Securities Industry Commentator by Bill Singer Esq
February 16, 2023
Order Determining Whistleblower Award Claim
In the Matter of Lon Charles Faccini Jr, Respondent (FINRA AWC)
In the Matter of Quint Capital Corporation and Alexander Quint, Respondents (FINRA AWC)
2/16/2023
https://www.justice.gov/usao-sdny/pr/seven-defendants-charged-million-dollar-identity-theft-and-fraud-scheme
From at least 2020 up to and including at least 2022, CHRISTOPHER PEEPLES, and/or KHALIL BEY-MUHAMMAD, purchased or otherwise obtained, through the Internet, personally identifiable and financial information belonging to victims of their scheme. Such information would generally include victims’ names, dates of birth, home addresses, social security numbers, driver’s license numbers, bank account information (sometimes including passwords), and phone numbers (the “Stolen Information”).
Once PEEPLES and/or BEY-MUHAMMAD obtained Stolen Information for a victim, they would provide that information to co-conspirators responsible for forging identification documents (the “ID Forgers”). Using the Stolen Information, the ID Forgers would manufacture a counterfeit driver’s license and sometimes a secondary form of false identification (each a “Fake ID”) in the victim’s identity. If the Fake ID was a form of photo identification, it would bear the photograph of one of the Crew’s members, typically LEE, REASONOVER, or ANAYDA HUERTAS.
In some cases, the Crew would take over the victim’s phone number through a “SIM swap” fraud — that is, by tricking the victim’s cellphone service provider to switch service for the victim’s cellphone number to a SIM card or cellphone controlled by the Crew. Members of the Crew would either impersonate the victim and claim that the victim’s existing cellphone had been lost or would enlist the assistance of corrupt cellphone store employees who would agree to process the SIM swap in exchange for payment. The purpose of the SIM swap was to take control of the victim’s cellphone number in order to gain access to the victim’s bank accounts — for example, to receive two-factor authentication or security text messages intended for the victim.
In some cases, the Crew would use the Stolen Information to log into victims’ online banking profiles, create new accounts in a victim’s name at the banks, and transfer funds from a victim’s existing accounts to the newly created accounts. The purpose of doing so was to divide the victims’ funds among as many bank accounts as possible and steal those funds through smaller withdrawals, which would be less likely to attract scrutiny from individual bank tellers processing single withdrawals in a single account.
Following the preparatory steps described above, the Crew would fly to a city in the United States to fraudulently withdraw funds from victims’ accounts over a period of days. During these trips, a Crew member (the “Runner”) would enter different bank locations impersonating a particular victim. The Runner would bring Fake IDs in the victim’s identity (and bearing a photograph of the Runner). At the teller window, the Runner would request a withdrawal, typically for less than $5,000 at a time to avoid triggering heightened bank scrutiny. In cases in which the Crew also obtained a “SIM-swapped” cellphone, that cellphone could also be used to intercept and impersonate the victim in response to the bank’s identification verification procedures. After a successful withdrawal, the Runner — and any Crew members participating in that trip — would drive to another bank branch location nearby to repeat the process until the victim’s bank accounts were substantially drained of funds. On a given trip, the Crew typically targeted multiple different victims’ accounts and typically stole tens of thousands of dollars or more.
The Crew has stolen at least approximately $1 million from bank accounts belonging to victims.
Former Beulah Bank President Sentenced to Two Counts of Bank Fraud (DOJ Release)
https://www.justice.gov/usao-nd/pr/former-beulah-bank-president-sentenced-two-counts-bank-fraud
In the United States District Court for the District of North Dakota, Brady Daniel Torgerson, 35, pled gulty to two counts of bank fraud; and he was sentenced to 24 months in prison plus three years of supervised release, and a $200.00 special assessment. As alleged in part in the DOJ Release:
Between 2019 and 2021, while employed at separate times as the President of First Security Bank-West and as a loan officer at the Union Bank, Torgerson conducted banking transactions, which caused harm to both these banks and the banks’ individual customers. Specifically, while employed at First Security Bank-West, Torgerson funded loans without obtaining: 1) necessary financial information; 2) security interest documents; or 3) promissory notes. Additionally, Torgerson engaged in deceptive banking transactions by entering false information into the bank’s computer system, increasing loans so that they exceeded the original loan amounts, and extending loan maturity dates to conceal his activities. Most notably, while employed at the Union Bank, Torgerson created fraudulent loan obligations in the amounts of $225,487.44 and $225,487.45 in the names of three separate individuals who neither knew about the creation of these loans nor received the funds described in these obligations.
. . .
So-Defendants for this investigation received the following sentences:
• Brent D. Torgerson (61 years old from Beulah, ND) received a sentence of time served (1 day in custody), 1-year supervised release, $5,000 fine, and a ban from participating in banking on a charge of Misapplication of Bank Funds
• Kelly Huffman (34 years old, from Beulah, ND) received a sentence of time served (1 day in custody), 1-year supervised release, and a $5,000 fine on a charge of Misapplication of Bank Funds
• Tyler Steven Hofland (35 years old, Rapid City, SD) received a sentence of time served (1 day of processing), 1-year of supervised release, and $98,163.40 in restitution on a charge of Aiding and Abetting Bank Fraud
SEC Charges Final Participant in Multi-Million Dollar Scheme to Spread and Trade on False Rumors about Public Companies (SEC Release)
https://www.sec.gov/news/press-release/2023-33
In the United Stated District Court for the Northern District of Georgia, the SEC filed a Complaint charging Milan Vinod Patel with violating Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder.
