Securities Industry Commentator by Bill Singer, Esq.

October 27, 2017

Veteran Wall Street Regulatory Critic Bill Singer, Esq. Offers Rare Praise to SEC Chair Clayton

For perhaps one of the only times during my 35 years on Wall Street, I have the sense that there is a no-nonsense hand at the helm of the Securities and Exchange Commission. In 2017, I have seen a significant reduction is what I often decry as the self-serving public relations crap that came out of far too many SEC administrations over the years (defining an "administration" as the term of a given Chair). Instead of focusing resources on prosecution and enforcement with a particular emphasis on protecting the most vulnerable investors (generally "retail"), the SEC often pursued high fallutin' agendas about the "culture" of Wall Street. The small fry investor was sacrificed on the altar of incomprehensible macro-regulatory-initiatives that sought answers to questions no one was asking or sought to orient regulation to attack problems that seemed of dubious concern.  Worse, far too much  money and time was wasted on the retention of over-priced, outside consultants who produced charts and spreadsheets in the service of grandiose nonsense. 

I freely concede that there are some aspects of the Clayton administration that irritate many industry reformers, but, by and large, I appreciate the infusion of professionalism at the federal regulator. As a three-decade critic of Wall Street regulation and an outspoken reformer, I still have criticisms and complaints. Notably, the ponderous SEC whistle-blowing system needs to be redressed and I still detest mandatory securities-industry arbitration. On the other end, there is a dynamic to regulation which must accept an ebb-and-flow between progressive and conservative agendas, between Republican and Democratic Congresses. As a libertarian, I genrally have little use for any prevailing political winds. I remain a staunch advocate for effective regulation by competent regulators. A defrauded retiree cares little if her life savings are returned to her via the efforts of an Elizabeth Warren progressive or a Donald Trump conservative, whatever those labels may even mean. In the end, let the politicians battle over what they will but let the mom and pop investors be protected by regulators who are vigilant on the ramparts. That is all that I have ever demanded from our federal, state, and self regulators. There is still much room for improvement but I give SEC Chair Clayton credit for setting a very professional, no-nonsense tone.
On October 26, 2017, Stephanie Avakian, Co-Director, of the Securities and and Exchange Commission's Division of Enforcement delivered a speech titled: "The SEC Enforcement Division's Initiatives Regarding Retail Investor Protection and Cybersecurity" Director Avakian's remarks provide an interesting insight into what I view as a profound transformation taking place under Chairman Clayton's leadership. I urge all serious industry participants to read her comments, which, in part, state:

As all of you know, Enforcement has a very broad mandate - we cover a lot of ground across the securities markets. One need only look at our various units, task forces, and working groups, as well as the cases we bring, to get a sense of our landscape. At a high level, our greatest priorities and where we allocate our limited resources do not really change over time, and nor should they. We are always going to be focused on retail investors. These are often the most vulnerable market participants who are most in need of our protection. We are also always going to be focused on cyber-related issues, which are only continuing to increase in number and impact. Finally, we are always going to be focused on issues raised by the conduct of investment advisers, broker-dealers, and other registrants, on financial fraud and disclosure issues involving public companies, and on insider trading. And that leads to the next questions: Are we allocating our resources in the best possible way to address those priorities? Is there something we should change?

Here, we do think there is more we can do to align our resources with two of our key priorities - specifically, retail and cyber. To be sure, we have long focused resources in both of these areas, but we think that some structural change and strategic focus will enable us to better fulfill our investor protection mission. And so the Commission recently announced the creation of a Retail Strategy Task Force and a Cyber Unit. . .

