Securities Industry Commentator by Bill Singer Esq

October 4, 2018

In its Order, the United States District Court for the District of Massachusetts found that the CFTC has the power to prosecute fraud involving virtual currency, and, accordingly, that My Big Coin ("MBC") was a commodity under the Commodity Exchange Act. The Court rejected the argument that the CFTC's anti-fraud authority over MBC extended only to fraudulent market manipulation. The CFTC's Amended Complaint alleges that defendants Randall Crater; Mark Gillespie; John Roche; Michael Kruger; My Big Coin Pay, Inc.; and My Big Coin, Inc.; and relief defendants Kimberly Renee Benge; Kimberly Renee Benge d/b/a Greyshore Advertisement a/k/a Greyshore Advertiset; Barbara Crater Meeks; Erica Crater; Greyshore, LLC; and Greyshore Technology, LLC operated a fraudulent virtual currency scheme in which they solicited over $6 million from  customers to purchase a fully-functioning virtual currency, MBC, by repeatedly making false and misleading claims about its value, usage, trade status, and financial backing.  Allegedly, Defendants lied that MBC could be bought, sold, donated, used to make purchases, and was actively trading -- and they asserted that MBC was backed by millions of dollars in gold, and would be used to stabilize the economies of twenty-two countries., as alleged in the amended complaint.  The Complaint alleges that the Defendants misappropriated funds to purchase a home, antiques, fine art, jewelry, luxury goods, furniture, interior decorating and other home improvement services, travel, and entertainment. 
READ the FULL TEXT Memorandum of Decision https://www.cftc.gov/sites/default/files/2018-10/enfmybigcoinpayincmemorandum092618.pdf

SEC and DOJ File Charges In Microcap Fraud

SEC Halts Microcap Fraud Scheme Orchestrated Through International Accounts (SEC Release 2018-228) https://www.sec.gov/news/press-release/2018-228

Founder of Swiss Brokerage Firm Charged in Global Securities Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-ma/pr/founder-swiss-brokerage-firm-charged-global-securities-fraud-scheme

In a Complaint filed in the United States District Court for the District of Massachusetts, the SEC charged Roger Knox and his Swiss-based company Wintercap SA with violating the antifraud and registration provisions of the federal securities laws and with acting as unregistered broker-dealers, and also charges Michael T. Gastauer and his entities with aiding and abetting Knox's violations of the antifraud and registration provisions.  The Complaint also names as relief defendants two family members of Gastauer and a U.K. entity Gastauer controlled.  In addition to the asset freeze and other temporary relief obtained yesterday, the SEC seeks permanent injunctions, disgorgement of allegedly ill-gotten gains plus interest, penalties, and penny stock bars. The Complaint alleges that Knox and Wintercap helped microcap stock sellers conceal their stock ownership and provided anonymous access to brokerage accounts to sell the shares in the U.S. market, and as pertaining to three issuers, Knox allegedly sold the stocks when their price and trading volume were inflated by promotional campaigns.  Gastauer allegedly aided and abetted the fraud by establishing several U.S. corporations and allowing Knox to use their bank accounts to disburse the proceeds of his illegal stock sales. The alleged scheme generated over $165 million of illegal sales of stock in at least 50 microcap companies. In the parallel criminal case, the US Attorney's Office for the District of Massachusetts charged Knox with securities fraud and conspiracy to commit securities fraud. READ the FULL TEXT SEC Complaint https://www.sec.gov/litigation/complaints/2018/comp-pr2018-228.pdf 

http://www.brokeandbroker.com/4220/fumento-sec-musk/
I had hoped to be done with Elon Musk's tweets, but then the SEC sued him. It hastily filed its Complaint last Thursday, after Musk walked away from a settlement struck the night before. Then Musk changed his mind. And so, on Saturday (Saturday?), the SEC announced a settlement. The settlement included a second suit, also filed on Saturday (Saturday???), against Tesla itself. Okay, I get Elon Musk's reputation for being mercurial -- and the SEC's for grabbing more power than Congress gave it -- but this, on both counts, is getting ridiculous. 

https://www.cftc.gov/PressRoom/PressReleases/7821-18
Following a two-day bench trial in the United States District Court for the District of Colorado, Judge Robert E. Blackburn ofound that Gregory L. Gramalegui d/b/a Eminitrading School had fraudulently marketed and sold a futures trading system that did not work and an advisory service that did not deliver as promised and, in doing so, Gramalegui failed to provide required advertising disclosures to clients and prospective clients.  Further, the Court found that Gramalegui  violated a prior CFTC Order entered against him ibased on his marketing of a previous deceptive trading system and advisory service. Gramalegui was ordered to pay a $1,442,070.51 civil monetary penalty and to disgorge $480,690.17 in ill-gotten gains; and the Court imposed permanent trading and registration bans on Defendant and permanently enjoined him from further violations of the CEA and CFTC Regulations, as charged. READ the FULL TEXT Findings of Fact
https://www.cftc.gov/sites/default/files/2018-10/enfgramaleguimemorandum092618.pdf

