The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

September 19, 2022







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September 19, 2022

https://www.brokeandbroker.com/6673/sec-owb-oig/
The SEC's Office of Inspector General issued a scathing investigative report about the SEC's former Ombudsman. What's set out in the OIG report is just another sordid example of piss-poor management whereby large government bureaucracies are run by folks lacking the ability to effectively manage their agencies. The allegations of misconduct at the SEC's Office of the Ombudsman from 2017 through 2020 during the tenure of former SEC Chair Jay Clayton are disconcerting enough; however, in 2022, we now wrestle with SEC Chair Gary Gensler's lack of disclosure to Congress about OIG's investigative findings during his September 15, 2022, Senate Banking Committee testimony. Gensler's omission is all the more troubling because the former SEC Ombudsman had presented misleading information in four Annual Reports to the Congress. 

https://www.sec.gov/news/speech/gensler-remarks-iilp-roundtable-091522

Good afternoon. It is my pleasure to welcome you to today's event with the Institute for Inclusion in the Legal Profession (IILP). My thanks to Sandra Yamate and the entire IILP team for the invitation to participate in this important event.

As is customary, I'd like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or Securities and Exchange Commission staff.

To me, the mission of the SEC relates directly to diversity, equity, and inclusion. We work every day to protect investors and facilitate capital formation across the spectrum of communities that make America strong, including underserved communities. With respect to the middle part of our mission-to maintain fair, orderly, and efficient markets-fairness literally is embedded in our mission.

In promoting fairness and efficiency, it is important that access to our more than $100 trillion capital markets is inclusive. It means that brokers and investment advisers provide services fairly and equitably. It means that entrepreneurs and companies of every size can tap into our capital markets to fund their ideas and innovations. It means that investors have access to the fair, full, and material information that they need to make informed investing decisions.

Diversity, equity, and inclusion are important not only to our agency's mission but also to our agency's makeup. The most important asset at the SEC is our remarkable staff. In recent years, we have made important gains to help ensure that the agency is a place where everyone on the staff can bring their whole selves to work, make their mark in public service, and rise in the profession, including into senior leadership.

We strive to be a model workplace at the SEC. That means tapping into the commitment of talented individuals of every background. We are dedicated to serving the American public, and we enhance that service when we draw upon every community across our nation.

Building upon earlier efforts, we have made progress with respect to diversity and representation among our senior management, advisory committees, and our Commissioners. We continue to implement our first-ever Diversity and Inclusion Strategic Plan, which the SEC published in 2020. In the near future, we will begin the planning process for the next Diversity and Inclusion Strategic Plan for fiscal years 2023-2025.

We want to make sure that career opportunities like internships are accessible for all. Therefore, we launched a paid internship program, and we have made efforts to ensure that these internships are available to all interested students, including those from underserved communities. We also have enhanced our inclusion-focused efforts regarding our recruiting and financial education programming.

Furthermore, we continue our ongoing work with regulated entities through the Diversity Assessment Report process, through which entities voluntarily provide self-assessments of their diversity policies and practices.

I am proud of the progress we have made. I am also proud that, in recent years, including this year, our staff has rated the SEC among the best places to work in the federal government. We have more work to do, and I look forward to working across the agency to advance these goals.

Throughout all of our work, we benefit from public engagement and public comment, including through venues and conversations like today's concerning the legal profession. I wish you a productive and thoughtful roundtable discussion.

Thank you.

Bill Singer's Comment: Memo to Chair Gensler, when you state "The most important asset at the SEC is our remarkable staff. In recent years, we have made important gains to help ensure that the agency is a place where everyone on the staff can bring their whole selves to work, make their mark in public service, and rise in the profession, including into senior leadership," are you discounting and/or factoring in the troubling revelations in "SEC Investigative Summary" (August 29, 2022) 

U.S. Promoter of Foreign Cryptocurrency Company Sentenced to Prison for Role in Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-sdca/pr/us-promoter-foreign-cryptocurrency-company-sentenced-prison-role-fraud-scheme
Glenn Arcaro, 44, pled guilty in the United States District Court for the Southern District of California to Southern District of California to conspiracy to commit wire fraud; and he was sentenced to 38 month in prison. As alleged in part in the DOJ Release, Arcaro had:

conspired with others to exploit investor interest in cryptocurrency by fraudulently marketing BitConnect's proprietary coin offering and digital currency exchange as a lucrative investment. Arcaro and others misled investors about BitConnect's "Lending Program." Under this program, Arcaro touted BitConnect's purported proprietary technology, known as the "BitConnect Trading Bot" and "Volatility Software," as being able to generate substantial profits and guaranteed returns by using investors' money to trade on the volatility of cryptocurrency exchange markets.

