Securities Industry Commentator by Bill Singer Esq

September 13, 2018

SEC Charges Hedge Fund Adviser With Short-and-Distort Scheme (SEC Release 2018-190)
In a Complaint filed in the United States District Court for the District of Massachusetts, the SEC charged Gregory Lemelson and Lemelson Capital Management LLC with having issued false information about Ligand Pharmaceuticals Inc., after Lemelson took a short position in Ligand in May 2014 on behalf of The Amvona Fund, a hedge fund he advised and partly owned. The Complaint alleges that Ligand's stock lost more than one-third of its value during the course of Lemelson's alleged scheme, which included false statements by Lemelson designed to shake investor confidence, lower the stock price, and increase the value of his position, resulting in alleged gains ov over $1.3 million. READ the FULL TEXT SEC COMPLAINT

Criminal and Civil Charges Filed In Cherry Picking Scheme:

Former stockbroker Michael Bressman  was Indicted in the United States District Court for the District of Massachusetts for securities fraud and investment advisor fraud. Allegedly, Bressman placed trades in an omnibus/allocation account from which he cherry-picked some $700,000 in profitable trades and transferred the proceeds into his own and family members accounts. The unprofitable trades were allocated to other customers. Separately, the SEC filed a Complaint in the same District Court charging Bressman with antifraud violations and seeking the return of allegedly ill-gotten gains, plus interest, penalties and a permanent injunction. The SEC asserts that it had uncovered the alleged fraud with data analysis used to detect suspicious trading patterns.
READ the FULL TEXT SEC Complaint

In re: Pending Administrative Proceedings (SEC Chief Administrative Law Judge's Order Assigning Proceedings Post Lucia v. SEC; Admin. Proc. Rul. Rel. No. 5955; Admin. Proc. File Nos. 3-15006 et al)
SEC Chief Administrative Law Judge  Brenda P. Murray announced that she is transferring Judge Cameron Elliot's cases to Judge Carol Fox Foelak, Judge Foelak's cases to Judge James E. Grimes, Judge Grimes's cases to herself, and her cases to Judge Elliot. Because Judge Jason S. Patil will not be available to preside at hearings for the next several months, and his pending cases will be distributed among the other judges.
Without admitting or denying the findings in an SEC Order, United Technologies entered into a settlement involving allegations that the company had violated  '34 Act anti-bribery, books and records, and internal accounting controls rules, and agreed to pay disgorgement of $9,067,142 plus interest of $919,392 and a penalty of $4 million. The Order alleged, in part, that United Technologies subsidiary Otis Elevator Co. made unlawful payments to Azerbaijani officials to facilitate the sales of elevator equipment for public housing in Baku and as part of a kickback scheme to sell elevators in China -- and that the company also paid a Chinese sales agent for confidential information from a Chinese official that would help the company win engine sales to a state-owned airline.  READ the FULL TEXT SEC Order

GUEST BLOG:How the SEC Would Run (and Ruin) Your Firm by Aegis Frumento Esq 
( Blog)
Let's be clear. The only thing that happened here is that the US Subsidiary complained to Merrill management that Due Diligence had not conducted a fair review of the New Team, and Merrill accommodated that complaint by granting more time. Both the complaint and the response were perfectly reasonable, because on the very face of it Due Diligence had not conducted a fair review. Due Diligence recommended terminating the Products because "the New Team had previously been responsible for institutional accounts with a minimum of $100 million invested in diversified portfolios of approximately 150 bonds whereas the Products were historically held in retail accounts with a minimum of $100,000 invested in portfolios of 20-25 bonds." Which is something like saying "You're not competent to play in the Minors because all you've ever done was pitch for the Yankees." Really?

SEC Charges Three in Crude Oil Processing Scheme (SEC Litigation Release No. 24266)
In a Complaint filed in the United States District Court for the Eastern District of New York, the SEC alleged that Joseph M. Laura violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder as well as the unregistered broker dealer provision of Section 15(a)(1) of the Exchange Act. Additionally, the Complaint  charges Anthony R. Sichenzio, and Walter Gil de Rubio with violating the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder, and with aiding and abetting Laura's violations of the antifraud provisions of Section 17(a)(2) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder. The SEC alleges that the Defendants defrauded about 80 investors out of over $3.7 million through sales of securities in a company that they fraudulently claimed to have rights to a crude oil processing technology. READ the FULL TEXT Complaint

OTC Equity Trading: FINRA Reminds Firms of Their Obligations When Effecting OTC Trades in Equity Securities on a Net Basis (FINRA Notice to Members 18-29)
As set forth under the "Background and Discussion" section of the NTM (footnotes omitted):

The term "net" trading generally refers to contemporaneous principal transactions where the initial and offsetting transactions are at different prices. For example, a firm trades on a "net" basis when it accumulates a position at one price and executes the offsetting trade with its customer or broker-dealer client at another price. These trades may otherwise be considered riskless principal transactions, except the initial and offsetting transactions are effected at different prices. As such, they do not constitute riskless principal transactions within the specific definition of that term under FINRA equity trade reporting rules. 

