Securities Industry Commentator by Bill Singer Esq

November 21, 2017

In the Matter of Shervin Neman and Neman Financial, Inc. (Initial Decision, Securities and Exchange Commission, Init. Dec. Rel. No. 1227; Admin. Proc. File No. 3-17699 / November 20, 2017)  As set forth in  the "Syllabus" of Administrative Law Judge Jason S. Patil's "Initial Decision":

Shervin Neman, through his firm Neman Financial, Inc., operated a Ponzi scheme. Neman was convicted, imprisoned, and ordered to pay millions of dollars in restitution. In a civil case, a federal district court permanently enjoined Neman and his firm from violating the federal securities laws. This initial decision imposes the further sanction of industry bars against Neman and revokes Neman Financial's registration.

A fascinating aspect of ALJ Patil's rationale is found in his consideration of whether Neman is likely to engage in future violations and if he has shown remorse for his misconduct. In pertinent part, the Initial Decision asserts:

Neman does not acknowledge that he did anything wrong. Instead, Neman maintains that all of the allegations against him and Neman Financial are false. He has exhibited "an exaggerated sense of victimization"  throughout the proceedings against him. Nov. 24, 2014, Tr. at 21, ECF No. 250 (testimony of one of Neman's actual victims); see, e.g., id. at 31 (Neman asking criminal court "what's the difference between here and Iran?"). In his answer, Neman contends that: 

1) . . . the SEC & FBI/DOJ tampered with my witnesses, 2) one of the jury members fell asleep during the IMPORTANT testimony of the FBI agent to the point that . . . jurors had to elbow him to wake him up, 3) . . . THERE WAS ABSOLUTELY NO DEFENSE FOR MY CRIMINAL TRIAL WHEN I HAVE PROOF THE PUBLIC DEFENDER PROMISED ME TO PUT ON DEFENSE & LIED TO ME . . . 

Resp. Letter of Mar. 15, 2017, at 2-3 (capitalization in original). In April 2017, Neman reiterated the preceding position, adding that "the Public Defender worked with the prosecutor to put [him] in jail." Resp. Letter of Apr. 3, 2017, at 2.

In May 2017, Neman made similar allegations, adding the allegation that all lawyers and witnesses lied:

[T]he SEC attorney SIMPLY LIED with no consequence . . . I feel that the process is rigged . . . the FBI agent lied on the stand . . . the lawyer/public defender lied to me . . . [and] the witnesses lied on the stand & to be clear ALL THE WITNESSES LIED . . . ALL MY CONSTITUTIONAL RIGHTS HAVE BEEN VIOLATED[.] 

Resp. Letter of May 15, 2017, at 1-2; see also, e.g., Nov. 24, 2014, Tr. at 32-33, ECF No. 250 ("[T]he situation that has occurred with the prosecution and my public defender, I believe that they worked together to put me in jail."). Respondents' last letter, received September 8, 2017, does not acknowledge the wrongful nature of Neman's conduct, nor does it provide any assurances against future violations. This is similar to his civil case, where the court observed that "Neman has provided no assurances against future violations. On the contrary, he committed the above-mentioned act of fraud after . . . a preliminary injunction to prevent such conduct." Ex. 7 at 20. 

But that is not all. After his criminal conviction but before sentencing, Neman gave his defense attorneys a forged bank statement and handwritten letter that purported to show that he had millions of dollars in an account with Goldman Sachs & Co. See Declaration and Exhibits in Support of Government's Opposition to Defendant's Motion for New Trial ¶¶ 8-9 ("Opp to New Trial Decl."), United States v. Neman, No. 2:13-cr-289 (C.D. Cal. June 6, 2014), ECF No. 121; id. Exs. 4-5, ECF Nos. 121-31-32; Reporter's Transcript of Motion for a New Trial, Monday, July 14, 2014, at 4-7, 11 ("July 14, 2014, Tr."), Neman, No. 2:13-cr-289 (C.D. Cal. July 21, 2014), ECF No. 125. The Goldman Sachs employee who supposedly wrote the letter has stated that Neman does not "have any funds invested at Goldman Sachs"; the bank statement is not a type of document that he has seen; the account number on the bank statement is not a Goldman Sachs number for "accounts originating in Los Angeles"; "the writing on [the letter] is not his writing"; and "the signature is not his." Opp. to New Trial Decl. Ex. 5 at 2, ECF No. 121-32. Despite this evidence, Neman insisted that he had over three million dollars in the account and was willing to repay his victims. See Nov. 24, 2014, Tr. at 23-24, ECF No. 250. He did not do so. See id. at 24, 26. The criminal court ordered a competency evaluation before sentencing because it could not "believe that a rational person would hold these positions." Nov. 24, 2014, Tr. at 44-46, 48, ECF No. 250. 

