Securities Industry Commentator by Bill Singer Esq

FINRA Arbitrators Award Over $2 Million In Disputed Customer Transfer and Asset Purchase Agreement (BrokeAndBroker.com Blog)

Former Cantor Fitzgerald Trader Sues Over Wrongful Termination Involving Child Care Leave (BrokeAndBroker.com Blog)

SEC Proposes Rules on Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure by Public Companies (SEC Release)

SEC Obtains Final Judgment Against Operator of Fraudulent Digital Asset Trading Fund (SEC Release)

FINRA Fines Deutsche Bank Securities, Inc. $2 Million For Best Execution Violations (FINRA Release)

Report on FINRA's Examination and Risk Monitoring Program / A Comprehensive Reference Item for Firms (FINRA Unscripted)

SEC Orders $3.5 Million Whistleblower Awards for Claimant

Order Determining Whistleblower Award Claims

Owners and Operators of Online Cryptocurrency Companies Indicted for Defrauding Investors / Defendants Allegedly Stole Over $40 Million in Investor Funds and Obstructed Justice (DOJ Release)

CFTC Charges Four Operators for $44 Million Bitcoin Ponzi and Misappropriation Schemes (CFTC Release)

Statement of Commissioner Dawn D. Stump Regarding Enforcement Action Relating to Bitcoin Fraud

Owner of Rust Rare Coin Sentenced to 19 Years in Prison for Running Fraudulent Silver Trading Program (DOJ Release)

John Barksdale Charged With Cryptocurrency Securities Fraud In Connection With Sale Of Ormeus Coin / Through False Representations, BARKSDALE's Company Ormeus Global Raised at Least $70 Million From More Than 8,000 Investors Around the World (DOJ Release)

SEC Charges Siblings in $124 Million Crypto Fraud Operation that included Misleading Roadshows, YouTube Videos (SEC Release)

New York Man Sentenced to Four Years in Prison for Role in Bank Fraud (DOJ Release)

North Carolina Man Charged with Wire Fraud, Securities Fraud, and Money Laundering in Connection with Ponzi Scheme (DOJ Release)

SEC Charges Previously-Barred Investment Adviser with Fraud (SEC Release)

According to the SEC's complaint, filed on December 22, 2020, Qin, through entities he controlled, defrauded investors in the Sigma Fund and an affiliated fund by making material misrepresentations about the funds' investment strategies, assets, performance, and financial condition. At one point, Qin claimed in SEC filings that the funds had assets in excess of $90 million. The SEC's complaint alleged that Qin was actively attempting to misappropriate or improperly divert millions of dollars of investor assets at the time the SEC filed its action, and the SEC obtained an asset freeze on December 23, 2020, followed by a preliminary injunction on January 6, 2021. On January 21, 2021, the Court appointed a receiver over the entity defendants previously controlled by Qin to locate, marshal, and distribute assets belonging to investors in the investment funds.

In a parallel criminal action filed February 4, 2021 by the United States Attorney's Office for the Southern District of New York, Qin pleaded guilty to one count of criminal securities fraud and was sentenced to 7.5 years in prison and ordered to pay $54,793,532 in criminal forfeiture.

In the SEC's action, Qin consented to the entry of the final judgment that permanently enjoins him from violating 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, and orders him to pay disgorgement of $36,352,028 and prejudgment interest of $3,494,791. These amounts are deemed satisfied by the order of forfeiture entered against Qin in the parallel criminal action.

On March 4, 2022, the SEC ordered in settled follow-on administrative proceedings pursuant to Section 203(f) of the Investment Advisers Act of 1940 that Qin is barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization.

During January 2014-May 2019, the relevant period, Deutsche Bank Securities owned and operated an alternative trading system (ATS) known as SuperX. When routing customer orders to exchanges through its smart order router, the firm routed its customers' marketable orders to SuperX before routing any part of the order to an exchange, unless customers opted out of this routing preference. This preference was known as the "SuperX ping."

The SuperX ping, however, created an inherent delay for orders that were not fully executed in the firm's ATS. This delay subjected orders to potentially lower fill rates. In fact, the firm's best execution committee reviewed reports that showed lower fill rates in SuperX than orders routed to the exchanges. Despite this information, Deutsche Bank Securities did not modify its routing arrangement. In addition, the firm did not reasonably consider how price improvement for SuperX ping orders compared to price improvement opportunities for orders routed directly to exchanges.