https://www.sec.gov/litigation/complaints/2023/comp-pr2023-33.pdf Previously, the SEC charged Barton Ross, Mark Melnick, Anthony Salandra, and Charles Parrino for their roles in this scheme. As alleged in part in the SEC Release;
[P]atel received rumors that he knew to be false from Ross, Salandra, or Parrino about purported market-moving events, such as corporate mergers or acquisitions, involving publicly-traded companies, and disseminated the rumors to his contacts at financial news services, chat rooms, and message boards. Patel also disseminated the rumors to Melnick, a host of a stock trading webcast, who shared them with his webcast subscribers. The circulation of more than 100 rumors between December 2017 and January 2020 caused the prices of the subject companies’ securities to rise temporarily, which allowed Patel to sell his holdings in such securities and generate more than $1 million in illicit trading profits.
SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes (SEC Release)
https://www.sec.gov/news/press-release/2023-32
In the United States District Court for the Southern District of New York, the SEC filed a Complaint charging Terraform labs PTE Ltd and Do Hyeong Kwon with violating the registration and anti-fraud provisions of the Securities Act and the Exchange Act. https://www.sec.gov/litigation/complaints/2023/comp-pr2023-32.pdf
As alleged in part in the SEC Release:
[F]rom April 2018 until the scheme’s collapse in May 2022, Terraform and Kwon raised billions of dollars from investors by offering and selling an inter-connected suite of crypto asset securities, many in unregistered transactions. These included “mAssets,” security-based swaps designed to pay returns by mirroring the price of stocks of US companies, and Terra USD (UST), a crypto asset security referred to as an “algorithmic stablecoin” that supposedly maintained its peg to the U.S. dollar by being interchangeable for another of the defendants’ crypto asset securities, LUNA. The complaint further alleges that Terraform and Kwon offered and sold investors other means to invest in their crypto empire, including the crypto asset security tokens MIR—or “mirror” tokens—and LUNA itself.
The SEC’s complaint alleges that Terraform and Kwon marketed crypto asset securities to investors seeking to earn a profit, repeatedly claiming that the tokens would increase in value. For example, they touted and marketed UST as a “yield-bearing” stablecoin, which they advertised as paying as much as 20 percent interest through the Anchor Protocol. The SEC’s complaint also alleges that, while marketing the LUNA token, Terraform and Kwon repeatedly misled and deceived investors that a popular Korean mobile payment application used the Terra blockchain to settle transactions that would accrue value to LUNA. Meanwhile, Terraform and Kwon also allegedly misled investors about the stability of UST. In May 2022, UST depegged from the U.S. dollar, and the price of it and its sister tokens plummeted to close to zero.
CFTC Orders The Options Clearing Corporation to Pay a $5 Million Penalty for Violations of Core Principles and Regulations Related to Operational Risk Management / Second CFTC Action for Core Principle Violations (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8661-23
-and-
SEC Charges Options Clearing Corporation with Rule Failures (SEC Release)
https://www.sec.gov/news/press-release/2023-31
Without admitting or denying the findings in an SEC Order that The Options Clearing Corporation (OCC) had failed to establish, implement, maintain and enforce certain policies and procedures reasonably designed to manage the operational risks related to its automated systems in violation of the Commodity Exchange Act (CEA) and related CFTC regulations, OCC agreed to pay a $5 million penalty for violations of the CEA and CFTC regulations and be subject to undertakings relating to remediation.
https://www.cftc.gov/media/8186/enforderoptionsclearing021623/download
As alleged in part in the CFTC Release:
[F] October 2019 through May 17, 2021, OCC failed to comply with DCO Core Principles to establish, implement, maintain and enforce certain policies and procedures reasonably designed to manage its operational risks by identifying the plausible sources of operational risk and mitigating their impact through the use of appropriate systems, policies, procedures, and controls. Specifically, to address the impact of certain transaction-based costs associated with the cost of liquidating a Clearing Member’s portfolio, OCC implemented an add-on charge to better account for the cost of liquidating a defaulting Clearing Member’s portfolio (the “LC Charge”) in its STANS methodology used to calculate margin. However, OCC failed to make a corresponding change to incorporate the LC Charge in its Clearing Fund calculation in violation of OCC’s Comprehensive Stress Testing and Clearing Fund Methodology, and Liquidity Risk Management Description, which is an OCC rule.
As a result of deficiencies in certain internal controls, human errors, and oversight failures, OCC’s Clearing Fund was underfunded by between $200 million to $588 million at various times during October 2019 through May 17, 2021. OCC represents that, notwithstanding the underfunding, OCC’s Clearing Fund maintained sufficient financial resources to meet its obligations in the event of a default by the single member or participant creating the largest financial exposure in extreme but plausible market conditions, in accordance with CFTC requirements. Nonetheless, the order finds, OCC’s failures violated two DCO Core Principles and related implementing CFTC Regulations 7 U.S.C. § 7a-l(c)(2)(H), (I); 17 C.F.R. §§ 39.17(a)(1), 39.18(b)(l), (2) (2022).
In September 2019, the CFTC instituted an action against OCC, which ordered OCC to cease and desist from committing or causing any violations and any future violations of certain DCO Core Principles and related CFTC regulations. [See CFTC Press Release No. 8000-19] This order included one Principle requiring system safeguards to identify and minimize sources of operational risk and the related CFTC regulation, and undertakings requiring that OCC establish and implement internal controls, and policies and procedures reasonably designed to comply with DCO Core Principles and the Regulations. The order states that, while the violations identified in this order differ in nature and scope, the CFTC notes its concern that OCC’s failure to implement certain of its policies and procedures related to the LC Charge occurred after the 2019 order.
