Securities Industry Commentator by Bill Singer Esq

After the SEC's PAUSE, We're Left Wondering Why (BrokeAndBroker.com Blog)

Robert Lenard Booth Convicted Of Defrauding Investors Of Nearly $2 Million /Jury Convicts Robert Lenard Booth for Conspiracies to Commit Securities Fraud, Wire Fraud, and Money Laundering (DOJ Release)

SEC Charges Promoters of "Automated Cryptocurrency Fund" with Fraud and Registration Violations (SEC Release)

SEC Charges Brazilian Mining Company with Misleading Investors about Safety Prior to Deadly Dam Collapse / Since 2016, Vale manipulated safety audits and obtained fraudulent stability certificates (SEC Release)

Founders Of Fake "Hedge Fund" Plead Guilty To Federal Charges For Orchestrating A $4 Million Ponzi Scheme (DOJ Release)

Four Charged in Connection with Multibillion-Dollar Collapse of Archegos Capital Management / Sung Kook (Bill) Hwang -- the Founder and Head of Archegos -- and Three Others Charged with Racketeering and Fraud Offenses Related to Market Manipulation Scheme (DOJ Release)

SEC Charges Archegos and its Founder with Massive Market Manipulation Scheme / Multiple Archegos Executives Charged with Misleading Counterparties (SEC Release)

CFTC Charges Archegos Capital Management and Three Employees with Scheme to Defraud Resulting in Swap Counterparty Losses Over $10 Billion / Two Archegos Employees Admit Roles in Fraud and Are Cooperating (CFTC Release)

SEC: Washington State Based Real Estate Investment Funds Managers Defrauded Investors for More Than a Decade (SEC Release)

SEC Awards Over $500,000 to Whistleblower Claimant

Order Determining Whistleblower Award Claims

Two Keene Residents Charged In Superseding Indictment With Additional Charges Related to Virtual Currency Exchange Business (DOJ Release)

FINRA Censures and Fines Berthel, Fisher For Unsuitable Options Recommendations

In the Matter of Berthel, Fisher & Co. Financial Services Inc., Respondent (FINRA AWC)

FINRA Arbitration Panel Awards $500,000 in Damages in New York Life Insurance Company Age Discrimination Lawsuit

In the Matter of the Arbitration Between George Fayezishk, Claimant, v. Richard Paul Simonetti and New York Life Insurance Company, Respondents (FINRA Arbitration Award)

Pro Se Customer Sues Robinhood But Fails To Show For Round One of FINRA Arbitration (BrokeAndBroker.com Blog)

Who Opened What Type of Account Becomes a Dilemma in E*Trade Federal Court Motion (BrokeAndBroker.com Blog)

From at least June 2019 through August 2021, BOOTH ran, and conspired with others to run, a boiler room operation that impersonated Manhattan-based brokerage firms and sold investors nearly $2 million in securities that they never received. To deceive investors, BOOTH and his co-conspirators created fake identities and false and misleading webpages, email addresses, and phone numbers. On phone calls with investors, BOOTH and others pretended to be licensed brokers, lied, and used high-pressure tactics to pitch stocks for American companies. They followed up by sending the victims false paperwork to confirm the alleged stock purchases and trades.

The victims were directed to wire payments -- sometimes hundreds of thousands of dollars -- to shell company accounts in New York, Hong Kong, and Singapore. The funds were laundered and distributed to BOOTH and his co-conspirators.

The SEC alleges that the San Francisco-based Block Bits entities, Dillman and Mata raised almost $1 million from over 20 investors based on misrepresentations about an automated digital asset trading bot that was never functional. Dillman also falsely claimed that the fund's assets were invested in purported risk-free "cold storage" deals, when in reality Dillman and Mata used the funds for high-risk loans and to invest in the AML Bitcoin initial coin offering, which the Commission has alleged was a fraudulent unregistered securities offering in SEC v. NAC Foundation, LLC, et al., N.D. Cal. case no. 3:20-cv-04188, filed June 25, 2020.

The Securities and Exchange Commission today charged Vale S.A., a publicly traded Brazilian mining company and one of the world's largest iron ore producers, with making false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. The collapse killed 270 people, caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale's market capitalization. 

According to the SEC's complaint, beginning in 2016, Vale manipulated multiple dam safety audits; obtained numerous fraudulent stability certificates; and regularly misled local governments, communities, and investors about the safety of the Brumadinho dam through its environmental, social, and governance (ESG) disclosures. The SEC's complaint also alleges that, for years, Vale knew that the Brumadinho dam, which was built to contain potentially toxic byproducts from mining operations, did not meet internationally-recognized standards for dam safety. However, Vale's public Sustainability Reports and other public filings fraudulently assured investors that the company adhered to the "strictest international practices" in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.  

