million to accounts controlled by the defendants. The defendants spent the victims' money on personal expenses, including a travel, jewelry, real estate, a wedding and a college education, and other business investments.

Cryptojacking is when cyber criminals fraudulently gain access to a victim's device to use its computing power to generate or "mine" cryptocurrency. Computing power is needed for a virtual master ledger that uses complicated algorithms to verify and record cryptocurrency transactions. Individuals or groups can dedicate their computer power and be rewarded with cryptocurrency.

According to court documents, both defendants conspired to victimize a technology company in St. Charles, Missouri by fraudulently gaining access and using the company's account on a cloud service. By misrepresenting themselves through the victim company's account, the defendants fraudulently authorized the cloud service provider to build and install at least five new computer servers in the cloud. The purpose of the new servers was to run and operate software programs to generate cryptocurrency.

The fraud came to light when the victim company received a bill of more than $760,000 from the cloud service provider related to the use of fraudulent servers.

In the first scheme, the complaint alleges that, from January 2018 through March 2018, Auzins fraudulently offered and sold unregistered digital tokens as part of an ICO of Denaro, a purported "multi-currency debit card platform." Specifically, the complaint alleges that Auzins falsely claimed Denaro enabled users to store their digital assets in a secure digital wallet and then spend them "like any other debit card" which could be provided by a credit card issuer. In fact, the complaint alleges, all of the claimed products or services being offered were fictitious, including the relationship with the credit card issuer. Finally, the complaint alleges that Auzins misappropriated all of the ICO's proceeds.

In the second scheme, the complaint alleges that, from April 2019 to July 2019, Auzins fraudulently offered the unregistered securities of Innovamine, which purportedly offered a cloud mining program.  According to the complaint, Auzins claimed that investors could contribute digital assets to Innovamine, and then the company would perform mining activities and provide investors with a daily "automatic payout . . . in whichever coin they mine." The complaint alleges that these promises were untrue, and that Auzins misappropriated nearly all of the funds raised in the offering.      

We are adopting amendments to finalize interim final rules that revised Forms 20- F, 40-F, 10-K, and N-CSR to implement the disclosure and submission requirements of the Holding Foreign Companies Accountable Act ("HFCA Act"). The final amendments apply to registrants that the Securities and Exchange Commission ("Commission") identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the Public Company Accounting Oversight Board ("PCAOB") is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. Consistent with the HFCA Act, the amendments require the submission of documentation to the Commission establishing that such a registrant is not owned or controlled by a governmental entity in that foreign jurisdiction and also require disclosure in a foreign issuer's annual report regarding the audit arrangements of, and governmental influence on, such registrants.

Thank you. It's good to be back with the Investor Advisory Committee again. As is customary, I will note that my views are my own, and I'm not speaking on behalf of my fellow Commissioners or the staff.

I'd like to thank the members for volunteering their time to provide us with advice. In addition to the important work you're doing, I understand you'll be announcing today a new Subcommittee on Disclosure. That's a great addition to the fold.

Since the SEC's founding in the Great Depression, we've been requiring disclosure of important information from companies.

The basic bargain is this: Investors get to decide what risks they wish to take. Companies that are raising money from the public have an obligation to share full and fair information with investors on a regular basis. Investors also are protected against fraud. There's a reason President Roosevelt called the '33 Act the "Truth in Securities" law.

Over the intervening decades, there have been many enhancements to those disclosures. Each change has been with an eye to our three part mission - investors, capital formation, and that which is in the middle, the efficiency of capital allocation.

Today, we have a number of projects related to how we can update disclosure regimes for modern markets.

This is about investors. Today, investors increasingly want to understand the climate and cybersecurity risks, as well as the human capital, of the companies whose stock they own or might buy. Large and small investors, representing literally tens of trillions of dollars, are looking for consistent, comparable, and decision-useful disclosures in these areas to determine whether to invest, sell, or make a voting decision one way or another.

I look forward to hearing from your new Subcommittee on those areas.

Today, I understand that you'll be holding panel discussions on the crypto markets and the importance of protecting senior investors, as well as also making recommendations with respect to Individual Retirement Accounts.

I can't stress how important it is to continue to protect older investors and those who are trusting their retirement savings to our markets. We at the SEC take that obligation seriously, and it gets to the heart of our work. I look forward to the readouts from all these conversations.

As to the crypto markets, I'd like to share a few thoughts.

First, Satoshi Nakamoto's "Bitcoin Whitepaper"[1] and the crypto markets that followed have been catalysts for change. This innovation challenged some early financial technologies: money and ledgers. It also has challenged incumbent business models of trading, lending, and collectibles, as well as the official sector.

Second, with a $2.6 trillion aggregate market capitalization and more than 100 tokens purportedly with market capitalizations each more than $1 billion,[2] this is an asset class that belongs inside public policy frameworks of looking after investors, guarding against illicit activity, and protecting our financial stability.

Third, unfortunately, this asset class is rife with fraud, scams, and abuse in certain applications. There's a great deal of hype and spin about crypto assets and crypto projects. In many cases, investors aren't able to get rigorous, balanced, and complete information on tokens or trading and lending platforms.

Fourth, right now, we just don't have enough investor protection in crypto. The American public is buying, selling, and lending crypto on trading, lending, and decentralized finance (DeFi) platforms, where there are significant gaps in investor protection.

This leaves markets open to manipulation. This leaves investors vulnerable. If we don't address these issues, I worry a lot of people will be hurt.

Fifth, many of these tokens are offered and sold as securities. There's actually a lot of clarity on that front. In the 1930s, Congress established the definition of a security, which included about 20 items, like stock, bonds, and notes.

One of the items is an investment contract. I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight.

A typical trading platform has more than 50 tokens on it. While each token's legal status depends on its own facts and circumstances, the probability is quite remote, with 50 or 100 tokens, that any given platform has zero securities.

Make no mistake: To the extent that there are securities on these trading platforms, under our laws they have to register with the Commission unless they meet an exemption.

Make no mistake: If a lending platform is offering securities, it also falls into SEC jurisdiction.

Sixth, it's best not to wait for a big spill on aisle three - the crypto aisle, with all its tokens, trading and lending going on - to clean up the investor protection issues.

Thus, I'd like to ask anybody who may be operating crypto platforms or issuing crypto tokens, please, come in and talk to the staff at the SEC. To the extent there are challenges about how to register or come into compliance, we'd like to hear what those are. The staff is standing by, ready to better understand if any bespoke adjustments may be appropriate. At the same time, investors should receive the same protections they receive in other asset classes.

For those who want to encourage innovations in crypto, I'd like to note that financial innovations throughout history don't long thrive outside of our public policy frameworks. If this field is going to continue, or reach any of its potential to be a catalyst for change, we'd better bring it into public policy frameworks.

I'll close with that. Thank you.

[1] See http://satoshinakamoto.me/whitepaper/.

[2] See https://coinmarketcap.com/.

• Securities Industry Commentator
• Bill Singer