In accepting the respondent’s offer, the CFTC recognizes OCC’s cooperation with the Division of Enforcement’s investigation of this matter. The CFTC also acknowledges the respondent’s representations concerning its remediation. The CFTC’s recognition of the respondent’s cooperation and appropriate remediation is further reflected in the form of a reduced penalty.
CFTC Charges California-based Company and Its CEO with Fraudulent Solicitation and Misappropriation of Digital Asset Commodities (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8660-23
In the United States District Court for the Eastern District of New York, the CFTC filed a Complaint chargingThe CFTC charged Vista Network Technologies and its Chief Executive Officer Armen Temurian with fraudulent solicitation and misappropriation of customers’ digital asset commodities.
https://www.cftc.gov/media/8181/enftemuriancomplaint021523/download As alleged in part in the CFTC Release:
The complaint alleges from approximately September 2017 through January 2018, the defendants falsely advertised to customers that Vista would trade their digital assets and earn a 2.5% daily return or “double in just 80 days.” The defendants represented they would trade investors’ bitcoin and ether using “Robot Traders.” The complaint alleges the defendants’ representations were false because the defendants had never traded customer assets and did not have any trading program capable of generating the promised returns.
Instead, the complaint alleges, the defendants engaged in a Ponzi-like scheme, whereby they used new investors’ assets to pay returns to investors who had invested earlier in the scheme.
FINRA Fines and Suspends Rep for Excessive/Unsuitable Trades
In the Matter of Lon Charles Faccini Jr, Respondent (FINRA AWC 2018056483903)
https://www.finra.org/sites/default/files/fda_documents/2018056483903
%20Lon%20Charles%20Faccini%20Jr.%20CRD%202736849%20AWC%20lp.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, Lon Charles Faccini Jr. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Lon Charles Faccini Jr. was first registered in 1996, and by 2016, he was registered with Arive Capital Markets. The AWC asserts in part that:
Faccini was named in three customer arbitrations in 2016, 2019, and 2020, all of which resulted in settlements to which Faccini contributed. Generally, the arbitration complaints alleged sales practice violations including unsuitability.
In accordance with the terms of the AWC, FINRA imposed upon Faccini a $5,000 fine and $18,770 in restitution, and a six-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC [Ed: footnotes omitted]:
Between March 2017 and January 2019, while he was registered through Arive, Faccini engaged in excessive and unsuitable trading, including using margin, in the accounts of Customers A and B.
Customer A is a 51-year-old farmer from North Carolina. Between July 2017 and January 2019, Faccini recommended that Customer A place 93 trades in his account—most of which were executed using margin—and Customer A routinely accepted Faccini’s recommendations. Although Customer A’s account had an average month-end equity of approximately $116,900 for 19 months, Faccini recommended purchases with a total principal value of approximately $2,410,300, which resulted in an annualized turnover rate in the account just over 13. This trading resulted in an annualized cost-to-equity ratio of 36.95 percent—meaning Customer A’s investments had to grow by 36.95 percent just to break even. As a result of Faccini’s unsuitable recommendations, Customer A had a loss of approximately $36,700. Collectively, the trades that Faccini recommended caused Customer A to pay approximately $55,389 in commissions and fees and another $12,997 in margin interest for a total of approximately $68,385.
Customer B is a 75-year-old retired teacher from Oklahoma. Between March 2017 and June 2018, Faccini recommended that Customer B place 22 trades in his account—all of which were executed using margin—and Customer B routinely accepted Faccini’s recommendations. Although Customer B’s account had an average month-end equity of approximately $26,856 for 16 months, Faccini recommended purchases with a total principal value of approximately $522,438, which resulted in an annualized turnover rate in the account of 14.59. This trading resulted in an annualized cost-to-equity ratio of 52.42 percent—meaning Customer B’s investments had to grow by 52.42 percent just to break even. As a result of Faccini’s unsuitable recommendations, Customer B had a loss of approximately $17,395. Collectively, the trades that Faccini recommended caused Customer B to pay approximately $16,074 in commissions and fees and another $2,696 in margin interest for a total of approximately $18,770.
Faccini’s recommended securities transactions in the accounts of Customers A and B were excessive and unsuitable. Therefore, Faccini violated FINRA Rules 2111 and 2010.
2/15/2023
https://www.justice.gov/usao-sdny/pr/former-bond-trader-and-hedge-fund-founder-jeffrey-soberman-parket-pleads-guilty-65
From at least 2016 through December 2021, PARKET fraudulently obtained over $65 million in short-term loans from individuals and financial institutions by materially misrepresenting his financial condition and pledging fake collateral. Claiming that he needed short-term liquidity for investment opportunities or real estate purchases, PARKET constructed elaborate stories and submitted hundreds of pages of supporting documents to obtain loans he had no intention of repaying. Among other things, he falsified bank and brokerage statements and contracts allegedly reflecting his significant assets and ownership interests in valuable investment accounts. To furnish proof of some of these ownership interests, PARKET also used the names, titles, and forged signatures of actual company executives he falsely claimed were his business associates. He created fake email addresses for them and forged lengthy email correspondence regarding measures supposedly taken by PARKET and his purported business associates to secure the loans.