[F]rom October 2020 to December 2021, Page and Teague engaged in an investment scheme that defrauded hundreds of investors, some of whom were at or near retirement age, of more than $4 million. Court documents show that the defendants falsely represented to victims that Page and Teague were running a hedge fund in Kings Mountain, N.C., D&T Investment Group (D&T), that invested in various securities, including stock of well-known companies like Apple. Contrary to representations made to victim investors, D&T was not a hedge fund and it did not hold any securities licenses or registrations. Also, Page and Teague were not licensed to sell securities and did not have a background associated with the sale of securities. In fact, prior to orchestrating the investment scheme the defendants sold campers.

According to court documents and admissions made in court, Page and Teague required investors to sign, among other documents, an investment contract with D&T. These documents contained false information, including that D&T would guarantee 100% of the investors' initial investment, and that investors would receive 70% of the trading profits. In reality, the investors' money was not guaranteed, and the purported "profits" investors received were Ponzi-style payments, whereby the defendants used new investors' money to make payments to existing investors. To cover up the fraud, Page and Teague sent victim investors monthly statements that reflected fictitious trading gains. When certain investors and D&T employees began to question the legitimacy of D&T's operations, Page created fictitious screenshots of various financial accounts that reflected inflated D&T account balances. For example, Page created a fake screenshot of a D&T brokerage account that reflected a balance of over $16,000,000, when in reality the account had a balance of less than $7.00. 

Contrary to representations made to victims, their money was not generally invested in securities. In addition to making Ponzi payments to investors, a significant portion of the funds was used to pay excessive salaries and other compensation to D&T employees, including to members of Page's family. For example, Page paid several D&T employees annual salaries of over $100,000 and also paid certain employees several thousand dollars each for getting the D&T company logo tattooed on their bodies. The defendants also squandered victims' money on personal expenses such as clothing, jewelry, travel, luxury car rentals, and to make cash withdrawals.

On December 2, 2021, as the fraudulent scheme was collapsing, the defendants traveled to Italy. On the same day, Page informed D&T employees, who did not know that D&T was a fraud, that they would be closing the company. The pair was arrested on New Year's Eve at JFK Airport in New York upon their voluntary return to the United States.

Sung Kook (Bill) Hwang is the founder and owner of Archegos Capital Management and its related business entities, which are collectively known as Archegos. As alleged, Hwang, along with Patrick Halligan, Scott Becker and William Tomita lied to banks to obtain billions of dollars that they then used to artificially inflate the stock price of a number of publicly traded companies.

Hwang and his co-conspirators invested in stocks mostly through special contracts with banks and brokers called "swaps." As alleged, these swaps allowed Hwang to cause massive buying of certain stocks, including at carefully selected days and times, to artificially pump up stock prices. Hwang, Halligan and their co-conspirators lied to banks and used a series of manipulative trading techniques to keep those prices high and prevent them from falling. This led to inflation of these stock prices. In one year, Hwang turned a $1.5 billion portfolio and fraudulently pumped it up into a $35 billion portfolio.

Last year, when the prices fell, Hwang's positions were sold off and he could no longer manipulate the prices, and billions of dollars of capital evaporated nearly overnight.

As alleged, the defendants committed this fraud in secret. Since 2014, Hwang has run Archegos as a private hedge fund or "family office," meaning that Archegos, unlike other large hedge funds, was not required to tell regulators information about its holdings and debt that might have shined a light on the fraud and allowed the crisis to be averted.

And because Hwang traded mostly through swaps, he was able to do the buying alleged in the indictment without anyone knowing that Archegos was actually behind all the trading. Regular market participants, and even the companies themselves, were duped into thinking the price increases were caused by the normal interplay of supply and demand when, instead, as alleged, they were the artificial result of Hwang's manipulative trading.

For example, as alleged, by March 24, 2021, Hwang effectively controlled more than 50% of the freely trading shares of Viacom - and no one outside of Archegos knew about it - not investors purchasing Viacom in the market, or the executives at Viacom itself, or even the banks and brokerages who held the stock as part of the swaps. Because, as alleged, by using various banks and brokerages for his swaps, Hwang made sure that no single institution would have any idea that he was behind all of this trading.

The indictment further alleges that in order to get the billions of dollars Archegos needed to sustain this market manipulation scheme, Hwang and his co-conspirators lied to and misled some of Wall Street's leading banks about how big Archegos's investments had become, how much cash Archegos had on hand and the nature of the stocks that Archegos held. As alleged, they told those lies so that the banks would have no idea what Archegos was really up to, how risky the portfolio was, and what would happen if the market turned.

