Securities Industry Commentator by Bill Singer Esq

March 13, 2018

Defendant Sentenced in Multimillion Dollar Prize Promotion Scams Targeting Elderly Victims (DOJ Press Release)
In December 2017, Glen Burke pled guilty to criminal contempt of court and conspiracy charges arising from his operation of two predatory schemes that defrauded thousands of victims out of over $20 million. Burke's conduct was in violation of a 1998 court order permanently banning him from telemarketing. Burke was sentenced to 87 months in prison plus three years of supervised release and ordered to pay $2,785,508.36 in restitution. As set forth in part in the DOJ Press Release:

[T]he charge stemmed from Burke's operation of a mass-mailing fraud scheme that misled consumers into believing that they had won large cash prizes, often millions of dollars. Burke specifically mailed consumers solicitations that used fake names and, in many cases, looked like they came from law firms or financial institutions, advising consumers to pay a fee - usually $20 to $30 - to claim their promised winnings.  Once consumers paid, however, Burke never sent any consumer a promised prize.  

Burke, along with Rossi, also pleaded guilty to conspiracy to commit mail and wire fraud for running a fraudulent telemarketing operation.  Telemarketers working for Burke and Rossi falsely told victims that they had won one of five valuable prizes, typically: a Chevy Camaro; a Boston Whaler boat; a diamond-and-sapphire bracelet; $3,000 cash; or a cruise that could be exchanged for $2,300.  To claim the prize, consumers were told to pay hundreds, or in some cases thousands, of dollars.  Once they paid, victims received a nearly worthless piece of costume jewelry or nothing at all.  

In January 2013, the FTC filed a civil contempt case against Burke for violating the 1998 court order.  The district court found Burke in civil contempt and ordered him to pay contempt sanctions of over $20 million, reflecting consumer loss from both the telemarketing and mass-mailing schemes. 

Disturbing FINRA Settlement Involving Elderly Client With Dementia ( Blog)
In today's Blog, publisher Bill Singer, Esq. presents us with a disturbing FINRA regulatory settlement -- disturbing in so many ways. Disturbing in that we are presented with alleged misconduct by a veteran stockbroker in a elderly client's account. Disturbing in that the alleged misconduct spans some four years. Disturbing in that the client was in his 90s with dementia. Disturbing in that the stockbroker had a disturbing history of settled customer complaints. Disturbing in that FINRA member firms seem all too willing to take on what we will euphemistically call "baggage." Disturbing in that despite clanging alarms and blazing flares, those in compliance and regulation seem deaf and blind. Disturbing in that we see similar signs and similar settlements over and over again but no one pushes the STOP button. Disturbing in that FINRA thinks it's doing its job by simply barring folks long after the damage and harm is done. Disturbing in that the Blog keeps publishing these settlements and keeps complaining about the impotent regulatory and compliance response but once the harangue dies down, nothing changes . . . and, apparently, nothing will. READ

Jury Finds Stockbroker Guilty of Insider Trading for Dealing in Stock of Local Biotechnology Firm (DOJ Press Release)
Stockbroker Paul Rampoldi was found guilty by a federal jury of conspiracy to commit insider trading, wire fraud, and money laundering, in connection with insider trading pursuant to a tip about the merger of Ardea Biosciences, Inc. with AstraZeneca. William Scott Blythe, Rampoldi's client who placed the trade and secretly paid Rampoldi his share of the profits in tens of thousands of dollars in cash, pled guilty to engaging in the same conspiracy. As set forth in part in the DOJ Press Release:

The evidence presented at trial showed that in April 2012, Ardea insider Fefferman learned that the company was planning to merge with AstraZeneca.  He also knew that this secret news would boost Ardea's stock price by a hefty 50%. Before the merger was announced to the public, Fefferman passed the inside information on to his close friend and brother-in-law Chad Wiegand, a licensed stockbroker at National Planning Corporation (NPC).  Wiegand passed the information on to his coworker at NPC, Akis Eracleous, who was also a licensed stockbroker.  Eracleous, in turn, passed the tip to defendants Rampoldi and Blythe, and the three agreed (to avoid suspicion and scrutiny) that Blythe would trade on the information in his non-NPC brokerage account, and then they would all share the profits. 

On the Friday before the merger was announced publicly, Blythe bought more than $5,400 in risky Ardea stock options.  On Monday - the next trading day after the merger announcement was released - Blythe sold the options for nearly $89,000. Blythe distributed approximately $40,000 of the fraudulent proceeds in cash to Rampoldi and Eracleous to hide the paper trail, and paid $2,000 in cash to Wiegand to compensate him for the tip.  After Forbes magazine reported on Blythe's spectacular earnings, the group realized an investigation was brewing, and they got together to work on their cover story to mislead the FBI and financial industry investigators.

Fefferman, Wiegand, and Eracleous were each charged previously, and each has admitted his involvement in the insider trading and agreed to cooperate with the investigation. Rampoldi and Blythe are scheduled to be sentenced on May 25, 2018, at 9:00 am before U.S. District Judge Dana M. Sabraw.  The jury hearing Rampoldi's case was unable to reach a verdict on two other counts facing him, so a status hearing is set for March 23, 2018, at 11:00 am before Judge Sabraw to discuss a possible retrial on those counts.