To perpetuate the scheme, PARKET used loans from new lenders to pay back earlier lenders. He also made fraudulent representations about delayed acquisitions and temporary liquidity issues to induce his existing lenders to extend the maturity date of his loans or to provide him millions of dollars in additional loans.
PARKET’s individual victims included friends and professional acquaintances, some of whom he persuaded to provide him numerous loans. His institutional victims included short-term bridge lenders, a real estate services company, a bank insured by the Federal Deposit Insurance Corporation, and an insurance company focused on helping clients save for retirement.
Throughout the offense period, PARKET also persuaded family members to transfer funds to his personal accounts by falsely promising to safely invest their life savings on their behalf. He then used the funds to pay down fraudulently obtained loans.
California Residents Indicted For Defrauding Architecture Firm Of More Than $91,000 By Using Fictitious Law Firm And Fraudulent Target Letter (DOJ Release)
https://www.justice.gov/usao-sdny/pr/california-residents-indicted-defrauding-architecture-firm-more-91000-using-fictitious
In the United States District Court for the Southern District of New York, an Indictment was filed charging Matthew Blak Morrow-Wu and Shangzhen Wu a/k/a "Daniel Wu: with one count each of conspiracy to commit wire and mail fraud; wire fraud; mail fraud; impersonating a federal officer and one count of aggravated identity theft.
https://www.justice.gov/usao-sdny/press-release/file/1568661/download
As alleged in part in the DOJ Release:
From at least in or about January 2022 through in or about October 2022, MORROW-WU and WU perpetrated a scheme to steal more than $91,000 from the Company, where WU was employed as a business manager, through the fraudulent and unauthorized use of a credit card held by the Company. MORROW-WU and WU took extensive steps to conceal the fraud, which included the following:
- Forming a sham law firm named Morrow Law Group (“MLG”) to receive the funds under the guise of receiving legal fees from the Company, despite the fact that neither MORROW-WU nor WU appear to be licensed attorneys.
- Fabricating a retainer agreement between MLG and the Company that purported to pre-authorize payments from the Company to MLG, as well as other correspondence from the Company to MLG purportedly authorizing the fraudulent transactions, and forging the signatures of Company representatives in these documents.
- Using a payment processing provider to process the credit card transactions, enabling MORROW-WU and WU to manually input the names of legitimate vendors of the Company as false recipients of the funds and further disguise the true recipients of the funds.
After the Company confirmed the credit card transactions were fraudulent and unauthorized, it disputed the transactions with the credit card company, leading MORROW-WU and WU to attempt to deter any further action by sending the Company a fake “target letter” from the U.S. Attorney’s Office for the Southern District of New York (the “Fraudulent Target Letter”). The Fraudulent Target Letter purported to be signed by a Special Assistant U.S. Attorney on behalf of the U.S. Attorney and threatened the Company with criminal prosecution for wire fraud, conspiracy to commit wire fraud, and the fraudulent use of credit cards.
Bill Singer's Comment: What the hell? Did these guys really think that they would get away with this? Then again, few folks who engage in such breathtaking nonsense ever think that they will wind up as Defendants, and even fewer as Inmates. The misuse of the credit card and fake invoices, I get -- not that I approve, but I get how someone would think that such a scam would work. Not that clever but something that's been tried before and, at times, works. On the other hand, creating a bogus law firm -- now that's original! Then there's the audacity of sending a fake Target Letter and pretending it was from a United States Attorney. Not too smart if you think it through carefully but I'm guessing that there wasn't a lot of careful thought given to any of the alleged fraud. My guess is that none of this is going to end well.
SEC Proposes Enhanced Safeguarding Rule for Registered Investment Advisers (SEC Release)
https://www.sec.gov/news/press-release/2023-30
The SEC proposed Rule Changes to amend and redesignate Rule 206(4)-2, the Commission’s custody rule, under the Investment Advisers Act of 1940 and amend certain related recordkeeping and reporting obligations.
https://www.sec.gov/rules/proposed/2023/ia-6240.pdf
As asserted in part in the SEC Release:
The proposed rules would exercise Commission authority under section 411 of the Dodd-Frank Act by broadening the application of the current investment adviser custody rule beyond client funds and securities to include any client assets in an investment adviser’s possession or when an investment adviser has authority to obtain possession of client assets. Like the current rule, the proposed rule would entrust safekeeping of client assets to qualified custodians, including, for example, certain banks or broker-dealers.
The proposed changes are intended to help ensure that qualified custodians provide certain standard custodial protections when maintaining an advisory client’s assets. These protections are designed, among other things, to ensure client assets are properly segregated and held in accounts to protect the assets in the event of a qualified custodian bankruptcy or other insolvency. The proposed rule would also enhance protections for certain securities and physical assets that cannot be maintained by a qualified custodian. Additionally, the proposal retains the current requirement for an adviser with custody of client assets to obtain a surprise examination from an independent public accountant to verify client assets, but it would modify the audit provision to expand the availability of its use, enhance investor protection, and facilitate compliance.
SEC Finalizes Rules to Reduce Risks in Clearance and Settlement / Final rules will shorten process for settling securities transactions from two business days to one (SEC Release)
https://www.sec.gov/news/press-release/2023-29
The SEC adopted Rule changes to shorten the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (T+2) to one (T+1).
https://www.sec.gov/rules/final/2023/34-96930.pdf As asserted in part in the SEC Release:
In addition to shortening the standard settlement cycle, the final rules will improve the processing of institutional trades. Specifically, the final rules will require a broker-dealer to either enter into written agreements or establish, maintain, and enforce written policies and procedures reasonably designed to ensure the completion of allocations, confirmations, and affirmations as soon as technologically practicable and no later than the end of trade date. The final rules also require registered investment advisers to make and keep records of the allocations, confirmations, and affirmations for certain securities transactions.
