Securities Industry Commentator by Bill Singer Esq

SEC Obtains Emergency Relief to Halt Pre-IPO Stock Fraud Scheme by Unregistered Broker-Dealer / Defendants, including persons barred from the brokerage industry, allegedly sold shares they didn't own, and pocketed more than $75 million (SEC Release)

January 2021 Short Squeeze Trading Litigation (Order, United States District Court for the Southern District of Florida, 21-MD-02989 / May 13, 2022)

Man Pleads Guilty to Multimillion Dollar Tax Fraud Scheme Involving Professional Athletes and PPP Loan Fraud (DOJ Release)

CEO Of Private Equity Fund Sentenced To 97 Months For $133 Million Bank And Securities Fraud Scheme (DOJ Release)

Maryland Man Sentenced to 37 Months in Prison for Stealing Over $120,000 From Bank Customer Accounts / Bank Detected Fraud Before Even More Money Was Stolen (DOJ Release)

CEO Of Cryptocurrency And Forex Trading Platform Charged With Fraudulent Scheme Involving Over $59 Million (DOJ Release)

CFTC Charges Long Island Resident and His Firm in Ongoing $59 Million Fraud Scheme (CFTC Release)

CFTC Settles Enforcement Action Against Kraft and Mondelēz (CFTC Release)

FINRA Censures and Fines Firm for Belated Private Placement Filings

In the Matter of Spire Securities, LLC, Respondent (FINRA AWC)

FINRA Censures and Fines Firm for OBA, PST, and FinCEN Issues

In the Matter of Roselaine Securities LLC, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Two OBAs

In the Matter of  Patrick Richard Daley, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Excessive Trading

In the Matter of Ian P. Lowrey, Respondent (FINRA AWC)

[T]he defendants, running an unregistered broker-dealer with a vast network of sales agents, raised at least $410 million from more than 2,200 investors from November 2017 through February 2022.  The SEC also alleges that the defendants repeatedly told investors that each investment would be kept separate and that they were charging no upfront fees, but the defendants freely commingled investor funds, paid themselves more than $75 million, and paid their sales agents nearly $48 million from illegal, undisclosed markups on the pre-IPO shares that were, in some cases, as high as 100 percent.  The SEC alleges that a share deficit exists of at least $14 million across the funds.  The defendants also allegedly concealed from investors that two of the three founders, Castillero and Lanaia, ran the funds despite being barred from the brokerage industry.  When SEC staff sought copies of the emails sent by the defendants' sales agents during its investigation, rather than producing them, Castillero and Martinsen allegedly deleted them from their servers and texted that "an a***hole regulator would have a field day" with a particular e-mail.

The Amended Complaint is Plaintiffs' third attempt at pleading an antitrust conspiracy claim arising from the January 2021 short squeeze. The Court dismissed Plaintiffs' Corrected Consolidated Class Action Complaint (the "CCAC") last fall, giving Plaintiffs the opportunity to amend. (See generally Nov. 17, 2021 Order [ECF No. 438]). They did so. What has changed with the latest pleading? Not much.

The CCAC described a wide-ranging conspiracy purportedly orchestrated by a market maker and involving over a dozen Defendants, including introducing brokerages, self-clearing brokerages, and clearinghouses. Plaintiffs alleged the market maker, Citadel Securities, pressured the other Defendants to halt trading in certain stocks that had undergone rapid and historic price increases due to a retail trading frenzy. According to Plaintiffs, Citadel Securities held significant short positions in the affected stocks, rendering it especially vulnerable to the retail-induced short squeeze.

Plaintiffs adequately pleaded parallel conduct among the Defendants. But there were no additional factual allegations supporting a plausible inference of a conspiracy - except for references to a few vague and ambiguous emails that were exchanged between a brokerage, Robinhood, and its market maker, Citadel Securities. The Court dismissed the CCAC in its entirety because a few questionable emails between two firms in an otherwise lawful business relationship were not enough to support a plausible inference of an unlawful conspiracy. 

