Securities Industry Commentator by Bill Singer Esq

The Gensler SEC's Rulemaking Reach Exceeds Its Grasp (BrokeAndBroker.com Blog)

DOJ RELEASES

U.S. Attorney Announces Historic $3.36 Billion Cryptocurrency Seizure And Conviction In Connection With Silk Road Dark Web Fraud / In November 2021, Law Enforcement Seized Over 50,676 Bitcoin Hidden in Devices in Defendant JAMES ZHONG's Home; ZHONG Has Now Pled Guilty to Unlawfully Obtaining that Bitcoin From the Silk Road Dark Web in 2012 (DOJ Release)

SEC RELEASES

SEC Charges Creator of Global Crypto Ponzi Scheme and Three US Promoters in Connection with $295 Million Fraud / Trade Coin Club raised money from more than 100,000 investors worldwide (SEC Release)

SEC Obtains Fraud Injunction and Penny Stock Bar Against Microcap Stock Promoter (SEC Release)

SEC Denies Whistleblower Award to Two Claimants
Order Determining Whistleblower Award Claims

SEC Awards Joint $1.6 Million Whistleblower Award to Three Claimant And A $1.6 Million Whistleblower Award to Fourth Claimant
Order Determining Whistleblower Award Claims

SEC Denies Whistleblower Award to Claimant 
Order Determining Whistleblower Award Claims

SEC Denies Whistleblower Award to Claimant 
Order Determining Whistleblower Award Claims

SEC Denies Whistleblower Award to Claimant 
Order Determining Whistleblower Award Claims

SEC Denies Whistleblower Award to Claimant 
Order Determining Whistleblower Award Claims

CFTC RELEASES

FINRA RELEASES

FINRA Fines and Suspends Rep for Outside Accounts, PSTs, and OBA

In the Matter of Joel D. Plasco, Respondent (FINRA AWC)

Silk Road was an online "darknet" black market.  In operation from approximately 2011 until 2013, Silk Road was used by numerous drug dealers and other unlawful vendors to distribute massive quantities of illegal drugs and other illicit goods and services to many buyers and to launder all funds passing through it.  In 2015, following a groundbreaking prosecution by this Office, Silk Road's founder Ross Ulbricht was convicted by a unanimous jury and sentenced to life in prison. 

In September 2012, ZHONG executed a scheme to defraud Silk Road of its money and property by (a) creating a string of approximately nine Silk Road accounts (the "Fraud Accounts") in a manner designed to conceal his identity; (b) triggering over 140 transactions in rapid succession in order to trick Silk Road's withdrawal-processing system into releasing approximately 50,000 Bitcoin from its Bitcoin-based payment system into ZHONG's accounts; and (c) transferring this Bitcoin into a variety of separate addresses also under ZHONG's control, all in a manner designed to prevent detection, conceal his identity and ownership, and obfuscate the Bitcoin's source. 

While executing the September 2012 fraud, ZHONG did not list any item or service for sale on Silk Road, nor did he buy any item or service on Silk Road.  ZHONG registered the accounts by providing the bare minimum of information required by Silk Road to create the account; the Fraud Accounts were merely a conduit for ZHONG to defraud Silk Road of Bitcoin.

ZHONG funded the Fraud Accounts with an initial deposit of between 200 and 2,000 Bitcoin.  After the initial deposit, ZHONG then quickly executed a series of withdrawals.  Through his scheme to defraud, ZHONG was able to withdraw many times more Bitcoin out of Silk Road than he had deposited in the first instance.  As an example, on September 19, 2012, ZHONG deposited 500 Bitcoin into a Silk Road wallet.  Less than five seconds after making the initial deposit, ZHONG executed five withdrawals of 500 Bitcoin in rapid succession - i.e., within the same second - resulting in a net gain of 2,000 Bitcoin.  As another example, a different Fraud Account made a single deposit and over 50 Bitcoin withdrawals before the account ceased its activity.  ZHONG moved this Bitcoin out of Silk Road and, in a matter of days, consolidated them into two high-value amounts.