https://www.justice.gov/usao-sdny/pr/manhattan-hair-salon-owner-pleads-guilty-insider-trading
The DOJ Release alleges that a credit rating agency assigned credit-ratings-analyst Sebastian Pinto-Thomaz to work on a Rating Evaluation Service for the Sherwin-Williams Company in advance of its contemplated but unannounced acquisition of the Valspar Corporation. Allegedly, Pinto-Thomaz misappropriated inside information about the acquisition and passed it to salon owner and hairstylist Abell Oujaddou , and to jeweler Jeremy Millul. -- the three men had close relationships.  Although Oujaddou had never purchased Valspar or Sherwin-Williams' securities, he used Pinto-Thomaz's tip to purchase 8,630 shares of Valspar stock, which yielded him a $192,080 in profits, of which he had agreed to give a portion back to Pinto-Thomaz. Similarly, Millul, who had never owned a brokerage account in the United States and had never traded in U.S. securities prior to the inside tip, opened a brokerage account and purchased Valspar common stock and 75 Valspar out-of-the-money During an ensuing FINRA investigation, the regulator sent Pinto-Thomaz's employer a list of individuals and entities that had traded Valspar in advance of the acquisition, and when shown the list, which included the names of  Oujaddou and Millul, Pinto-Thomaz denied having a past or present relationshiup with either of them. Oujaddou pled guilty in the United States District Court for the Southern District of New York to one count of conspiracy to commit securities fraud. 

SEC Charges Atlanta-Based Individual and His Company with Defrauding Investors in Real Estate Investment Scams (SEC Litigation Release No. 24303)
https://www.sec.gov/litigation/litreleases/2018/lr24303.htm
In a Complaint filed in the United States District Court for the Northern District of Georgia, the SEC alleged that Russell Craig and his company, OneStep Financial Services, LLC with violations of 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. The Complaint seeks a judgment against the defendants providing for permanent injunctions, disgorgement with prejudgment interest, and civil penalties. The Complaint also names Peter Baker, Elizabeth Oharriz, Prestige Global Trading, Ltd., and Diversified Initiatives Consulting & Logistics, Inc. as relief defendants, seeking disgorgement with prejudgment interest against them. The SEC alleges that Craig defrauded an investor of more than $900,000 and misappropriated over $600,000 via misrepresentations that the investor's funds would remain in escrow and be used only for the purpose of obtaining a "proof of funds" to purchase the Heritage Condominiums in Atlanta, Georgia, which would result in a full return to the investor of principal plus about a short-term 30% profit.The SEC alleges that Craig and OneStep engaged in a similar, later scheme in which at least five investors were fraudulently induced into investing $460,000 in another real estate project. READ the FULL TEXT Complaint https://www.sec.gov/litigation/complaints/2018/comp24303.pdf

https://www.justice.gov/usao-sdny/pr/virginia-man-arrested-and-charged-manhattan-federal-court-2-million-iraqi-dinar-fraud
In an Indictment filed in the United States District Court for the Southern District of New York, William Burbank was charged with one count of wire fraud for allegedly engaging in a Ponzi-like scheme to defraud more than 150 individual investors, including many U.S. military veterans and their families, of more than $2 million. Allegedly, Burbank claimed he would use investors' funds to purchase quantities of the Iraqi dinar, through an Iraqi bank headquartered in Bagdad.  The Indictment alleges that Burbank actually used the funds to trade in his own brokerage accounts, to make payments to earlier investors, and for his personal expenses. READ the FULL TEXT Indictment 
https://www.justice.gov/usao-sdny/press-release/file/1097916/download

https://www.sec.gov/litigation/litreleases/2018/lr24305.htm
After previously ordering an asset freeze and preliminary injunction, the United States District Court for the District of Connecticut ordered Iftikar Ahmed to pay $41.9 million in disgorgement, $1.5 million in interest, and a $21 million civil penalty, and turn over interest and returns on frozen assets. The judgment prohibits Ahmed from violating the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act. The SEC had alleged that Ahmed fraudulently diverted tens of millions of dollars from the venture capital funds he advised.

Remedies and Relief in SEC Enforcement Actions (Speech at PLI White Collar Crime 2018: Prosecutors and Regulators Speak by Steven Peikin, Co-Director, SEC Division of Enforcement)
https://www.sec.gov/news/speech/speech-peikin-100318
It's been about a year since the SEC appointed Steven Peikin and Stephanie Avakian as Co-Directors of the SEC's Division of Enforcement. By most accounts, the pair are doing an admirable job -- and that's coming from someone who does not hesitate to criticize and critique Wall Street's regulatory community. In his recent remarks during a PLI conference, Peikin offered his views on the effectiveness of particular remedies and relief, with some emphasis on the utility of imposing financial penalties. It's an interesting read and I would urge all serious market participants to invest the time. By way of a teaser, consider these remarks:

It may not come as a surprise that many individuals as to whom we seek bars choose to litigate rather than settle with the Commission.  As such, bars can be a resource-intensive remedy for the agency.  But the flip side of the resources coin is a remedy that, like undertakings, can have direct, far-reaching, and positive effects for investors.  As such, obtaining bars and suspensions, when warranted by the facts and circumstances, are a high priority for the Division.

. . .

[P]enalties are one of the primary enforcement tools we have to incentivize regulated entities to remain in compliance with the rules that protect investors.  Stephanie and I embrace this rationale, and you can expect us to apply it throughout our tenure as Co-Directors.

But the analysis with respect to corporate issuers with a class of securities registered with the SEC often involves additional considerations that don't uniformly apply in matters involving regulated entities.  Such issuers are required by statute and regulation to file public periodic and annual reports and financials, and to have policies, procedures, and controls in place to enable them to satisfy their obligations concerning the accuracy, completeness, and timeliness of such filings.  Using enforcement to promote the integrity of issuers' public filings -- which are central to the sound functioning of our capital markets -- is a critical part of our mandate.  So in matters involving corporate issuer misconduct, decisions about whether to recommend the assessment of penalties require careful and thoughtful balancing of many factors including, of course, the nature of the misconduct.