This third time around, Plaintiffs only allege collusion between Robinhood and Citadel Securities; they have dropped every other Defendant from the suit. While Plaintiffs profess to have bolstered their factual allegations as to Robinhood and Citadel Securities, the allegations of conspiracy are in substance the same and thus inadequate. In addition, Plaintiffs fail to plausibly allege an unreasonable restraint of trade because their garbled market theory does not conform to the alleged facts. The Court explains. 

[Q]uin Ngoc Rudin, 45, a convicted felon, was the Secretary, Director and Chief Financial Officer of Mana Tax Services, which purported to be a tax preparation business in the Los Angeles area. Rudin engaged in a conspiracy to commit two sets of fraud schemes using Mana Tax.

First, from May of 2019 through his arrest in December of 2021, Rudin and his co-conspirators prepared and filed with the IRS a series of false and fraudulent income tax returns on behalf of at least nine professional athletes that reported fabricated business and personal losses in order to get large refunds to which they were not entitled. Rudin and the co-conspirators represented to the professional athletes that Rudin was knowledgeable and experienced in the preparation of tax returns. Rudin represented that Mana Tax could obtain large refunds for the athletes and that he had specialized knowledge that their prior CPAs and tax professionals did not have. Not only did Rudin assist in the preparation of original tax returns for his professional athlete clients, but he also filed amended tax returns for past years to correct what he falsely characterized as "errors" made by the athletes' previous accountants. Mana Tax then charged the athletes a fee of 30% of whatever amount of tax refunds the IRS issued. As a result of Rudin's scheme to defraud the United States, the IRS paid refunds to the athletes totaling millions of dollars.

For his second scheme, from April of 2020 through December of 2021, Rudin and his co-conspirators assisted small businesses in applying for PPP loans, a federal loans initiative designed to help businesses pay their employees and meet their expenses during the COVID-19 pandemic, in exchange for a 30% fee. Additionally, Rudin and his co-conspirators prepared fraudulent PPP loans for business entities that the co-conspirators controlled. In order to obtain the fraudulent PPP loans, Rudin and his co-conspirators grossly inflated the number of employees and monthly payroll costs claimed on the applications. Some of the businesses were not eligible for any PPP loan funds at all because they did not have any payroll expenses. Rudin and his co-conspirators obtained millions of dollars in fraudulently obtained PPP loans.

The conspirators also submitted fabricated tax returns in support of the PPP loan applications. Some of the business owners never saw their loan applications before Mana Tax filed them. To conceal the 30% fee obtained from the business owners, Rudin and his co-conspirators directed the businesses to pay the fee with cashier's checks and to note falsely on the memo lines of the checks that the funds were related to payroll. 

The total actual losses for the tax fraud and PPP loan fraud are between $25 million and $65 million.

From at least in or about January 2019 through at least in or about March 2021, ELLIOT SMERLING was the mastermind of a scheme to secure financing for a series of private equity funds (the "Funds") through fraud and deceit.  SMERLING solicited and obtained loans totaling approximately $133 million on behalf of the Funds, which were secured by purported capital commitments made by limited partners in the Funds.  SMERLING obtained the loans on the basis of falsified documents and material misrepresentations, including:  (1) a forged audit letter, purportedly prepared by an international network of accounting, audit, tax, and professional services firms, attesting to audited financial statements; (2) forged subscription agreements that falsely represented, among other things, that the investment fund of a private university based in New York, New York had committed $45 million to the Funds, and that the investment management division of a banking and financial services firm headquartered in New York, New York had committed $40 million to the Funds; and (3) falsified bank records showing wire transfers from purported limited partners to the Funds.  

In connection with his bank fraud scheme, from at least in or about January 2013 through at least in or about March 2021, SMERLING also solicited investments in his Funds through materially false and misleading statements concerning the Funds' audited financial statements, limited partners, capital commitments, and holdings.