Nearly five years after ZHONG's fraud, in August 2017, solely by virtue of ZHONG's possession of the 50,000 Bitcoin that he unlawfully obtained from Silk Road, ZHONG received a matching amount of a related cryptocurrency - 50,000 Bitcoin Cash ("BCH Crime Proceeds") - on top of the 50,000 Bitcoin.  In August 2017, in a hard fork coin split, Bitcoin split into two cryptocurrencies, traditional Bitcoin and Bitcoin Cash ("BCH").  When this split occurred, any Bitcoin address that had a Bitcoin balance (as ZHONG's addresses did) now had the exact same balance on both the Bitcoin blockchain and on the Bitcoin Cash blockchain.  As of August 2017, ZHONG thus possessed 50,000 BCH in addition to the 50,000 Bitcoin that ZHONG unlawfully obtained from Silk Road.  ZHONG thereafter exchanged through an overseas cryptocurrency exchange all of the BCH Crime Proceeds for additional Bitcoin, amounting to approximately 3,500 Bitcoin of additional crime proceeds.  Collectively, by the last quarter of 2017, ZHONG thus possessed approximately 53,500 Bitcoin of total crime proceeds (the "Crime Proceeds"). 

The Government's Seizure of Forfeitable Property

On November 9, 2021, pursuant to a judicially authorized premises search warrant (the "Search"), IRS-CI agents recovered approximately 50,491.06251844 Bitcoin of the Crime Proceeds from ZHONG's Gainesville, Georgia, house.  Specifically, law enforcement located 50,491.06251844 Bitcoin of the approximately 53,500 Bitcoin Crime Proceeds (a) in an underground floor safe; and (b) on a single-board computer that was submerged under blankets in a popcorn tin stored in a bathroom closet.  In addition, law enforcement recovered $661,900 in cash, 25 Casascius coins (physical bitcoin) with an approximate value of 174 Bitcoin, 11.1160005300044 additional Bitcoin, and four one-ounce silver-colored bars, three one-ounce gold-colored bars, four 10-ounce silver-colored bars, and one gold-colored coin. 

Beginning in or around March 2022, ZHONG began voluntarily surrendering to the Government additional Bitcoin that ZHONG had access to and had not dissipated.  In total, ZHONG voluntarily surrendered 1,004.14621836 additional Bitcoin. 

Forfeiture Actions

In connection with ZHONG's guilty plea, on November 4, 2022, Judge Gardephe entered a Consent Preliminary Order of Forfeiture as to Specific Property and Substitute Assets/Money Judgment forfeiting ZHONG's interest in the following property:

• ZHONG's 80% interest in RE&D Investments, LLC, a Memphis-based company with substantial real estate holdings;
• $661,900 in United States currency seized from ZHONG's home on November 9, 2021;
• Metal items, consisting of four one-ounce silver-colored bars, three one-ounce gold-colored bars, four 10-ounce silver-colored bars, and one gold-colored coin, all seized from ZHONG's home on November 9, 2021;
• 11.1160005300044 Bitcoin seized from ZHONG's home on November 9, 2021;
• 25 Casascius coins (physical Bitcoin) with an approximate value of 174 Bitcoin, collectively, seized from ZHONG's home on November 9, 2021;
• 23.7112850 Bitcoin provided by ZHONG on April 27, 2022;
• 115.02532155 Bitcoin provided by ZHONG on April 28, 2022; and
• 4.57427222 Bitcoin provided by ZHONG on June 8, 2022.

Today, in United States v. Ross Ulbricht, S1 14 Cr. 68 (LGS), the Government filed a motion for entry of an Amended Preliminary Order of Forfeiture, seeking to forfeit approximately 51,351.89785803 Bitcoin traceable to Silk Road, valued at approximately $3,388,817,011.90 at the time of seizure, as follows:

• 50,491.06251844 Bitcoin seized from ZHONG's home on November 9, 2021;
• 825.38833159 Bitcoin provided by ZHONG on March 25, 2022; and
• 35.4470080 Bitcoin provided by ZHONG on May 25, 2022.