Further, the final rules add a new requirement to facilitate straight-through processing, which applies to certain types of clearing agencies that provide central matching services. The final rules will require central matching service providers to establish, implement, maintain, and enforce new policies and procedures reasonably designed to facilitate straight-through processing and require them to submit an annual report to the Commission that describes and quantifies progress with respect to straight-through processing.
SEC Chair/Commissioner Statements
on RIA and Clearance Rules Proposals
| Statement on Proposed Rules Regarding Investment Adviser Custody | Chair Gary Gensler | |
| Statement on Safeguarding Advisory Client Assets Proposal | Commissioner Hester M. Peirce | |
| Statement on Safeguarding Advisory Client Assets Proposal | Commissioner Caroline A. Crenshaw | |
| Statement on Proposed Rule Regarding the Safeguarding of Advisory Client Assets | Commissioner Mark T. Uyeda | |
| Protecting Investors’ Assets | Commissioner Jaime Lizárraga | |
| Statement on Adopting Rules Regarding the Settlement Cycle | Chair Gary Gensler | |
| Timing Matters: Statement on Shortening the Settlement Cycle | Commissioner Hester M. Peirce | |
| Statement on Rule Amendments Shortening the Settlement Cycle | Commissioner Caroline A. Crenshaw | |
| Statement on Final Rule on Shortening the Securities Transaction Settlement Cycle | Commissioner Mark T. Uyeda | |
| Increasing Market Fairness and Efficiency for Investors | Commissioner Jaime Lizárraga | |
2/14/2023
https://news.bloomberglaw.com/us-law-week/new-york-securities-fraud-ruling-threatens-us-white-collar-cases
The divided Manhattan panel held that the Center for Medicare and Medicaid Services’ confidential information—which two of the defendants used to earn millions at their hedge funds by shorting stocks of affected companies—didn’t qualify as “property” or a “thing of value” under wire and securities fraud laws.
At a minimum, former federal prosecutors and other lawyers predict the United States v. Blaszczak opinion—which received little attention when it came down two days after Christmas—will impede cases brought against those who’ve stolen government regulatory information. The decision could also provide new avenues of defense to those investigated for a variety of criminal offenses in the public and private sectors.
Idaho I.T. Professional Sentenced To 28 Months In Prison For Insider Trading Scheme / David Stone Electronically Accessed an Investment Advice Service’s Unannounced Stock Picks and Used that Information to Generate Millions in Trading Profits and to Provide Inside Tips to Another (DOJ Release)
https://www.justice.gov/usao-sdny/pr/idaho-it-professional-sentenced-28-months-prison-insider-trading-scheme
In the United States District Court for the Southern District of New York, David Stone pled guilty to one count of securities fraud; and he was sentenced to 28 months in prison plus three years of supervised release, and ordered to forfeit $2,883,800 and particular shares of stock, to pay $344,000 in restitution to Advisor-1, and to pay a $20,000 fine. As alleged in part in the DOJ Release:
From 2020 up to at least March 2022, DAVID STONE exploited market-moving stock recommendations made by an investment recommendation service (“Advisor-1”) before those recommendations were released to paying subscribers. STONE, an I.T. professional, accessed Advisor-1’s computing system using log-in credentials he obtained without authorization and used his improperly obtained access to view information relating to Advisor-1’s recommendations before they were announced to Advisor-1’s paying subscribers.
Advisor-1’s stock recommendations typically lead to higher closing prices for the recommended stock as compared to the prior day’s closing price. By trading on those recommendations before they were announced, STONE was able to obtain significant profits unavailable to other market participants. In fact, across all the brokerage accounts he traded in, STONE realized gains of at least $4.8 million.
In addition to his own trading, STONE supplied these stolen trading tips to another person (“Tippee-1”). From in or about January 2021 up to and including in or about March 2022, on approximately 45 different days, STONE sent emails to Tippee-1 providing stock names and/or ticker symbols ahead of Advisor-1 announcements of stock recommendations to its paying subscribers. A brokerage account associated with Tippee-1 traded ahead of Advisor-1’s recommendations on more than a dozen occasions. As a result of that trading, Tippee-1 profited more than approximately $2.7 million.