[D]rummond admitted to orchestrating a scheme that was carried out in 2017 in which Drummond recruited bank employees who would make unauthorized withdrawals from Wells Fargo customer accounts.  The bank employees used the bank's internal systems to check the account balances of customers without the customer's knowledge.  Those employees then told Drummond the customer's name and account balance. 

Drummond then sent another accomplice into the bank to pose as the customer and to withdraw the funds, unbeknownst to the actual customer.  The conspirators used this scheme to steal $124,000 in cash and an $80,000 cashier's check from two of the bank's customers.  Although Wells Fargo was able to detect the theft and stop payment of the $80,000 cashier's check, Wells Fargo incurred losses on behalf of its customers for the $124,000 in cash that Drummond and others stole. 

Another conspirator, Tiara Langston, 30, of Upper Marlboro, Maryland, entered a guilty plea in November 2020 to related charges and was sentenced in March 2021 to a 15-month prison term.

From in or about September 2021, up to and including in or about May 2022, ALEXANDRE, operated EminiFX, Inc. ("EminiFX"), a purported investment platform that ALEXANDRE founded, and for which he solicited more than $59 million in investments from hundreds of individual investors. ALEXANDRE marketed EminiFX as an investment platform through which investors would earn passive income through automated investments in cryptocurrency and foreign exchange ("FOREX") trading. ALEXANDRE offered his investors "guaranteed" high investment returns using new technology that he claimed was secret. Specifically, ALEXANDRE falsely represented to investors that they would double their money within five months of investing by earning a 5% weekly return on their investment using a "Robo-Advisor Assisted account" to conduct trading. ALEXANDRE referred to this technology as his "trade secret" and refused to tell investors what the technology was. Each week EminiFX's website falsely represented to investors that they had earned at least 5% on their investment, which they could withdraw or re-invest.

In truth and in fact, and as ALEXANDRE well knew, EminiFX did not earn 5% weekly returns for its investors. ALEXANDRE did not even invest the vast majority of investor funds entrusted to him, and ALEXANDRE sustained over $6 million in losses on the limited portion of funds that he did invest, which he did not disclose to his investors. Instead of using investors' funds as he had promised, ALEXANDRE misdirected at least approximately $14,700,000 to his personal bank account and failed to invest the vast majority of the investors' funds. For example, ALEXANDRE used $155,000 in investor funds to purchase a BMW car for himself and spent an additional $13,000 of investor funds on car payments, including to Mercedes Benz. 

The complaint alleges that since at least September 2021 to the present, the defendants solicited and accepted at least $59 million from hundreds of people to purportedly trade forex and cryptocurrencies, as well as futures and options, in an investment club. The defendants guaranteed customers returns of 5% per week. In fact, the defendants' used only approximately $9 million of customers' funds to trade forex and cryptocurrency in an account in Alexandre's name. Alexandre lost nearly 70% of that amount -approximately $6.2 million-through unprofitable trading and fees.

The complaint alleges the defendants also misappropriated substantial amounts of the remaining customer money by sending it to accounts in Alexandre's name, using it to pay other customers in a Ponzi-like scheme, and using it for Alexandre's personal expenses. For example, Alexandre used participant funds to make payments to BMW, Mercedes Benz, and Saks Fifth Avenue. Payments were also made for flights, luxury hotels, clothing, and occupational and physical therapy. Alexandre also used substantial participant funds to rent and furnish office space for EminiFX and to host "galas" on behalf of EminiFX, which the defendants used to solicit additional contributions from participants.

From February 2018 through September 2019, Spire Securities failed to make timely filings with FINRA related to eight private offerings that it sold. For the eight private offerings, Spire Securities made the required regulatory filings an average of 88 days late, or 103 days after the first sale of the offerings. 

Therefore, Spire Securities violated FINRA Rules 5123 and 2010.