[B]raga created and controlled Trade Coin Club, a multi-level marketing program that operated from 2016 through 2018 and promised profits from the trading activities of a purported crypto asset trading bot. The SEC alleges that Braga and Paradise lured investors with false representations that the bot made "millions of microtransactions" every second, and that investors would receive minimum returns of 0.35 percent daily. However, instead of deploying investor funds for the purported trading bot, Braga allegedly siphoned off investor funds for his own benefit and to pay a network of worldwide Trade Coin Club promoters, including Paradise, Taylor, and Tetreault.

The SEC further alleges that Trade Coin Club operated as a Ponzi scheme and that investor withdrawals came entirely from deposits made by investors, not from any crypto asset trading activity by a bot or otherwise. The complaint further alleges that Braga personally received at least 8,396 bitcoin of the amounts invested (worth $55 million at the time), Paradise received 238 bitcoin (worth more than $1.4 million at the time), Taylor received 735 bitcoin (worth more than $2.6 million at the time), and Tetreault received 158 bitcoin (worth more than $625,000 at the time).

[F]rom at least October 2019 through January 2021, Costello and Ferraro engaged in a stock promotion scheme in which Ferraro recommended and promoted to his Twitter followers and the public at least five microcap stocks that Costello owned, without disclosing that he and Costello intended to sell shares of those stocks as their prices rose, or that Costello would pay Ferraro a portion of his profits from some of those sales. Costello shared approximately $32,000 of his profits with Ferraro, and Ferraro profited approximately $41,000 from his own trading in this scheme. The SEC's complaint also alleges that Ferraro separately conducted his own stock promotion scheme respecting two additional microcap stocks, generating profits of approximately $68,000.

Because Claimant 1 obtained his/her information as a result of his/her association with the Company-which was retained to perform compliance functions-Claimant 1 must therefore satisfy at least one of Rule 21F-4(b)(4)(v)'s exceptions to receive an award. Claimant 1, however, has not done this. 

. . .

We therefore conclude that Claimant 2 did not provide information that caused Staff to commence an examination, open or reopen an investigation, inquire concerning different conduct as part of a current examination or investigation that then resulted in the Commission bringing the Redacted Action, or significantly contribute to the success of the Redacted Action. . . .

Claimant 4 requested reconsideration of the Preliminary Determinations asserting that (1) the information submitted by Claimants 1, 2, and 3 was not original information because it was based on information Claimant 4 submitted to Redacted ("Research Publication"), and (2) that the CRS overlooked several contributions made by Claimant 4 to the staff's investigation, as well as hardships Claimant 4 suffered, when determining the award percentage.

. . .

Contrary to Claimant 4's assertions in his/her reconsideration request, Claimants 1, 2, and 3 submitted original information in their Form TCR, which included information about *** Redacted . Claimants 1, 2, and 3's tip was submitted to the Commission before the Redacted Research Publication report and therefore, could not have been based on information contained in that report. . .

. . .

Furthermore, the additional contributions and hardships discussed in Claimant 4's request for reconsideration do not warrant a change in the award allocation. Most of the contributions cited by Claimant 4 concerned allegations that were not charged by the Commission. . . .

The record also does not show that Claimant's information caused the staff to inquire into different conduct or significantly contributed to the ongoing Investigation. The staff declaration confirms that information in Claimant's TCR was already known to the staff, and Claimant's later conversations with the staff regarding Claimant's TCR, where Claimant provided additional documents, also did not yield any information not already known to the staff through its own investigation. Claimant also reported on the substance of a meeting Claimant had with an individual connected to the Defendants; however, Claimant's information about that meeting did not advance the Investigation or contribute to the success of the Covered Action as the staff was either already aware of the information or it was not relevant to the Investigation.

Claimant's argument that Other Agency staff should be contacted because the Covered Action and the Other Agency actions are "deeply intertwined" is misplaced. As stated above, the initial question we examine is whether Claimant provided original information to the Commission that led to a successful Commission enforcement action.7 Commission staff are best-placed to determine Claimant's contributions to the Investigation and the Covered Action, and Claimant offers no plausible basis for why we should think otherwise. Based on the record, including the sworn declaration from Enforcement staff, which we credit, Claimant's information did not lead to the success of the Covered Action. We decline Claimant's invitation to gather additional information from Other Agency staff on the basis of Claimant's speculation that Other Agency staff may have more information about Claimant's contributions to the Commission Investigation and the Covered Action than Commission staff themselves. 