Similarly, when routing customers' orders to dark pools, Deutsche Bank Securities routed more orders to SuperX than any other dark pool during some of the period. The firm, however, failed to consider alternate routing arrangements even though, according to the firm's own dark pool ranking model, other dark pools consistently ranked higher than SuperX for execution quality.

In addition, Deutsche Bank Securities' supervisory system was not reasonably designed to achieve compliance with its best execution obligation because the firm failed to reasonably review certain factors set forth in the rule. The firm's supervisory procedures also failed to provide reasonable guidance on how the firm should conduct its reviews or circumstances in which the firm should consider modifying its routing practices.

Deutsche Bank Securities also failed to disclose material aspects of its relationship with the markets to which it routed orders in its quarterly reports filed under Rule 606 of Regulation NMS. The firm's reports contained non-specific disclosures that the firm could receive trading rebates but did not disclose any details regarding the payment, such as amounts per share or per order.

"Best execution of customer orders is one of FINRA's core focus areas, and we closely monitor and review member firms' compliance with this important component of investor protection and market integrity," said Stephanie Dumont, Executive Vice President, Market Regulation and Transparency Services, whose department's referral led to the enforcement action.

FINRA has included best execution as a topic in its 2022 and 2021 Report(s) on FINRA's Examination and Risk Monitoring Program, as well as its 2020 and 2019 Annual Risk Monitoring and Examination Priorities letters. 

In settling this matter, Deutsche Bank Securities consented to the entry of FINRA's findings without admitting or denying them.

In February, FINRA issued its second Report on FINRA's Examination and Risk Monitoring program, a comprehensive document that combines elements of what used to be the annual Priorities Letter and the Examination Findings Report. The report can serve as a reference document, addressing more than 20 topics of interest for firms and regulators from Regulation Best Interest and Form CRS to cybersecurity and mobile apps. 

On this episode, J Koutros, vice president of risk monitoring standards, Joe Sheirer, vice president of the examination program, and Steve Polansky, senior director of special initiatives, join us to talk about the report, some key highlights and how firms can use this extensive document. . . .

should deny the award claims of three other claimants who did not contest the preliminary determinations. Accordingly, the preliminary determinations for those claimants have become the Final Order of the Commission with respect to those claimants pursuant to Exchange Act Rule 21F-10(f), 17 C.F.R. § 240.21F-10(f). In addition, OWB preliminarily denied the award claim of a fifth claimant pursuant to the Summary Disposition process under Rule 21F-18, which was not contested. 

Claimant provided information that significantly contributed to the success of the Covered Action, including providing new information that caused Commission staff to further investigate certain potential securities violations that were included in the Covered Action. Claimant's information saved Commission time and resources and helped advance settlement discussions.  

[B]etween April 2017 and August 2017, Golden, Aggesen, and Egerton, together with others, operated a series of web-based virtual currency companies known as EmpowerCoin, ECoinPlus and Jet-Coin.  The websites for EmpowerCoin, ECoinPlus and Jet-Coin fraudulently promised investors and potential investors guaranteed fix returns on virtual currency investments.  They falsely promised investors and potential investors that these returns were made possible through overseas virtual currency trading operations.  Investors and potential investors were encouraged to invest in the companies with either cash or Bitcoin.  In reality, the assets were used to repay other investors or simply stolen, including by Golden, Aggesen and Egerton.  Golden maintained exclusive access to the Bitcoin and often siphoned Bitcoin funds off the top before paying any investors.  The companies collapsed shortly after receiving the investors' assets, without having engaged in trading activity.  In total, EmpowerCoin, ECoinPlus and Jet-Coin received more than $40 million from investors. 

The indictment further alleges that, from July 2017 to the present, Golden, Aggesen and White conspired to obstruct a Federal Trade Commission ("FTC") investigation and a federal criminal grand jury investigation into the fraudulent schemes.  Golden, Aggesen and White allegedly destroyed evidence, and White, on Aggesen's behalf, provided false and misleading information to the FTC and in response to a federal grand jury subpoena. 