From July 2015 to September 2021 , the firm failed to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with FINRA Rules 3270 and 3280. The firm maintained written procedures requiring its representatives to provide written notice to certain designated principals prior to engaging in OBAs or PSTs. However, the firm's written procedures unreasonably failed to identify anyone to whom the designated principals were required to disclose their own OBAs or PSTs. 

During 2015 and 2016, the firm received oral notice from one of the designated principals regarding his PSTs. In April 2019 and March 2020, the firm received oral notice that another designated principal was engaging in OBAs. However, the firm did not promptly follow up to obtain further detail or written submissions regarding these OBAs and PSTs in order to evaluate whether they presented any conflicts with firm business, involved customers, or presented any additional issues. Indeed, the firm did not follow up until May 2020, after it received inquiries about the OBAs and PSTs from FINRA. 

Therefore, the firm violated FINRA Rules 3110 and 2010. 

. . .

Treasury Department regulations implementing the Bank Secrecy Act allow law

enforcement agencies to provide FinCEN with notices identifying individuals suspected

of engaging in money laundering and terrorist financing. FinCEN regularly requests

information concerning such individuals from financial institutions.

Under BSA regulation 31 C.F.R. § 1010.520, financial institutions are required to

expeditiously search their records to determine whether they maintain or have maintained any account for, or have engaged in any transaction with, each individual, entity, or organization named in the 314(a) requests they receive from FinCEN, and report any positive matches to FinCEN within 14 days. Specifically, financial institutions are required to compare the names of the individuals listed in the 314(a) requests with their records of accounts for the past 12 months and transactions for the past six months. 

From July 2015 to June 2021 , the firm failed to search its records in response to any FinCEN 314(a) Lists. 

Therefore, the firm violated FINRA Rules 3310 and 2010. 

In April 2019, Respondent became an owner and board member of a meat processing company. Respondent orally informed the firm that he had invested in a meat processing company. However, he did not disclose that he served on the company's board and made strategic business decisions with the other owners in areas such as hiring and equipment purchasing. 

Additionally, in March 2020, Respondent became an owner of a real estate investment company, in partnership with other owners. Respondent orally informed the firm that he had invested in the company but did not disclose that he engaged in management activity for it, including by participating in strategic business decisions. Respondent did not provide any written notice to the firm of the activities described above, neither of which involved firm customers, until September 2021 , after the firm received inquiries about these activities from FINRA. 

Therefore, Respondent violated FINRA Rules 3270 and 2010. 

From April 2017 through October 2019, Lowrey engaged in quantitatively unsuitable trading in two customer accounts. Lowrey recommended high frequency trading in the two customer accounts. Lowrey's customers routinely followed his recommendations and, as a result, Lowrey exercised de facto control over the two customers' accounts. Lowrey's trading resulted in high turnover rates and cost-to-equity ratios as well as significant losses, as set forth below.

1. From April 2017 to October 2019, Lowrey effected 56 transactions in Customer A's account, resulting in an annualized turnover rate of 11.09 and an annualized cost-to-equity ratio of 49%. Lowrey's trading in Customer A's account generated total trading costs of $23,680, including $19,845 in commissions, and caused $38,891 in realized losses.

2. From November 2017 to March 2019, Lowrey effected 48 transactions in Customer B's account, resulting in an annualized turnover rate of 26.39 and an annualized cost-to-equity ratio of 162%. Lowrey's trading in Customer B's account generated total trading costs of $31,356, including $28,271 in commissions, and caused $64,362 in realized losses. 

Lowrey's trading in these two customers' accounts was excessive and unsuitable given the customers' investment profiles. As a result of Lowrey's excessive trading, the customers suffered collective realized losses of $103,253 while paying total trading costs of $55,036, including commissions of $48,116. 

Therefore, Lowrey violated FINRA Rules 2111 and 2010.

• Securities Industry Commentator
• Bill Singer