SEC Sues Texas Company and Two Executives to Halt $34 Million Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25640.htm
In the United States District Court for the Eastern District of Texas, the SEC filed a Complaint
https://www.sec.gov/litigation/complaints/2023/comp25640.pdf charging Clyde Cameron Cravey, Kenneth Wiedrich, Reliable One Resources, Inc., and Quantum Filtration, Inc. with with violating the antifraud and securities-registration provisions of Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act, and Rule 10b-5 thereunder. Without admitting or denying the allegations in the SEC Complaint, Wiedrich and Cravey agreed to partially settle the SEC's claims
https://www.sec.gov/litigation/litreleases/2023/judg25640.pdf against them and the Court entered a judgment reflecting those settlements whereby Wiedrich and Cravey are permanently enjoined from further violations of the antifraud and registration provisions of the federal securities laws and imposes an officer-and-director bar, a penny stock bar, and a conduct-based injunction against each of them. Separately, the Court entered an unopposed order freezing the defendants' assets and appointing a receiver that will remain in place until further order of the Court; and, also, entered an unopposed preliminary injunction against Reliable One Resources and Quantum Filtration
https://www.sec.gov/litigation/litreleases/2023/injuct25640.pdf. As alleged in part in the SEC Release:
[T]he defendants sought to exploit the COVID-19 pandemic by promoting false claims that Quantum Filtration was using a cutting-edge technology to produce and sell an N-95 certified facemask. In reality, the mask had no N-95 certification. The complaint further alleges that the defendants falsely claimed that Reliable One imminently expected the U.S. Food and Drug Administration to approve the facemask for sale, even though the defendants never submitted the necessary application to the FDA. The complaint also alleges that the defendants touted business deals that did not exist, misled investors about Reliable One's use of investor funds, and failed to disclose Cravey's involvement in the companies to prevent investors from discovering negative information about his past, including that, in 2012, a Texas court entered an $8 million judgment against him for his role in a fraudulent securities offering.
SEC Charges Former CEO of Slync in $67 Million Offering Fraud / Defendant Kirchner Misappropriated More Than $28 Million of Investor Proceeds to Fund His Lavish Lifestyle (SEC Release)
https://www.sec.gov/news/press-release/2023-26
In the United States District Court for the Northern District of Texas, the SEC filed a Complaint charging Slync, Inc. Co-Founder/Former Chief Executive Officer Christopher S. Kirchner with violating the antifraud provisions of the federal securities laws
http://www.sec.gov/litigation/complaints/2023/comp-pr2023-26.pdf
. A parallel criminal action was filed against Kirchner. As alleged in part in the SEC Release:
[B]etween approximately January 2020 and January 2022, Kirchner misrepresented the financial condition of Slync to investors, including concerning the amount of revenue received from customers and the nature and volume of contracts with existing and potential customers, as well as the planned use of fundraising proceeds. In addition, between March 2020 and his termination from Slync in August 2022, Kirchner allegedly misappropriated more than $28 million of the funds Slync raised from investors, including by transferring tens of millions of dollars from Slync corporate bank accounts to his personal bank accounts and by paying for his personal expenses directly out of one of Slync’s bank accounts. As alleged in the complaint, Kirchner used the money to, among other things, fund his personal investment entity, KFIM LLC, pay entertainment expenses, and purchase a $16 million personal private jet, all while failing to make timely payroll distributions to Slync employees on several occasions.
SEC Awards 30% Whistleblower Award to Claimant
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-96923; Whistleblower Award Proc. File No. 2023-36)
https://www.sec.gov/rules/other/2023/34-96923.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award of 30% of sanctions collected to Claimant for both a Covered Action and a Related Action. CRS recommended the denial of an Award to a second Claimant. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:
[C]lamant provided more than limited assistance, and there are no public interest, investor protection, or programmatic concerns that would warrant departure from a 30% award here. Claimant saved Enforcement staff time and resources in conducting the investigation. Claimant provided meaningful information that advanced the investigation and assisted in establishing the underlying misconduct. Claimant provided continuing assistance throughout the investigation,including providing documents and meeting with the staff. Claimant also acted quickly in trying to expose the misconduct.
FINRA Sanctions Member Firm and Its CEO for Permitting Association of Statutorily Disqualified Individual
In the Matter of Quint Capital Corporation and Alexander Quint, Respondents (FINRA AWC 2021070418202)
https://www.finra.org/sites/default/files/fda_documents/2021070418202
%20Quint%20Capital%20Corporation%20BD%2026586%20and
%20Alexander%20Quint%20CRD%20No.%201012135
%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, Quint Capital Corporation ("QCC") and Alexander Quint submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Quint Capital Corporation has been a FINRA member firm since 1990 with about 20 registered persons; and that Alexander Quint was first registered in 1981, by 2014, he was registered with QCC and has been the firm's Chief Executive Officer. In accordance with the terms of the AWC, FINRA imposed upon QCC a Censure and $35,000 fine; and on Quint a $10,000 fine and five-month suspension in Principal-only capacities. As alleged in part in the AWC [Ed: footnotes omitted]:
Quint was the principal at QCC responsible for supervising QCC’s compliance with licensing and registration matters, including matters relating to statutory disqualification. In February 2018, Quint signed and submitted on behalf of QCC a Membership Continuance Application (“MC-400 Application”) seeking to permit Individual A to associate with the firm despite Individual A being statutorily disqualified under Section 3(a)(39) of the Securities Exchange Act of 1934 due to an SEC bar and a federal district court order enjoining Individual A from violating various federal securities laws and regulations.
In November 2019, FINRA’s National Adjudicatory Council issued a Notice Pursuant to Exchange Act Rule 19h-1 approving the application for Individual A to associate with the firm as a GSR. However, as stated in the Notice and in FINRA’s letter to Quint and QCC accompanying the Notice, under FINRA Rule 9524(b)(3) the Notice would become effective only after the issuance of an order from the SEC stating that the SEC would not institute proceedings pursuant to Section 15(b) of the Exchange Act and that it will not direct otherwise pursuant to Exchange Act Section 15A(g)(2). The SEC never issued such an order, and the Notice never became effective.