Claimant does not qualify for a whistleblower award on two independent grounds. First, Claimant did not submit Claimant's whistleblower application within the required ninety-day deadline. The requirement that claimants file whistleblower award claims within ninety days of the posting of a Notice of Covered Action ("NoCA"), set forth in Exchange Act Rule 21F-10, serves important programmatic functions. Here, Claimant's application was approximately seven months late. This ground alone renders Claimant ineligible for an award. Further, Claimant did not contest the CRS's recommended denial on this ground and accordingly forfeits Claimant's opportunity to contest on this ground.

Claimant also does not qualify for an award on the ground that Claimant's information did not lead to the successful enforcement of the Covered Action. Enforcement staff confirms that the investigation that led to the Covered Action (the "Investigation") was opened based upon the staff's own investigative steps and not based on any information from Claimant. The staff also confirms that the staff did not receive any information provided by Claimant prior to opening the Investigation. Accordingly, Claimant's information did not cause the staff to open the Investigation.

Here, Claimant's whistleblower application was submitted more than three months after the ninety-day filing period had closed. Claimant argues that the Commission should use its authority under Exchange Act Rule 21F-8(a) to waive the ninety-day filing requirement. Rule 21F-8(a) provides that "the Commission may, in its sole discretion, waive any of these procedures upon a showing of extraordinary circumstances." We have explained that the "extraordinary circumstances" exception is "narrowly construed" and requires an untimely claimant to show that "the reason for the failure to timely file was beyond the claimant's control." Further, we have identified "attorney misconduct or serious illness" that prevented a timely filing as two examples of the "demanding showing" that an applicant must make before we will consider exercising our discretionary authority to excuse an untimely filing. 

As an initial matter, Claimant first provided information to the staff in Redacted over four months after the staff opened the investigation that led to the Covered Action (the "Investigation") and more than one month after the Commission filed its complaint. Accordingly, Claimant cannot be credited with causing the staff to open an investigation. 

Second, the record does not demonstrate that Claimant significantly contributed to the success of the Covered Action or caused the staff to inquire into different conduct that was later the subject of a successful Commission enforcement action. Enforcement staff have confirmed, in a sworn supplemental declaration, which we credit, that Claimant's information did not advance the Investigation: Claimant's information related to the Individual who was not charged in the Covered Action. And the staff confirmed that it first became aware of the Individual in approximately Redacted about four months before Claimant provided information, and the Redacted staff was aware of the Individual's involvement with Redacted (the "Firm") the following month, approximately three months before Claimant submitted his information. The staff confirmed that Claimant's information was not a motivating factor in the decision to interview the Individual and that Claimant's information was either already known to the staff or did not advance the Investigation or contribute to the charges in the Covered Action.  The staff also confirmed that Claimant's information did not assist the staff during settlement discussions with any of the Defendants.

In April 2019, Plasco loaned $200,000 to a company for one month and expected to receive a 100 percent return at maturity. The loan was a security. After the company defaulted on the loan, the parties entered into a settlement agreement, pursuant to which Plasco received shares of a thinly-traded stock of a different company that he sold in a private transaction for $75,000. Plasco did not provide Dalmore Group with written notice or obtain the firm's written approval prior to participating in these private securities transactions. Therefore, Plasco violated FINRA Rules 3280 and 2010.

. . .

Between February 2020 and July 2020, Plasco opened outside brokerage accounts at three firms without the prior written consent of Dalmore Group. One of the firms held the account through which he effected the second private securities transaction described above. Therefore, Plasco violated FINRA Rules 3210 and 2010. 

. . .

From 2016 until his departure from the firm in November 2020, Plasco served as a senior executive with and, in some instances, received compensation from six related businesses in the aviation industry. Plasco did not provide Dalmore Group with prior written notice of five of the six businesses and therefore violated FINRA Rules 3270 and 2010.

• Securities Industry Commentator
• Bill Singer