[G]olden, Patel, and Egerton operated the websites Empowercoin and Ecoinplus, through which they fraudulently solicited individuals of more than $23 million of bitcoin. The complaint also alleges that Golden, Patel, Aggesen, and an accomplice, operated the website JetCoin, through which they fraudulently solicited individuals of more than $21 million of bitcoin. According to the complaint, the websites all promised customers that professionals would trade their bitcoin and they guaranteed that the resulting profits would be paid daily. In reality, the complaint states, the customers' bitcoin were either misappropriated by the defendants and their accomplice or used to make supposed profit payments to other customers that were Ponzi payments. The complaint alleges that Golden, Patel and Egerton misappropriated approximately $9.8 million worth of bitcoin received through the Empowercoin and Ecoinplus websites. The complaint also alleges that Golden, Patel, Aggesen and their accomplice misappropriated approximately $7.8 million worth of bitcoin received through the JetCoin website.

The CFTC's Complaint in this matter[1] is based on a charge of defrauding customers with respect to purported trading of Bitcoin in violation of the anti-fraud provisions of the Commodity Exchange Act and the CFTC's rules.

I write separately (as I have before[2]) to ensure the public is not misled to believe that the CFTC regulates cash or "spot" transactions in Bitcoin or other digital assets.  It does not.  The CFTC does not regulate Bitcoin (or any other cash digital asset transactions). 

Because this point seems to be confused from time to time, I want to be very clear that the CFTC regulates derivatives (e.g., futures contracts, options, swaps) associated with underlying commodities, but not the underlying commodities themselves.  In other words, the CFTC regulates futures on Bitcoin because Bitcoin is a commodity - but the CFTC does not regulate Bitcoin itself (much like the CFTC regulates cattle futures because cattle are commodities, but it does not regulate the sale of cattle at auction barns throughout the country).

While the CFTC does not regulate cash commodities, it does have authority to prosecute enforcement actions in cases of fraud or manipulation involving cash commodities - including Bitcoin (as here).  That is, where cash commodities are concerned, anti-fraud and anti-manipulation enforcement authority (as opposed to day-to-day regulatory oversight) is bestowed upon the CFTC as a tool to assist in its primary function of regulating derivatives products, such as futures.  However, the CFTC is not in the business of regulating Bitcoin transactions or the individuals or entities that buy, sell, trade, transfer, or store Bitcoin.

As a result, those who seek to trade Bitcoin cannot rely upon the protections afforded by CFTC regulation and oversight.  The CFTC should be very clear about that so as not to give the public a false sense of security that when they engage in cash transactions involving Bitcoin or other digital assets, they enjoy the protection of CFTC regulatory oversight.  They do not. 

If the CFTC is to fulfill its customer protection mission, it must make this clear whenever it takes enforcement action involving digital assets:  The CFTC does not regulate cash or spot transactions involving digital assets such as Bitcoin (or any other cash commodity), or those who buy, sell, or engage in activities relating to digital assets (or any other cash commodity). 

= = =

[1] CFTC v. Dwayne Golden, Jatin Patel, Marquis Demarking Egerton a/k/a Mardy Eger a/k/a Mardy Egerton, and Gregory Aggesen (E.D.N.Y. filed March 8, 2022).

[2] See Concurring Statement of Commissioner Dawn D. Stump Regarding Enforcement Action Against Coinbase, Inc. (March 19, 2021), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement031921.

[R]ust admitted that he was the owner and operator of Rust Rare Coin, Inc. (RRC) in Utah, from 2002 until 2018, and that he had previously worked as the manager of the business. Rust admitted that beginning in 2008, he began a scheme to defraud investors by inducing them to invest in RRC's fraudulent "silver trading program." However, Rust's "silver trading program" operated as a Ponzi scheme. Rust admitted to selling investments in the fraudulent program to approximately 500 investors located throughout the United States in amounts totaling $225 million dollars. Rust admitted that he paid out money from later investors to earlier investors to create the impression that his "silver trading program" was profitable and to keep the scheme operating. 

Rust carried out the fraudulent scheme by explaining to victims that RRC's silver trading program was a lucrative investment that involved the buying and selling of actual silver bullion; that 100% of investor funds would be used to buy actual silver; that all the silver bullion purchased would be stored at Brinks Global Services in Salt Lake City or Los Angeles; and, that RRC was storing almost $80 million dollars of silver bullion at Brinks. 

