Securities Industry Commentator by Bill Singer Esq

October 16, 2018
For no particular reason, today I offer you a riff. Proust had his bite of a lousy Madeleine and I had the whiff of Christopher M. Tanner pleading guilty to counterfeiting United States currency. No pile of dead bodies. Not so much as a hint of a violent crime. Instead, we got funny money. Bogus bills. Counterfeit currency. We got a pair of shoes. Banality at its best (or worst). On the other hand, we got Highway 90 (maybe near to Highway 61) and we got Mobile, Alabama, which reminded me of Bob Dylan's Stuck Inside of Mobile with the Memphis Blues Again, which took me back to my teenage years in the Sixties. So, as I begin to draw circles up and down the block, and you ask me what the matter was, please be patient as today's Blog unwinds. If you're lucky, you'll get answers to all your questions after only one read. If you don't sit so patiently, you may wind up waiting to find out what price you have to pay to get out of going through all these things twice. 

In the Matter of RD Legal Capital, LLC and Roni Dersovitz (PUBLIC REDACTED ALJ Initial Decision; SEC; Initial Decision Release No. 1260; Administrative Proceeding File No. 3-17252 / October 15, 2018) As set forth in the Syllabus to the ALJ Initial Decision:

Respondent Roni Dersovitz spotted a business opportunity while working as a personal injury attorney: lending money to other attorneys who were waiting on their fees from settlements to pay out. This was a profitable line of business and eventually Dersovitz created namesake hedge funds and companies to manage the funds, including Respondent RD Legal Capital LLC, and originate the loans.Investors testified that they were enticed by marketing representations that Respondents' funds invested only in settled or otherwise resolve cases and did not take on litigation risk. For many years the funds were profitable for investors and Dersovitz alike. the Division of Enforcement nevertheless alleges that Respondents made materially false and misleading statements in violation of  the antifraud provision of the Securities Act off 1933 and the Securities Exchange Act of 1934 because at times more than half of the funds'' portfolios were tied up in cases that involved litigation risk.

In his initial decision, I find that contrary to Respondents' representations to investors, the funds they managed became increasingly invested in certain cases beyond the scope of the funds' strategy. I conclude that Respondents made material misrepresentations, but not to the extent alleged by the Division and not with scienter. Respondents thus violated Securities Act Section 17(a)(2) and (a)(3), but not Securities Act Section 17(a)(1) and Exchange Act Section 10(b) or Rule 10b-5. As a result, I will impose civil monetary penalties, suspend Dersovitz from the industry for six months, prohibit him from association with an investment company for six months, and order Respondents to cease and desist from further violations.

In the Matter of James A. Winkelmann, Sr. and Blue Ocean Portfolios, LLC (ALJ Initial Decision Following Remand; SEC; Initial Decision Release No. 1261; Administrative Proceeding File No. 3-17253 / October 15, 2018) As set forth in the "Summary" to the ALJ Initial Decision:

The parties in this remanded case agreed to proceed before me on the record already established, including new evidence supporting Respondents' reliance-on-counsel defense, which was accepted into the record by the Securities and Exchange Commission and submitted for my consideration on remand. After reviewing this new evidence and the parties' briefs, I issue this revised initial decision finding that Respondents James A. Winkelmann, Sr., and Blue Ocean Portfolios, LLC, made material misrepresentations and omissions regarding conflicts of interest in the course of their offerings of Blue Ocean securities to their advisory clients, but reversing my prior finding that they did so with scienter. I therefore dismiss the scienter-based antifraud charges and conclude that Respondents willfully violated, and Winkelmann caused Blue Ocean's violations of, Section 17(a)(2) and (a)(3) of Securities Act of 1933 and Section 206(a)(2) of the Investment Advisers Act of 1940. I also conclude that Blue Ocean willfully violated, and Winkelmann caused Blue Ocean's violations of, the custody and compliance provisions of Advisers Act Section 206(4) and Rules 206(4)-2 and 206(4)-7; and that Respondents willfully violated Advisers Act Section 207 as a result of material misstatements disclaiming custody of client assets in their Forms ADV. The Division's remaining allegations are not sustained. 

I impose the following sanctions as to Winkelmann: a six-month suspension from the securities industry, a cease-and-desist order, disgorgement of $415,000 plus prejudgment interest, and civil penalties of $25,500. I also impose a cease-and-desist order as to Blue Ocean.
The United States District Court for the Eastern District of New York issued a Consent Order on against Kevin Scott Antonovich requiring him to pay $554,375 in restitution and a civil monetary penalty for violations of the Commodity Exchange Act and CFTC Regulations; and imposes permanent trading and registration bans among other injunctive relief. The Order found that Antonovich fraudulently solicited hundreds of thousands of dollars from over 150 pool participants in connection with pooled investments in off-exchange binary options; in fact, all trading occurred on offshore platforms. Further, Antonovich misappropriated over $100,000 of the funds for business expenses and his personal use. READ the FULL TEXT Consent Order

June M. Ward, Plaintiff/Appellee v. J. J. B. Hilliard; W.L. Lyons, LLC d/b/a Hilliard Lyons, a Kentucky Corporation (Opinion, Appellate Court of Illinois; 2018 IL App (5th) 180214; No. 5-18-0214)
As set forth in the "Syllabus" of the Opinion:

This case is before us on an interlocutory appeal pursuant to Illinois Supreme Court Rule 307(a)(1) (eff. Nov. 1, 2017), from an order of the circuit court denying the defendants' motion to dismiss the plaintiff's complaint or, alternatively, to stay the lower court proceedings pending mandatory arbitration. The appeal stems from a complaint filed by the plaintiff, June M. Ward, in which she alleged that the defendants, J.J.B. Hilliard, W.L. Lyons, LLC d/b/a Hilliard Lyons (Hilliard Lyons), and Michael Barnett, were negligent in the management of her individual retirement account (IRA). The appeal centers on the issue of whether the parties' contract concerning the management of the IRA included an agreement to arbitrate disputes stemming from the contract. The defendants filed the motion seeking the dismissal or stay, alleging that their agreement required 1 arbitration of the dispute. The circuit court, however, denied the defendants' request, holding that, under Kentucky law, the parties' agreement did not include an enforceable arbitration provision. The defendants now appeal from this interlocutory order. For the following reasons, we reverse and remand for further proceedings. 

SEC Halts Sham Real Estate Investment Offering Fraud (SEC Litigation Release No. 24316)
The SEC filed an emergency action in the United States District Court for the Central District of California to halt an alleged ongoing offering fraud perpetrated by Susan Werth, a/k/a Susan Worth, and several companies she controlled :Corporate Mystic, LLC, Commercial Exchange Solutions, Inc., and Exchange Solutions Company. The Complaint alleges that Werth and her companies raised over $26 million, promising investors to use their money to fund short-term, high-interest rate loans in connection with tax-deferred real estate projects, but the funds were diverted for Ponzi-like payments to other investors, and to pay Werth's personal expenses. The Complaint charges Werth, Corporate Mystic, LLC, Commercial Exchange Solutions, Incorporated, and Exchange Solutions Company with violating the antifraud provisions of Sections 17(a) of the Securities Act of 1933, Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder, as well as the securities registration provisions of Section 5 of the Securities Act of 1933. The SEC is seeking injunctions against future securities laws violations, disgorgement of the defendants' ill-gotten gains, and civil penalties.On October 2, 2018, the SEC obtained a temporary restraining order which enjoins the defendants from continuing to violate the federal securities laws, imposes an asset freeze, orders an accounting, and prohibits the destruction of documents. READ the FULL TEXT Complaint