In short, Neman is either deliberately misrepresenting his past actions or is sincerely holding beliefs that are belied by the evidence. I find that, on this record, there is no recognition of wrongful conduct nor meaningful assurance against future violations.

SEC Charges Individual and His Company with Operating an Unregistered Dealer Business (SEC Litigation Release No. 23992 / November 20, 2017) As set forth in pertinent part in the SEC Litigation Release, the federal regulator alleged that:

[B]eginning in January 2013, Ibrahim Almagarby and his company, Microcap Equity Group LLC (MEG), engaged in a business that purchased aged penny stock issuer debts. After converting the debts into equity, they sold the resultant shares into the market. At the time of this conduct, the complaint alleges that neither Almagarby nor MEG were registered with the SEC as a dealer and Almagarby was not associated with a registered broker or dealer. Through these activities, Almagarby and MEG purchased over $1.1 million of aged debts of 39 microcap issuers and sold into the market over 7.4 billion shares generating over $1.4 million in ill-gotten gains.

READ FULL TEXT SEC Almabarby COMPLAINT: Securities and Exchange Commission, Plaintiff, v. Ibrahim Almabarby and Microcap Equity Group LLC, Defendants (Complaint, United States District Court for the Southern District of Florida, 17-CV-62255 / November 17, 2017) Attorney General Jeff Sessions issued a memo prohibiting the Department of Justice from issuing guidance documents, which purportedly were used at times to circumvent the rulemaking process by attempting to  change the law or to impose new compliance standards. 

In the Matter of Martin Shkreli (Order on Motion for Summary Disposition, Securities and Exchange Commission, Admin. Proc. Rul. Rel. NO. 5233;Admin. Proc. File No. 3-18127 / November 17, 2017). As set forth in pertinent part in the "Procedural Background' of the SEC Order [Ed: footnotes omitted]:

The Securities and Exchange Commission instituted this proceeding against Shkreli in August 2017. The order instituting proceedings (OIP), which was issued under Section 203(f) of the Investment Advisers Act of 1940, alleges that during an unspecified timeframe, Shkreli was the managing partner and portfolio manager for two hedge funds.  It also alleges that in August 2017, a jury convicted Shkreli of violating Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (securities fraud), and 18 U.S.C. § 371 (conspiracy). The OIP summarizes the factual allegations in the superseding indictment related to the charges of which Shkreli was convicted. The OIP directs me to determine whether the allegations are true and, if so, what "remedial action is appropriate."

Shkreli filed a timely answer to the OIP. Shkreli, who has not yet been sentenced, declined on Fifth Amendment grounds to answer the first operative paragraph of the OIP, which included the allegations related to his alleged association with a hedge fund. He admitted, however, the fact of the verdict rendered against him and the accuracy of the OIP's summary of the allegations included in his superseding indictment.

In accordance with a schedule that I set, the Division filed a motion for summary disposition, which Shkreli opposes.

Administrative Law Judge James E. Grimes granted in part and denied in part the Motion. In pertinent part, ALJ Grimes explains that [Ed: footnotes omitted]:

Given the foregoing, there is a material question as to whether Shkreli was associated with an investment adviser at the time of his misconduct. To the extent the Division moves for summary disposition on this issue, the motion is denied.

 As to the public interest, the Division has established that Shkreli was convicted of criminal offenses involving fraud. And the Commission has observed that summary disposition will "rare[ly]" be inappropriate in cases involving fraud convictions. Even so, the Commission and the courts have made clear that a bar does not automatically result from a conviction --otherwise there would be no need for this proceeding -- and an individual assessment of the public interest in each case is required.

The problem here is that the Division principally relies on the superseding indictment and the jury's verdict. But it has not supplied the evidence necessary to determine what the jury necessarily decided when it convicted Shkreli. This problem is accentuated here because Shkreli was acquitted of five of the eight counts in the superseding indictment. Given the length of the 21-page factual recitation that precedes the first count in the superseding indictment, I cannot without more evidence reliably determine the facts on which the jury relied. And without knowing what the jury necessarily decided, it is not possible to rely on the factual allegations in Shkreli's superseding indictment. To the extent the Division seeks summary disposition on the question of whether the public interest supports barring Shkreli, the Division's motion is denied.   

Spoofing Email Sends Payment To Minneapolis, Shanghai, And Bremen ( Blog
The Blog has frequently covered stories involving spoofed emails that are sent to banks and brokerage firms. Sometimes the recipients of these fraudulent emails are victims. Sometimes, they're complicit. Sometimes, folks just go about their day and despite all sorts of memos and policies over the years warning them against accepting emails at face value, they disregard protocol and set off an avalanche of trouble and pain.  As demonstrated in a recent federal criminal case, we got lots of scamsters alive and well out there in cyberspace.