Rust further told investors that all of the silver trades were conducted through an RRC account at HSBC Bank; that profit generated in trades would be used to repurchase a larger amount of silver at a lower price, thereby continually increasing the amount of silver for investors; and, that by using algorithms, the silver trading program had never experienced a losing month, much less a losing year, and that the worst year had generated a 12 percent return, and that the average rate of return was 20 percent to 25 percent per year.

However, Rust had little to no silver stored at Brinks; Rust had not stored silver bullion at Brinks since 2016, and no meaningful investor funds were ever used to purchase silver bullion during the scheme; RRC had no mechanism to generate meaningful returns on silver trading; and HSBC Bank had never maintained an account on behalf of RRC. Rust diverted nearly all investor funds to other businesses, personal uses, and to making payments to previous investors. Rust also admitted that in January of 2016, he opened three personal accounts at Zions bank and used these accounts to launder approximately $18 million dollars from the fraudulent trading scheme. 

From in or about 2017 through at least in or about October 2021, BARKSDALE and his relative ("CC-1") perpetrated a scheme to sell Ormeus Coin, an ERC-20 compliant smart contract-based token on the Ethereum blockchain, through false representations.  Ormeus Coin was offered to investors throughout the world, including in the United States and the Southern District of New York, through enrollment packages sold by Ormeus Global, a multi-level marketing company controlled by BARKSDALE and CC-1, various digital currency exchanges, and directly from BARKSDALE and his associates.

Through a series of white papers, in-person roadshows, online webinars and videos, social media platforms, and other marketing materials approved by BARKSDALE and CC-1, BARKSDALE and CC-1 falsely represented, among other things, that Ormeus Coin was a digital money system secured by a $250 million cryptocurrency mining operation, which would have been one of the largest such operations in the world.  In order to backstop the false representations regarding the size and value of cryptocurrency mining assets that purportedly secured the value of Ormeus Coin, BARKSDALE, among other things: (i) approved marketing materials that falsely depicted photos of a purported Ormeus Coin mining facility; (ii) deceptively referenced an "Ormeus Reserve Vault" ("ORV") that stored over 3,000 Bitcoin purportedly derived from Ormeus Coin's mining operations, which was represented as securing the value of Ormeus Coin; and (iii) falsely stated that Ormeus Coin's mining revenues exceeded $5 million on a monthly basis.  For example, on or about February 9, 2018, Ormeus Coin ran an advertisement on a jumbotron in Times Square in Manhattan, New York, which proclaimed, in a caption above a giant ORME symbol, "$250 Million Cryptocurrency Mining Farm Revealed in Legal Audit by Ormeus Coin."  On or about February 12, 2018, a photograph of the Times Square advertisement was posted to Ormeus Global's Twitter account with the caption "Live from New York City, Ormeus Coin Advertising its $250 million Cryptocurrency Mining Farm in Times Square, Manhattan!"  In truth, Ormeus's mining operations never approached a value close to $250 million and never produced revenues exceeding one million dollars in any month, and the Bitcoin stored in the "Ormeus Reserve Vault" belonged to a third party.

Numerous investors purchased enrollment packages through Ormeus Global and purchased Ormeus Coin through digital currency exchanges or directly from BARKSDALE and his associates.  Investors made these purchases based at least in part on BARKSDALE's false representations regarding the size, value, and purported profitability of the cryptocurrency mining assets controlled by Ormeus Global and Ormeus Coin, as well as the purported security that the ORV provided to the value of Ormeus Coin.  Through this scheme, from in or about June 2017 through at least in or about April 2018, Ormeus Global raised at least approximately $70 million from the sale of enrollment packages to more than 8,000 investors around the world.  From in or about June 2017 through at least in or about October 2021, Ormeus Coin was sold to at least approximately 12,000 investors, including at least 200 U.S.-based investors.  At its peak, Ormeus Coin had a market capitalization of approximately $52 million in or about January 2018.

