Securities Industry Commentator by Bill Singer Esq

September 28, 2018

BREAKING NEWS: United States Securities and Exchange Commission, Plaintiff, v. Elon Musk, Defendant (Complaint, 18-CV-8865; United States District Court for the Southern District of New York)
As set forth in the "Summary" portion of the Complaint;

1. This case involves a series of false and misleading statements made by Elon Musk, the Chief Executive Officer of Tesla, Inc. ("Tesla"), on August 7, 2018, regarding taking Tesla, a publicly traded company, private. Musk's statements, disseminated via Twitter, falsely indicated that, should he so choose, it was virtually certain that he could take Tesla private at a purchase price that reflected a substantial premium over Tesla stock's then-current share price, that funding for this multi-billion dollar transaction had been secured, and that the only contingency was a shareholder vote. In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source. 

2. At approximately 12:48 p.m. EDT on August 7, 2018, during trading hours, Musk tweeted to his over 22 million Twitter followers, "Am considering taking Tesla private at $420. Funding secured." This statement was false and misleading. Over the next three hours, Musk made a series of additional materially false and misleading statements via Twitter including: 
    • "My hope is *all* current investors remain with Tesla even if we're private. Would create special purpose fund enabling anyone to stay with Tesla." 
    • "Shareholders could either to [sic] sell at 420 or hold shares & go private." 
    • "Investor support is confirmed. Only reason why this is not certain is that it's contingent on a shareholder vote." 
3. Musk knew or was reckless in not knowing that each of these statements was false and/or misleading because he did not have an adequate basis in fact for his assertions. When he made these statements, Musk knew that he had never discussed a going-private transaction at $420 per share with any potential funding source, had done nothing to investigate whether it would be possible for all current investors to remain with Tesla as a private company via a "special purpose fund," and had not confirmed support of Tesla's investors for a potential going private transaction. He also knew that he had not satisfied numerous additional contingencies, the resolution of which was highly uncertain, when he unequivocally declared, "Only reason why this is not certain is that it's contingent on a shareholder vote." Musk's public statements and omissions created the misleading impression that taking Tesla private was subject only to Musk choosing to do so and a shareholder vote. 

4. Investors reacted to Musk's August 7 tweets. From the time of Musk's first tweet that day until the close of trading on August 7, Tesla's stock price increased by more than 6% on significantly increased volume and closed up 10.98% from the previous day. 

5. Musk's false and misleading public statements and omissions caused significant confusion and disruption in the market for Tesla's stock and resulting harm to investors.

6. By engaging in the conduct alleged in this Complaint, Musk violated, and unless restrained and enjoined will violate again, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.

Petrobras Reaches Settlement With SEC for Misleading Investors (SEC Release 2018-215)
In an Order filed against and settled by Brazilian oil-and-gas company Petróleo Brasileiro S.A., the SEC found that senior Petrobras executives worked with the company's largest contractors and suppliers to inflate by billions of dollars the cost of its infrastructure projects, for which billions in kickbacks were paid to the Petrobras executives, who, in turn, paid Brazilian politicians who had helped them obtain their Petrobras jobs. As a result, Petrobras filed false and misleading statements in a $10 billion 2010 stock offering that overstated assets by some $2.5 billion. In connection with the settlement of the SEC's Order and in accordance with a Non-Prosecution Agreement with the Department of Justice, Petrobras will pay $933 million in disgorgement and prejudgment interest and an $853 million penalty, subject to off-sets for payments in a related class-action settlement and per payments to Brazilian law enforcement authorities. READ the FULL TEXT Order
In a recent FINRA regulatory settlement, we come across a Wells Fargo registered person who allegedly engaged in nearly 400 unauthorized discretionary trades over a three-year period. FINRA resolved the case with a fine and suspension. Frankly, the sanctions seem measured and deserved. Be that as it may, the self-regulatory-organization's resort to yet another fine-and-suspend settlement with yet another of the industry's human being employees prompts Blog publisher Bill Singer to ask why that "and" doesn't get applied with equal fervor to the industry's large member firms. How is it -- who came up with the half-assed regulatory approach -- that the too-big-to-fail are also too-big-to-be-suspended? Why is any form of suspension for large FINRA member firms such a sacrosanct no-go for Wall Street's broker-dealer regulators but not for those who regulate banks?