In truth, however, BitConnect operated a textbook Ponzi scheme by paying earlier BitConnect investors with money from later investors. Furthermore, Arcaro and others ensured up to 15 percent of the money invested into BitConnect went directly into a slush fund to be used for the benefit of the owner and promoters of BitConnect. The BitConnect Ponzi scheme ensnared 4,154 victims from 95 countries making it a true worldwide Ponzi scheme.

. . .

Arcaro admitted that he earned no less than $24 million from the BitConnect scheme, all of which, according to court documents, will now be repaid to investors in restitution or forfeited to the government. Arcaro took steps to transmit the BitConnect proceeds that he earned to offshore accounts, transform some of the proceeds into precious metals storage, and obtain foreign passports. Arcaro's goal was to avoid paying federal and state income taxes on his income earned from the scheme and to shield his assets from collection by the Internal Revenue Service.

The United States District Court for the Northern District of Illinois entered a judgment against William Thomas Caniff and his company, Berkley Capital Management, LLC ("BCM"), and two investment pools that BCM operated: BBOT 1, LP ("BBOT") and Berkley II, LP ("Berkley II").
https://www.cftc.gov/media/7641/enfcanifforder082922/download The Order requires Defendants to pay $2,598,632 in restitution and a $3.6 million civil monetary penalty. Separately, the Court entered a Consent Order against Caniff's partner, Arie Bos
https://www.cftc.gov/media/7636/enfbosconsentorder091422/download, who will be jointly and severally liable to pay the $2,598,632 in restitution in addition to a $500,000 civil monetary penalty. As alleged in part in the CFTC Release:

[I]n January 2016, Caniff formed a partnership with Bos called BCM, which offered two pools for trading foreign exchange binary options through accounts at the North American Derivatives Exchange (NADEX). Caniff, a convicted felon, opened a trading account at NADEX by making false statements to NADEX that concealed his criminal record.  

From approximately February 2016 through September 2018, Bos solicited 58 pool participants who paid more than $3.3 million to invest in these pools. All of the participants were in the Netherlands with the exception of one U.S. participant. Caniff was purportedly trading their funds at NADEX. However, rather than depositing their funds in the account he opened at NADEX, Caniff simply misappropriated participants' funds and used them to pay himself approximately $1.2 million and Bos approximately $1.1 million. 

To conceal the misappropriation, Caniff sent bogus trading results to Bos who, in turn, reported false profits and exaggerated pool values to participants. For example, Bos reported profits for months in which there was no trading; grossly exaggerated the size of the fund by claiming a value of $5.5 million in 2016 when the fund's account balance was less than $278,000; and reported an average rate of return of 10% in 2016 when there was, in fact, a negative rate of return. The order finds that Bos committed fraud by ignoring numerous red flags that should have prompted him to seek corroboration of BCM's purported profits at NADEX. Bos was also found to have issued false BCM account statements to participants. The court's order against Caniff also found that Caniff made a false statement to NADEX.

Parallel Criminal Actions

Caniff is facing charges in two criminal cases related to this binary options fraud scheme. In United States v. Caniff, 2:21-cr-00121-MHW (S.D. Ohio, June 30, 2021), a jury trial is scheduled in Ohio on October 31, 2022, where Caniff faces charges of wire fraud and money laundering. In United States v. Caniff, 1:19-cr-00332 (N.D. Ill. Apr. 17, 2019), a criminal case is also pending against Caniff who was charged with making a false statement on his application to open a NADEX trading account. 

https://www.finra.org/sites/default/files/fda_documents/2018058988301
%20Solomon%20Wei-En%20Hua%20CRD%206168816%20AWC%20gg.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Solomon Wei-En Hua submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Solomon Wei-En Hua entered the industry in 2013, and by April 2016, he was registered with Wells Fargo Clearing Services, LLC. In accordance with the terms of the AWC, FINRA imposed upon Hua a $15,000 fine, $61,543.07 disgorgement, and a one-year suspension from associating with any FINRA member in all capacities. As alleged in part in the "Overview" portion of the AWC:

During the period July 27, 2016 to March 13, 2018, Hua recommended new issue preferred securities (NIPs) to his customers without a reasonable basis to believe that the securities were suitable, in violation of FINRA Rules 2111 and 2010. 

Additionally, Hua sent unwarranted and misleading communications regarding NIPs and other securities, in violation of FINRA Rules 2210(d)(1)(A) and (B) and 2010. 

Hua also used his personal cell phone to communicate with a customer regarding firm business, without notice or approval by his firm, thereby causing the firm to maintain incomplete books and records. As a result, Hua violated FINRA Rules 4511 and 2010. 

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