From January 2020 to March 2020, at a time when the Notice was not effective and Individual A was not registered as a Municipal Securities Representative, QCC and Quint nevertheless permitted Individual A to associate with the firm and to engage in activities requiring registration as a Municipal Securities Representative. Specifically, Quint and QCC provided Individual A with passwords and access to electronic systems and platforms at QCC to trade municipal bonds. With QCC and Quint’s knowledge, Individual A referred four customers, including a married couple, to open accounts at QCC, discussed municipal securities transactions with those customers and effected approximately 25 municipal securities purchase and sale transactions for the accounts of
those customers.
In March 2021, Quint caused QCC to withdraw the MC-400 Application for Individual A, and to file a Uniform Termination Notice for Securities Industry Registration (Form U5) terminating Individual A’s association with the firm.
By permitting Individual A to engage in the activities described above, Quint and QCC permitted a barred and statutorily disqualified individual to associate with the firm.Therefore, Quint and QCC violated Article III, Section 3(b) of FINRA’s By-Laws, FINRA Rules 8311 and 2010, and MSRB Rules G-4 and G-5.
In addition, QCC and Quint permitted Individual A to engage in activity requiring registration as a Municipal Securities Representative. Therefore, QCC and Quint violated MSRB Rules G-2 and G-3.
2/13/2023
Calling All Unreasonable Financial Professionals: a personal message from Bill Singer Esq (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/6881/unreasonable-financial-professionals/
Maybe this year, finally, someone launches a trade group for the industry's hundreds of thousands of financial professionals. Yeah, I know, wishful thinking. But there are rumblings. I hear them. I feel them. The industry's grunts are getting fed up. In 2023, if pressed, many financial professionals would admit that they now realize that they can deliver better customer service if they weren't shackled to a large industry employer by anti-consumer laws and rules enforced by co-opted industry regulators.
SEC Obtains Court Order for Partial Asset Freeze and Other Temporary Relief in Fraud Action Against Microcap Public Company and CEO (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25638.htm
In a Complaint filed in the United States District Court for the District of Connecticut, the SEC charged Seong Yeol Lee and Ameritrust Corporation with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and Rule 10(b)-5 thereunder. The Court entered a temporary order prohibiting Lee and Ameritrust from violating certain antifraud provisions of the securities laws and from soliciting or accepting funds from investors; and the TRO freezes assets in certain bank accounts of Ameritrust and two affiliated entities named as relief defendants in the SEC's action. The TRO will be in effect for sixty (60) days, to allow time for Lee and Ameritrust to retain counsel to represent them in the SEC's action. By agreeing to the entry of the TRO, Lee and Ameritrust did not admit to any wrongdoing and did not waive any rights to assert any defenses. As alleged in part in the SEC Release:
[T]hrough a network of recruiters acting at his direction, Lee solicited more than $20 million from investors primarily in the Republic of Korea, who sent money to corporate and personal bank accounts that Lee controls in the United States to buy shares of Ameritrust, a publicly traded company in the United States. Lee, either directly or through his recruiters, allegedly told investors that their money would buy shares in a U.S.-based company that would be listed on a national stock exchange, guaranteeing profits for anyone holding the shares. In reality, the complaint alleges that Ameritrust has no real operations and has not taken any steps to apply for any exchange listing. According to the SEC's complaint, Lee misappropriated at least $4 million of investor funds by transferring money from corporate bank accounts to his personal bank accounts and to three of his adult children, who are also named as relief defendants in the SEC's action. Lee and Ameritrust also allegedly defrauded the public by making materially false statements or failing to disclose material information in Ameritrust's filings with the Commission.
Kraken to Discontinue Unregistered Offer and Sale of Crypto Asset Staking-As-A-Service Program and Pay $30 Million to Settle SEC Charges (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25637.htm
In a Complaint filed in the United States District Court for the Northern District of California, the SEC Payward Ventures, Inc. and Payward Trading Ltd., a/k/a "Kraken" with failing to register the offer and sale of their crypto asset staking-as-a-service program.
https://www.sec.gov/litigation/complaints/2023/comp-pr2023-25.pdf Without admitting or denying the allegations in the SEC's Complaint, the Kraken entities consented to the entry of a final judgment that would permanently enjoin each of them from violating Section 5 of the Securities Act and permanently enjoin them and any entity they control from, directly or indirectly, offering or selling securities through crypto asset staking services or staking programs. In settling the charges, the Kraken entities agreed to immediately cease offering or selling securities through crypto asset staking services or staking programs and pay $30 million in disgorgement, prejudgment interest, and civil penalties. As alleged in part in the SEC Release:
[S]ince 2019, Kraken has offered and sold its crypto asset "staking services" to the general public, whereby Kraken pools certain crypto assets transferred by investors and stakes them on behalf of those investors. Staking is a process in which investors lock up - or "stake" - their crypto tokens with a blockchain validator with the goal of being rewarded with new tokens when their staked crypto tokens become part of the process for validating data for the blockchain. When investors provide tokens to staking-as-a-service providers, they lose control of those tokens and take on risks associated with those platforms, with very little protection. The complaint alleges that Kraken touts that its staking investment program offers an easy-to-use platform and benefits that derive from Kraken's efforts on behalf of investors, including Kraken's strategies to obtain regular investment returns and payouts.