[F]rom June 2017 through the present, the Barksdales offered and sold Ormeus Coin to investors on crypto trading platforms. In addition, from June 2017 to April 2018, through a multi-level marketing business called Ormeus Global, the Barksdales offered and sold subscription packages that included Ormeus Coin and an investment in a crypto trading program. As alleged, to promote the offerings, John Barksdale held roadshows around the world while he and his sister, Tina, led the production of social media posts, YouTube videos, press releases, and other promotional materials. The complaint alleges that at the events, in the produced materials, and currently on Ormeus Coin's website, the defendants falsely claimed that Ormeus Coin was supported by one of the largest crypto mining operations in the world, even though they abandoned their mining operations in 2019 after generating less than $3 million in total mining revenue.  As alleged, in many of these investor communications, the defendants falsely stated that Ormeus Coin had a $250 million crypto mining operation and was producing $5.4 million to $8 million per month in mining revenues.

According to the complaint, to preserve the fiction that Ormeus Coin was successfully mining crypto, the Barksdales arranged for a public website to display a wallet of an unrelated third party showing more than $190 million in assets as of November 2021, even though the Ormeus wallets were worth less than $500,000. The complaint also alleges that the Barksdales manipulated Ormeus Coin's price and misused millions of dollars of investor funds for personal expenses. 

From August 2016 through August 2017, Melhado conspired with Jamere Hill-Birdsong, of Camden, and others, to defraud a Mount Laurel, New Jersey, bank. Hill-Birdsong worked inside the banks's call center and recruited other call center employees to participate in the scheme by stealing the identities and account information of customers who called into the bank's call center.

The conspirator bank employees would then take photographs or screenshots of the bank customers' account information and signatures and would send that information to Hill-Birdsong and Melhado. The conspirators then had phony identification documents made in the names of the bank customers, and used various runners to go into bank branches and make unauthorized cash withdrawals. The conspirators also used the stolen identity information to conduct unauthorized online transfers of monies from the customer's accounts. Hill-Birdsong was indicted in March 2021 on conspiracy to commit bank fraud, bank fraud and aggravated identity theft; those charges remain pending. The charges and allegations contained in the indictment against Hill-Birdson are merely accusations, and the defendant is presumed innocent unless and until proven guilty.

Starting in 2014, Schamens fraudulently solicited investments in various entities he controlled, including TD Trading LLC, TFG Trading LLC, TradeStream Analytics LTD, Tradedesk Financial Group Inc. and others, under the promise of annual rates of return of 12 percent to 30 percent. In 2019, Schamens began to solicit investment in Tradestream Algo Fund, an algorithm-based trading pool that he claimed to have developed. In each instance, Schamens directed investors to wire funds directly or to transfer portions of their Individual Retirement Accounts (IRAs) to bank accounts he controlled.

Once invested, Schamens often moved victim funds through several different bank accounts before he ultimately used the funds for some non-investment related purpose.  Schamens took several steps to keep his customers' trust, including: sending false account statements; posting false monthly account statements to his companies' websites showing balances for trading accounts that did not exist; and sending false tax documents reporting earnings that did not exist.

Schamens allegedly misappropriated at least $6.8 million from at least 25 different individuals, using some of that money to repay earlier investors in the manner of a Ponzi scheme, and to pay for his personal expenses, including the purchase of a house, payments for a luxury car, and other personal expenses.

[S]tarting in approximately February 2019, David W. Schamens solicited investments in a purported pooled investment vehicle that would invest in pre-selected stocks, which would then be "auto-traded" by a proprietary algorithm. However, rather than using investor funds to engage in any type of trading, Schamens allegedly used the overwhelming majority of the money for personal expenses and to repay previous investors seeking redemptions.

The complaint also alleges that Schamens provided investors with fictitious monthly statements showing returns at times exceeding 80 percent and that he sought to conceal his actions by presenting investors with a phony audit letter verifying transactions and balances in the fund.  The complaint, filed in the U.S. District Court for the District of New Jersey, charges Schamens with violating antifraud provisions of the federal securities laws. The SEC seeks a permanent injunction, disgorgement, and penalties against Schamens.

"This is not the first time that David Schamens has been charged by the SEC for misconduct and serves as a good reminder for investors to research potential advisers," said Richard R. Best, Director of the SEC's New York Regional Office. "Before entrusting someone with managing your money, investors should visit Investor.gov where they can vet potential advisers."

In 1992, the SEC charged Schamens for, among other things, misappropriating investor funds. As part of the settled charges, he was barred from association with any broker, dealer, municipal securities dealer, investment adviser, or investment company.

• Securities Industry Commentator
• Bill Singer