As alleged, just over a year ago, the market turned and the stock prices Hwang and his co-conspirators had artificially inflated crashed, causing immense damage to U.S. financial markets and ordinary investors. In a matter of days, the companies at the center of Archegos's trading scheme lost more than $100 billion in market capitalization, Archegos owed billions of dollars more than it had on hand, and Archegos collapsed. Market participants who purchased the relevant stocks at artificial prices lost the value they believed their investments held, the banks lost billions of dollars, and Archegos employees, many of whom were required to invest 25% or more of their bonuses with Archegos as deferred compensation, lost millions of dollars.

[F]rom at least March 2020 to March 2021, Hwang purchased on margin billions of dollars of total return swaps. These security-based swaps allow investors to take on huge positions in equity securities of companies by posting limited funds up front. As alleged, Hwang frequently entered into certain of these swaps without any economic purpose other than to artificially and dramatically drive up the prices of the various companies' securities, which induced other investors to purchase those securities at inflated prices. As a result of Hwang's trading, Archegos allegedly underwent a period of rapid growth, increasing in value from approximately $1.5 billion with $10 billion in exposure in March 2020 to a value of more than $36 billion with $160 billion in exposure at its peak in March 2021.

The complaint also alleges that, as part of the scheme, Archegos repeatedly and deliberately misled many of Archegos's counterparties about Archegos's exposure, concentration and liquidity, in order to get increased trading capacity so that Archegos could continue buying swaps in its most concentrated positions, thereby driving up the price of those stocks.  Ultimately in March 2021, price declines in Archegos's most concentrated positions allegedly triggered significant margin calls that Archegos was unable to meet, and Archegos's subsequent default and collapse resulted in billions of dollars in credit losses among Archegos's counterparties.

The complaint against Archegos and Halligan alleges that from March 2020 to March 2021, Archegos and others acting on its behalf repeatedly misrepresented material facts or omitted material facts relevant to assessing the risk of Archegos Fund's portfolio, including the size of its largest positions, aggregate gross exposure, amount of unencumbered cash, and liquidity. The complaint further alleges that Halligan aided and abetted Archegos' fraud by directing Archegos employees to misrepresent or omit certain of these material facts. 

To hedge the market risk associated with its long portfolio, Archegos Fund entered into short swaps with a total notional value of tens of billions of dollars referencing broad-based exchange-traded funds and broad-based custom baskets of securities. The complaint alleges that these short broad-based swaps were also critical to inducing Archegos Fund's swap counterparties to allow Archegos Fund to continue to build on its highly leveraged, concentrated, and illiquid long positions.

As an example of the defendants' numerous misrepresentations, the complaint alleges that Archegos and other employees repeatedly and consistently misrepresented to swap counterparties the size of Archegos Fund's largest position. By March 2021, Archegos Fund's largest position was approximately 70% of the fund's net asset value, yet Archegos, at Halligan's direction, misrepresented during that time that the fund's largest position was only 35% of its net asset value. Archegos also misrepresented to swap counterparties that Archegos Fund's portfolio was more liquid than it really was. By misrepresenting the size of Archegos Fund's largest position and the overall liquidity of Archegos Fund's portfolio, the defendants misrepresented that Archegos Fund's portfolio was materially less concentrated (and hence materially less risky) than it actually was. 

During the week of March 22, 2021, virtually all of Archegos Fund's largest long positions sharply declined, triggering margin calls from its swap counterparties totaling over $13 billion. The margin calls far exceeded Archegos Fund's available cash, causing it to collapse, dismiss employees, and cease operations. The complaint alleges that during this week, Archegos made additional misrepresentations regarding Archegos Fund's financial state. 

Tomita and Becker Settlements

The CFTC's orders for Tomita and Becker find that each made numerous misrepresentations to Archegos Fund's swap counterparties in connection with the fraudulent scheme. Tomita and Becker admitted to engaging in the fraudulent scheme, including intentionally and/or recklessly providing false or misleading material information and failing to provide such material information to Archegos Fund's swap counterparties regarding, among other things, the size, composition, and liquidity of positions in Archegos Fund's entire portfolio across financial institutions. 

[R]oss C. Miles, 72, of La Center, Washington and his business partner Maureen T. Wile, 70, of Vancouver, Washington fraudulently raised some $15.5 million from investors by claiming that the money raised would be used to purchase real estate receivables, such as mortgages and trust deeds secured by real property. According to the complaint, the defendants also falsely represented that interest payments to investors would come primarily from the interest generated by the receivables and the profits made when the receivables were sold. However, as alleged in the complaint, the defendants never disclosed to investors that the investment funds they managed were insolvent and that they had improperly commingled money among the funds, and used new investor money to make payments to other fund investors in Ponzi-like fashion.