In the Matter of Hui Feng and Law Offices of Feng & Associates, P.C. (Initial Decision, Securities and Exchange Commission; Initial Decision Release No. 1242; Administrative Proceeding File No. 3-18209 / March 12, 2018)
Respondent Hui Feng graduated from Columbia Law School in 1997 and his law firm (the Law Office of Feng & Associates, P.C.) was incorporated in October 2011. Feng's legal practice focused primarily on immigration law, and in 2010, he became involved in the EB-5 Immigrant Investor Program through  which entrepreneurs who invest in a U.S. commercial enterprise and create/preserve permanent full-time jobs for U.S. workers are eligible to apply for permanent residence. As set forth in part in the SEC Initial Decision [Ed: Footnote omitted]:

[B]efore February 2015, Feng told his clients he received referral fees only if they asked him. Id. at 16; Feng Decl. at 9. Respondents did not tell their clients about the referral fees because they did not want to have to return a portion of them to their clients. Div. Ex. 3 at 19.1 Also, Respondents never registered as brokers with the Commission. Id. at 15. 

On these facts, the district court found that Respondents acted as unregistered broker-dealers in violation of Section 15(a) of the Securities Exchange Act of 1934. Id. The district court further found that Respondents' failure to disclose to their clients that they received commissions was a material misrepresentation in connection with the offer or sale of a security, and that Respondents acted with scienter. Id. at 17-19. 

In addition, Feng told regional centers that he was working with individuals in China to procure investors and that those individuals were demanding the referral fees. Div. Ex. 3 at 21. Feng made it look like the referral fees were not going to him. See id. In reality, at Feng's direction, his relatives purported to be the overseas individuals demanding the referral fees and signed agreements with the regional centers on behalf of Atlantic Business Consulting Limited (ABCL), a Hong Kong entity Feng formed in April 2014. Id.; Feng Decl. at 8. Feng is the sole beneficial owner of ABCL and has sole control over its bank account. Div. Ex. 3 at 20-21. ABCL's employees were all employees of the Law Offices. Id. at 21. 

Feng failed to disclose to the regional centers that ABCL was his company, that his relatives had no role in finding investors, and that they had no actual role in ABCL. Id. at 21-22. At least one regional center would likely have ceased doing business with Feng if it had known about this arrangement. Id. at 22. Respondents offered no evidence that the regional centers were aware of Feng's real relationship with ABCL. Id. The district court therefore found that this conduct was a scheme to defraud the regional centers, and that the Commission proved that Respondents had violated  .

The district court ordered Respondents to jointly and severally disgorge the $1,268,000 in commissions that they received, in addition to $130,517.09 in prejudgment interest. Id. at 23. The district court imposed $160,000 in civil penalties against Feng and $800,000 against the Law Offices. Id. at 24. The court permanently enjoined Respondents from violating Section 17(a) of the Securities Act, and Sections 10(b), 15(a), and Rule 10b-5 of the Exchange Act. Div. Ex. 4 at 1-3. . .

Based upon the above facts and findings, the ALJ granted the Division of Enforcement's motion for default and sanctions and ordered that Hui Feng and the Law Offices of Feng & Associates, P.C., are barred from associating with a broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or nationally recognized statistical rating organization and from participating in an offering of penny stock. 

Virginia Man Sentenced To Two Years In Prison For Scheme To Manipulate The Market For Fitbit Stock (DOJ Press Release)
Following his guilty plea, Robert Walter Murray was sentenced to 24 months in prison plus two years of supervised release and ordered to forfeit $3,914.08 in connection with his manipulating the market for the stock of Fitbit, Inc. by filing a sham tender offer with the Securities and Exchange Commission in November 2016.  As set forth in part in the DOJ Press Release;

On November 8, 2016, MURRAY, falsely purporting to be an officer at a China-based entity called ABM Capital, created an account on the SEC's Electronic Data Gathering, Analysis, and Retrieval (or "EDGAR") system.  The next day, MURRAY submitted a filing on EDGAR that reported that ABM Capital had offered to purchase Fitbit for approximately $12.50 a share, a significant premium to the price of Fitbit stock at the time.  This filing was made public on November 10, 2016, and, when it was, Fitbit's stock temporarily increased in response to the news.  While Fitbit's stock had closed at approximately $8.55 a share on November 9, 2016, it reached a high of approximately $9.27 per share, with significantly increased trading volume, after MURRAY's fake tender offer filing was made public.  This resulted in a temporary increase of Fitbit's market capitalization of around $100 million.  The tender offer that MURRAY filed, however, was entirely fictitious, and was instead meant only to increase the value of options in Fitbit stock that MURRAY had purchased just days earlier. 

MURRAY also took significant steps to hide his connection to the tender offer filing.  For example, he created a separate email account to register with the SEC and to file the sham tender offer, and took efforts to disguise his IP address when accessing that account. 

(DOJ Press Release)
Kerby Rigaud pled guilty to conspiracy to commit wire and bank fraud and money laundering in connection with an international business email compromise scheme, Victims received emails purportedly from sources such as banking representatives and closing agents, and were directed to wire money to specific bank accounts,. After receiving the wires, Rigaud directed his recruits on where to send the money, including Asian financial institutions in Asia.