FINRA rules do not prohibit net trading or mandate the prices at which firms must execute the initial and offsetting transactions. However, if a firm chooses to trade on a net basis, it must comply with all applicable rules, including, but not limited to, the FINRA trade reporting rules, FINRA Rules 2124 (Net Transactions with Customers), 2121 (Fair Prices and Commissions), 5310 (Best Execution and Interpositioning) and 5320 (Prohibition Against Trading Ahead of Customer Orders), and SEC Rule 611 under Regulation NMS (Order Protection Rule). , ,

Latvian National Sentenced to Prison for "Scareware" Hacking Scheme That Targeted Minneapolis Star Tribune Website (DOJ Release)
Following his guilty plea, Peteris Sahurovs aka "Piotrek" and "Sagade" was sentenced in the United States District Court for the District of Minnesota to 33 months in prison for conspiracy to commit wire fraud. As set forth in part in the DOJ Release:

[S]ahurovs operated a "bullet-proof" web hosting service in Latvia, through which he leased server space to customers seeking to carry out criminal schemes without being identified or taken offline.  The defendant admitted that he knew his customers were using his servers to perpetrate criminal schemes, including the transmission of malware, fake anti-virus software, spam, and botnets to unwitting victims, and he received notices from Internet governance entities (such as Spamhaus) that his servers were hosting malicious activity.  Nonetheless, Sahurovs admitted he took steps to protect the criminal schemes from being discovered or disrupted, and hosted them on his servers for financial gain.

Sahurovs admitted that from in or about February 2010 to in or about September 2010, he registered domain names, provided bullet-proof hosting services, and gave technical support to a "scareware" scheme targeting visitors to the Minneapolis Star Tribune's website.  On Feb. 19, 2010, the Minneapolis Star Tribune began hosting an online advertisement, purporting to be for Best Western hotels, on its website,  Two days later, however, the advertisement began causing the computers of visitors to the website to be infected with malware.  This malware, also known as "scareware," caused visitors to experience slow system performance, unwanted pop-ups and total system failure.  Website visitors also received a fake "Windows Security Alert" pop-up informing them that their computer had been infected with a virus and another pop-up that falsely represented that they needed to purchase the "Antivirus Soft" computer program to fix their security issues, at a price of $49.95.

Website visitors who clicked the "Antivirus Soft" window were presented with an online order form to purchase a purported security program called "Antivirus Soft."  Users who purchased "Antivirus Soft" would receive a file download that "unfroze" their computers and stopped the pop-ups and security notifications.  However, the defendant admitted, the file was not a real anti-virus product and did not perform legitimate computer security functions, and merely caused malware that members of the conspiracy had previously installed to cease operating.  Meanwhile, the defendant admitted, victim users who did not choose to purchase "Antivirus Soft" became immediately inundated with so many pop-ups containing fraudulent "security alerts" that all information, data, and files on their computers were rendered inaccessible.  Members of the conspiracy defrauded victims out of substantial amounts of money as a result of the scheme.  The defendant admitted that as a result of his participation, he made between $150,000 and $250,000 U.S. dollars.

Russian National Who Operated Kelihos Botnet Pleads Guilty to Fraud, Conspiracy, Computer Crime and Identity Theft Offenses (DOJ Release)
Following his Indictment in the United States District Court for the District of Connecticut, Peter Yuryevich Levashov, aka "Petr Levashov," "Peter Severa," "Petr Severa" and "Sergey Astakhov" pled guilty to one count each of causing intentional damage to a protected computer, conspiracy, wire fraud and aggravated identity theft in connection with his operation of Kelihos botnet, which he used to facilitate malicious activities including harvesting login credentials, distributing bulk spam e-mails, and installing ransomware and other malicious software. As set forth in part in the DOJ Release:

[S]ince the late 1990s until his arrest in April 2017, Levashov controlled and operated multiple botnets, including the Storm, Waledac and Kelihos botnets, to harvest personal information and means of identification (including email addresses, usernames and logins, and passwords) from infected computers.  To further the scheme, Levashov disseminated spam and distributed other malware, such as banking Trojans and ransomware, and advertised the Kelihos botnet spam and malware services to others for purchase in order to enrich himself.  Over the course of his criminal career, Levashov participated in and moderated various online criminal forums on which stolen identities and credit cards, malware and other criminal tools of cybercrime were traded and sold.