In addition, the complaint alleges that Miles and Wile misappropriated fund assets by making unauthorized payments to themselves and parties related to them, which were reflected as loans in the funds' accounting records. But many of the purported loans allegedly lacked basic documentation such as loan agreements, payment terms and interest rates, and violated the funds' own underwriting standards. About $8.7 million of this money transferred to related parties remains unpaid and owed to the funds.

[W]e have determined that it would be in the public interest and consistent with the protection of investors for the Commission to exercise our discretionary authority under Section 36(a) of the Exchange Act to waive the TCR filing requirements of Rules 21F-9(a) and (b) as to the Claimant in light of the specific facts and circumstances present here. Specifically (1) Claimant filed a Redacted complaint against, inter alia, the Company with the Other Federal Agency that suggested a potential securities-law violation; (2) the Other Federal Agency referred that complaint to the Commission and Claimant knew that the Commission had received Claimant's information; (3) the Commission's Office of Market Intelligence generated a TCR based on the referral; and (4) Claimant made substantially the same allegations in a federal lawsuit Redacted. We do not, however, suggest in any way that a putative whistleblower is relieved of the requirement to file a Form TCR merely because they first report to another federal agency, and that agency provides the same information to the Commission.

[F]reeman, DiMezzo, and others operated a business that enabled customers to exchange fiat currency for virtual currency.  The superseding indictment alleges that the unlicensed business violated federal anti-money laundering laws and regulations.  Among other things, the superseding indictment alleges that the defendants opened bank accounts at financial institutions while deceiving financial institutions about the nature of the business being transacted through the accounts.  The superseding indictment alleges that some of the transactions conducted by Freeman facilitated the transfer of the proceeds of scams, such as "romance scams."

In August 2015, when reviewing a customer's request for approval to trade options in his brokerage account, Berthel Fisher failed to exercise due diligence to ascertain the customer's investment experience and knowledge, in violation of FINRA Rules 2360(b)(16)(B) and 2010. 

Between August 2015 and February 2018, Berthel Fisher, through Broker A, recommended options transactions to the same customer without having reasonable grounds for believing that the transactions were suitable for that customer. Through this conduct, Berthel Fisher violated FINRA Rules 2360(b)(19), 2111, and 2010. 

During the same period, Berthel Fisher failed to establish and maintain a supervisory system, including written procedures, reasonably designed to achieve compliance with FINRA's rules pertaining to the suitability of options trading in customer accounts. Berthel Fisher also failed to enforce multiple provisions of its written supervisory procedures pertaining to options trading. Through this conduct, Berthel Fisher violated FINRA Rules 2360(b)(20)(A), 3110(a), 3110(b), and 2010.

[B]ecame a Berthel Fisher customer by transferring his IRA from another broker-dealer where he had previously been Broker A's customer. At that time, Customer A was 71 years old and retired. His IRA was worth approximately $205,000. Since retiring in 2009, Customer A had taken $1,500 in monthly withdrawals from his IRA for current expenses and had occasionally withdrawn larger amounts to pay for other expenses. Social Security benefits were Customer A's only other source of income.

Between 2013 and 2015, Customer A's account holdings did not produce enough income or gains to offset his withdrawals. By August 2015, the account's value had declined to approximately $120,000 after taking withdrawals of approximately $73,000. Broker A recommended that Customer A begin trading options as a strategy to generate income. 

Broker A submitted an Options Approval Request form for Customer A's account to Berthel Fisher in August 2015 requesting approval to trade options at the Firm's "Level 2" option-trading level. The form indicated that Customer A had "good" knowledge of options and "moderate" experience trading several types of options. In fact, Customer A had little or no knowledge of, and zero experience with, options investing. The new-account form that Customer A had completed in 2012 stated that he did not have any experience trading options. Berthel Fisher approved the Options Approval Request. 

In total, the 28 unsuitable options transactions resulted in net losses of more than $31,000 in Customer A's account between August 2015 and February 2018.⁶The combined effect of investment losses and withdrawals resulted in Customer A's account declining 50% in the first six months after Berthel Fisher approved it for options trading. By January 2018, Customer A's account balance had declined to $17,008, which was more than $100,000 below its balance when Berthel Fisher approved Customer A's Options Approval Request and after receiving withdrawals of $42,200.⁷  

= = = = =

Footnote 6: This figure includes all premiums paid and received for the 28 option contracts, losses on securities purchased when put options Customer A wrote were exercised, and all associated transaction costs.

Footnote 7: In December 2018, Berthel Fisher agreed to a settlement with Customer A regarding the activity described here.

• Securities Industry Commentator
• Bill Singer