SEC Awards Almost $3 Whistleblower Award to Claimant
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-96887; Whistleblower Award Proc. File No. 2023-35)
https://www.sec.gov/rules/other/2023/34-96887.pdf
The SEC's Claims Review Staff ("CRS") issued Preliminary Determinations recommending a Whistleblower Award of almost $3 million to Claimant for both a Covered Action and a Related Action. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:
In making this determination, we find that (i) the above-referenced criminal action constitutes a “related action” to the Covered Action within the meaning of Exchange Act Section 21F(a)(5) and Rule 21F-3(b) promulgated thereunder; (ii) the original information that Claimant provided to the Commission that led to the successful enforcement of the Covered Action also led to the successful enforcement of the Related Action; and (iii) Claimant otherwise satisfies the award criteria for a “related action” set forth in Exchange Act Section 21F and the rules promulgated thereunder. We also find that the Related Action has a more direct or relevant connection to the Commission’s whistleblower program than to another whistleblower program,including REDACTED (“Other Agency”) whistleblower program.5 This is because the Related Action primarily charged the defendant with securities fraud in connection with REDACTED , similar to the Commission’s own charges in the Covered Action.
= = =
Footnote 5: We understand that Claimant is also seeking a whistleblower award for the Related Action from the Other Agency, but that the Other Agency has not yet adjudicated Claimant’s award claim. The Commission’s rules do not permit a claimant to obtain a “double recovery” on the same enforcement action. Pursuant to Exchange Act Rule 21F3(b)(3)(iii)(C), Claimant’s award in the Related Action “shall be conditioned on the claimant making an irrevocable waiver of any claim to an award from the [the Other Agency]. The claimant’s irrevocable waiver must be made within 60 calendar days of the claimant receiving notification of the Commission’s Final Order.”
CFTC Charges Three Puerto Rico Residents and Their Companies with Misappropriating Over $13 Million in Connection with Commodity Pool Ponzi Scheme (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8656-23
In a Complaint filed in the United States District Court for the District of Puerto Rico
https://www.cftc.gov/media/8161/enffxlatinocomplaint021023/download, the CFTC charged Ramon Salvador Delgado-Gomez, FX Latino (FXL), FXL Investment PR LLC (FXLI), Walmy Rivera-Santiago, JRH Services Inc. (JRH), Hector Javier Santos-Pagan (Santos), and Infinity Investment and Construction Management Corp. (Infinity) with fraud and registration violations. As alleged in part in the CFTC Release:
[F]rom approximately November 18, 2019 through February 8, 2021, Gomez and FXL, aided and abetted by, among others, Rivera and Santos and their respective companies, JRH and Infinity, conducted a scheme which solicited and accepted at least $17 million from over 2,000 individuals and entities in Puerto Rico and the continental United States for the purpose of engaging in a pooled investment in forex trading. According to the complaint, rather than using the pool participants’ funds to trade on behalf of the pool, FXL engaged in little to no trading, and, instead, FXL and Gomez misappropriated at least $13 million of pool participants’ funds to pay purported returns to existing pool participants in a manner typical of a Ponzi scheme. The complaint further alleges Gomez and FXL misappropriated pool participant funds to pay business and personal expenses and to make payments to Gomez, some of the aiders and abettors, and other unnamed individuals and entities involved in the scheme.
As charged, FXLI, JRH, and Infinity, by and through their respective principals, Gomez, Rivera, and Santos, aided and abetted FXL’s and Gomez’s misappropriation by, among other things, using FXLI’s, JRH’s, and Infinity’s bank accounts to accept pool participants’ funds; transfer pool participants’ funds amongst themselves, FXL, Gomez, and other entities and individuals involved in the scheme; and make Ponzi-type payments to pool participants.
The complaint also charges FXL with failure to register as a commodity pool operator (CPO) and Gomez with failure to register as an associated person of a CPO.
Notice Regarding Paxos-Issued BUSD (Consumer Alert / New York State Department of Financial Services)
https://www.dfs.ny.gov/consumers/alerts/Paxos_and_Binance
Paxos Trust Company (“Paxos”) is a limited purpose trust company under the supervision of the New York State Department of Financial Services (“DFS”).
DFS has ordered Paxos to cease minting Paxos-issued BUSD as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD. In response, on February 13, 2023, Paxos notified customers of its intent to end its relationship with Binance for BUSD.
The Department is monitoring Paxos closely to verify that the company can facilitate redemptions in an orderly fashion subject to enhanced, risk-based, compliance protocols.
It is important to note that the Department authorized Paxos to issue BUSD on the Ethereum blockchain. The Department has not authorized Binance-Peg BUSD on any blockchain, and Binance-Peg BUSD is not issued by Paxos. There is currently no restriction on the listing or exchange in New York of existing Paxos-issued BUSD by DFS-licensed entities.
Pursuant to DFS requirements, all stablecoins issued by DFS-regulated entities are required to be fully backed 1:1 by cash or cash equivalents. These reserves are regularly reviewed through third-party attestations and internal and external, independent reviews. Compliance with the DFS stablecoin guidance and bespoke supervisory agreements are also part of the examination process.
Paxos is required to redeem their Paxos-issued BUSD tokens for U.S. dollars through Paxos at a 1:1 exchange rate pursuant to compliance protocols for customers in good standing.
U.S. residents who own Paxos-issued BUSD and are not already Paxos customers in good standing can apply to be onboarded as a Paxos customer. Once a customer has gone through the onboarding and due diligence process, Paxos is required to redeem Paxos-issued BUSD for USD at a 1:1 exchange rate pursuant to compliance protocols
Per DFS requirements, Paxos is required to conduct due diligence on every new customer. There may be a high volume of new customer and redemption requests that will require extended processing time. If you have any issues creating an account with Paxos or would like to know the status of your redemption request, please submit a support request through the Paxos Support Website, at help.paxos.com.