Marijuana Pump-And-Dump Goes Up In SEC Smoke

There are those who believe that the shenanigans of the old pennystock hustlers and boiler-room aficionados were put to rest with the 1990s. Maybe. Maybe not. Either some folks figure that Wall Street's "Golden Oldies" deserve a dusting off or, perhaps, a few blissfully ignorant souls think that they've reinvented the wheel. Whatever the case, in anticipation of the institution of proceedings by the Securities and Exchange Commission ("SEC") but without admitting or denying the findings, Artemus Mayor submitted an Offer of Settlement, which the federal regulator accepted.  In the Matter of Artemus Mayor, Respondent, (Order Instituting Administrative And Cease-And-Desist Proceedings, Making Findings, And Imposing Remedial Sanctions And A Cease-And-Desist Order; '34 Act Rel. No. 81966; '33 Act Rel. No. 10432; Admin. Proc. File No. 3-18268 / October 26, 2017).

As set forth in the "Summary" portion of the Order:

From early 2013 through June 2014, Mayor and Henry Lin-Han Jan ("Jan") engaged in an over $2.3 million scheme to manipulate the stock price of SK3 Group, Inc. ("SK3") - an entity controlled by Jan - in violation of the antifraud and registration provisions of the federal securities laws. The fraud consisted of two coordinated components. First, Jan and Mayor, who Jan appointed as SK3's president, orchestrated a pump-and-dump scheme. Jan and Mayor caused SK3 to issue two press releases announcing that the company had entered into the medical marijuana industry and had secured certain acquisitions and agreements valued at millions of dollars. SK3's stock price and trading volume increased significantly following the issuance of these press releases. However, the purported acquisitions and agreements were nothing more than a series of transactions that created the appearance of positive corporate activity. In fact, prior to these press releases, SK3 had no assets or revenue, and SK3's purported acquisitions and agreements had no realistic prospect of creating revenue. After these initial releases, Jan and Mayor continued to cause SK3 to issue misleading press releases touting positive business developments as well as making material misrepresentations in the company's periodic reports and financial statements throughout 2013 and early 2014, although actual assets and revenue remained minimal. 

Second, with the stock price inflated, Jan and Mayor unlawfully caused hundreds of millions of purportedly unrestricted SK3 common stock to be issued, for which no exemption from registration was available, to nominees of Jan (the "Nominees"). Then, in accordance with an agreement with Jan, the Nominees sold the shares into the market and transferred almost half of the proceeds from the SK3 stock sales back to Jan for his own personal and business uses. 

Mayor, age 48, was the President, Secretary and Director of SK3 from about October 2011 through 2014. In addition to the imposition of a Cease-And-Desist, Mayor was ordered to pay a $160,000 civil money penalty, and as stated in the Order:

prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required 7 to file reports pursuant to Section 15(d) of the Exchange Act for a period of five (5) years from the entry of this Order; and

barred from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock, with the right to apply for reentry after five (5) years to the appropriate self-regulatory organization, or if there is none, to the Commission. 

Also READSEC Settles Charges Against Two Individuals in a Fraudulent Manipulation Scheme Involving the Stock of a Medical Marijuana Company  (SEC Administrative Proceeding File No. 3-18267 and 3-18268 / October 26, 2017) :

The Securities and Exchange Commission today announced that Henry Lin-Han Jan and Artemus Mayor have agreed to settle charges that they engaged in a fraudulent manipulation scheme involving the securities of SK3 Group, Inc., a publicly traded microcap company purportedly operating in the medical marijuana industry

Securities and Exchange Commission Suspends CPA and Imposes Industry Bar

In anticipation of the institution of proceedings by the Securities and Exchange Commission ("SEC") but without admitting or denying the findings, Respondent Thomas F. Duszynski submitted an Offer of Settlement, which the federal regulator accepted.  In the Matter of Augustine Capital Management, LLC (F/K/A Augustine Capital Management, Inc.), John T. Porter, and Thomas F. Duszynski, CPA, Respondents, (Order Instituting Administrative And Cease-And-Desist Proceedings, Making Findings, And Imposing Remedial Sanctions And A Cease-And-Desist Order as to Thomas F. Duszynski, CPA; '34 Act Rel. No. 81951; Invest. Adv. Act Rel. No. 4800; Invest. Co. Act Rel. No. 32883; Acct. and Audit. Enf. Rel. No. 3904, Admin. Proc. File No. 3-17740 / October 26, 2017). 