SEC and CFTC Charge Bitcoin-Funded Trading Platform:

In a Complaint filed int eh United States District Court for the District of Columbia, the SEC alleged that 1pool Ltd. a/k/a 1Broker, registered in the Republic of the Marshall Islands, and its CEO Patrick Brunner solicited investors to buy and sell security-based swaps.  Investors opened accounts with only an email address and a user name, but could only fund their account using bitcoins.An undercover FBI agent allegedly purchased several security-based swaps on 1Broker's platform despite not meeting the discretionary investment thresholds required by the federal securities laws.  Further, the Complaint alleges that Brunner and 1Broker failed to transact its security-based swaps on a registered national exchange, and failed to properly register as a security-based swaps dealer. 

The CFTC Complaint alleged that 1pool Ltd. (1pool), and Brunner engaged in unlawful retail commodity transactions, failed to register as a Futures Commission Merchant (FCM), and failed to implement procedures to prevent money laundering as required under federal laws and regulations.

READ the FULL TEXT SEC Complaint
In Complaints filed in Florida and North Carolina, the SEC sought penalties, disgorgement of ill-gotten gains, and permanent injunctions against Timothy J. Atkinson, Ronald "Ronnie" Montano, Jay Passerino, Michael Wright, and All In Publishing LLC.  Without admitting or denying charges, Justin Blake Barrett, William E. Berry and his company Berry Mediaworks, Grayson Brookshire, Antonio Giacca, Shmuel Pollen, and Travis Stephenson settled SEC's charges and agreed to pay $4.1 million in disgorgement and prejudgment interest.  Pollen has agreed to pay a $42,500 penalty.  The Commission did not assess a penalty on the other settling parties as a result of their cooperation. The Complaints asserted that internet marketers created and disseminated elaborate rags-to-riches videos to trick retirees and other retail investors into opening brokerage accounts and trading high-risk securities known as binary options. According to the Complaints, the videos were disseminated through spam emails and, in part, staged fake demonstrations of supposed software users watching their account balances grow in real time. READ the FULL TEXT Complaints




SEC Obtains Permanent Injunction Against CEO in Penny Stock Fraud Scheme (SEC Litigation Release No. 24290)
In a final judgment entered in the United States District Court for the Northern District of Illinois, Andrew J. Kandalepas, former CEO of Wellness Center USA,Inc. was permanently enjoined from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the broker registration provisions of Section 15(a) of the Exchange Act. Also, Kandalepas is barred from serving as an officer or director of a public company, from participating in penny stock offerings. The SEC had charged Kandalepas with making false and misleading statements in Wellness Center USA's SEC filings and press releases and with manipulating the company's stock; and taking $450,000 in unauthorized withdrawals from Wellness that he disguised as salary, prepayments, or loans in annual and quarterly reports. Further, Kandalepas allegedly caused Wellnes to issue press releases about non-existent sales of medical devices. Allegedly,  Kandalepas manipulated Wellness' stock by secretly trading in a friend's brokerage account and coordinating trades with  Matthew T. Mushlin, who was charged with acting as an unregistered broker.

Former Financial Officer of Non-Profit Charged with Embezzling over $1.3 Million (DOJ Release)
In an Indictment filed in the United States District Court for the District of Massachusetts, Nicole Lescarbeau, former financial officer of a non-profit organization, was charged with three counts of wire fraud, five counts of bank fraud, and one count of aggravated identity theft. Lescarbeau's duties included managing incoming invoices, paying bills by check and wire transfer, using and paying credit cards, financial account maintenance, and bookkeeping -- tasks that gave her access to the non-profit's checkbook, bookkeeping and accounting software, and online bank accounts. The Indictment allegest that Lescarbeau wrote unauthorized checks to herself using the non-profit's accounting software and affixed the signatures of the authorized signers on the account. Further, she allegedly logged on to the non-profit's online bank accounts and directed unauthorized payments and transfers for her personal benefit. Allegedly, Lescarbeau embezzled about $1,389,317 from the non-profit.