Respondent Duszynski, 62 years old, was a licensed but now inactive CPA who has never been registered with the SEC in any capacity. He is a one-third owner of ACM, for which he served as the chief operating officer, secretary and director. In addition to the imposition of a Cease-And-Desist, a joint-and-several liability to pay a $685,514.73 disgorgement with $42,791,38 interest, and a $50,000 civil money penalty, Respondent Duszynski is suspended from appearing and practicing before the SEC as an accountant and as stated in the Order:

barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; 

prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter;

with the right to apply for reentry after three (3) years to the appropriate self regulatory organization, or if there is none, to the Commission.

As set forth in the "Summary" portion of the Order [Ed: footnotes omitted]:

1. Respondents J. Porter and Duszynski, together with another individual, own Respondent Augustine Capital Management, LLC. ACM, in turn, acts as an investment adviser for Augustine Fund, L.P. (the "Fund"), a private fund. 

2. Respondents caused the Fund to engage in conflicted transactions without disclosure to, or the consent of, the Fund's investors. Such consent was needed because the investment adviser had a conflict of interest and therefore could not give meaningful consent on behalf of the Fund. Respondents invested in and lent money to two entities in which the ACM owners had an interest. Respondents also lent an ACM owner, Duszynski, money to fund his investment in a business venture with other ACM owners. Duszynski defaulted on the loan.

3. Respondents used nearly $950,000 in investor funds to pay for ACM's expenses. These expenses, which under the investment documentation provided to investors were to be borne by ACM, included virtually all of ACM's overhead expenses - including the salaries of ACM employees. J. Porter, Duszynski and certain of their family members paid approximately $362,000 of these excess expenses. The other investors in the Fund paid approximately $585,000 of these excess expenses. Additionally, even though J. Porter and Duszynski were themselves investors in the Fund, they exempted themselves and certain of their relatives who were investors in the Fund from paying their pro rata shares of their salaries. 

4. The offering documentation ACM gave to investors provided that classes would be formed and that an investor's holdings in the Fund would be based upon when the investor made an investment in the Fund. In practice, however, Respondents unilaterally determined which investments were allocated to which investors, and how much cash was allocated to each investor's account. Respondents thereafter periodically reallocated various investors' holdings. Respondents improperly kept investors in the dark about what investments were allocated to them, and why. 

5. Respondents provided investors with account statements that did not accurately reflect the value of certain underlying investments. Respondents privately concluded that one of the Fund's investments had been rendered worthless. But the account statements for the quarter did not capture adverse developments that occurred during that timeframe. Instead, in the account statements Respondents valued the investment at what the Fund had originally paid for the investment before their determination the investment was worthless.

Also READChicago Based Private Fund Censured And Principals Barred From Securities Industry (SEC Administrative Proceeding File No. 3-17740 / October 26, 2017) 

The Securities and Exchange Commission today barred two principals at a Chicago-based private fund adviser from the securities industry. 

The SEC also censured the adviser, Augustine Capital Management, LLC (ACM) and ordered ACM and the two principals, John T. Porter and Thomas F. Duszynski, to pay more than $1 million in disgorgement and civil penalties.

FINRA Hides The Name Of An Affiliated Bank ( Blog)

It can't be that easy, we think. It can't be that simple, we believe. In the end we're wrong on both counts. Apparently, it doesn't require much ingenuity or stealth for the employee of a FINRA member firm's affiliated bank to generate an ATM card without a customer's authorization. The one thing that is apparently quite easy and simple for FINRA, however, is to protect the name of the affiliated banks of its member firms. Sure, there are times when such an affiliate should not have its name published in a FINRA document, however, I don't think that this is such a time. You read today's settlement and see how you feel. READ