November 8, 2018
In a criminal Complaint filed in the United States District Court for the Southern District of New York, LPG trader David Smothermon is charged with wire fraud.
READ the Complaint https://www.justice.gov/usao-sdny/press-release/file/1108676/download
As alleged in part in the DOJ Release:
From 2005 through early September 2016, SMOTHERMON worked for a privately owned firm, headquartered in Manhattan, engaged in the international marketing, distribution, and trading of commodities products (the "Company"). SMOTHERMON ran a subsidiary of the Company, based in Houston, Texas, specializing in the trading of liquefied petroleum gas or "LPG" (the "Subsidiary"). The Subsidiary engaged in two forms of LPG trading: entering into and executing contracts for the purchase and sale of barrels of LPG, and trading financial derivative products related to LPG in an over-the-counter market.
From December 2015 up to and September 2016, SMOTHERMON caused false entries to be entered into an electronic accounting system used by the Company in an effort to hide substantial trading losses generated by the Subsidiary's derivatives trading. SMOTHERMON repeatedly caused others working for the Subsidiary to make false entries in the accounting systems. For example, in or about August 2016, SMOTHERMAN instructed an employee to make a change in the accounting system to make it appear that a contract for the purchase of LPG entitled the Subsidiary to purchase twice as much LPG as was in fact contracted for, at the same price, essentially doubling the Subsidiary's profits.
SMOTHERMON caused these false entries to be made in an effort to retain his job and the significant compensation due to him in connection with his employment, including a bonus of more than $14 million awarded to him in May 2016. As a result of the false entries made at SMOTHERMON's direction, the Company overestimated the Subsidiary's potential profits by in excess of approximately $35 million.
In the face of an upcoming audit of the Subsidiary by the Company, SMOTHERMAN resigned in or about September 2016. In part as a result of the false entries discovered by the Company in the period that followed, the Company liquidated the derivatives positions held by the Subsidiary at a substantial loss and laid off workers.
After a one-week trial, radio personality Craig Carton was convicted in the United States District Court for the Southern District of New York on one count of conspiracy to commit securities fraud and wire fraud; one count of wire fraud; and one count of securities fraud in connection with his solicitation of investments for a live-event ticket buying scheme involving his fabrication of contracts for blocks of tickets. Carton spent the almost $7 million of investors' fund on gambling and personal expenses.
READ the criminal Complaint https://www.justice.gov/usao-sdny/press-release/file/994881/download
As set forth in part in the DOJ Release:
CARTON and another individual ("CC-1") worked together to induce investors to provide them with millions of dollars, based on representations that the investor funds would be used to purchase blocks of tickets to concerts, which would then be re-sold on the secondary market. CARTON and CC-1 purportedly had access to those blocks of tickets based on agreements that CC-1 had with a company that promotes live music and entertainment events (the "Concert Promotion Company") and that CARTON had with a company that operates two arenas in the New York metropolitan area (the "Sports and Entertainment Company"). In fact, neither the Concert Promotion Company nor the Sports and Entertainment Company had any such agreement with CARTON, Wright, CC-1, or any entity associated with them. After receiving the investor funds, CARTON, Wright, and CC-1 misappropriated those funds, using them to, among other things, pay personal debts and repay prior investors as part of a Ponzi-like scheme.
In the fall of 2016, CARTON, Wright, and CC-1 exchanged emails and text messages regarding their existing debts. On September 5, 2016, for example, Wright emailed CARTON and CC-1, "for the sake of our conversation tomorrow," and outlined "the debt past due and due next week." Wright listed several apparent creditors, to whom he, CC-1, and/or CARTON were personally indebted for over a million dollars. Wright listed eight possible options for repaying the debt, including "Run to Costa Rica, change name, and start life all over again - may not be an option." CARTON responded to Wright and CC-1, stating "don't forget I have $1m coming tomorrow from ticket investor[.] will need to be discussed how to handle." On September 7, 2016, CARTON emailed Wright and CC-1, referenced a potential investor ("Investor-1") in an upcoming holiday concert tour, and suggested "borrow[ing] against projected profits" on that investment.
Later in the fall of 2016, CARTON began negotiating with a hedge fund (the "Hedge Fund") regarding a transaction in which the Hedge Fund would extend CARTON capital to finance CARTON's purchase of event tickets, which CARTON would then re-sell at a profit. In early December 2016, CC-1 texted CARTON and Wright and discussed using the Hedge Fund's capital "to repay debts," and not for the purchase of tickets.
The next day, December 7, 2016, CARTON emailed the Hedge Fund five agreements between (i) CC-1 and a company controlled by CC-1 (the "CC-1 Entity") and (ii) the Concert Promotion Company. In each of the purported agreements, the Concert Promotion Company agreed to sell the CC-1 Entity up $10 million worth of tickets to different concert tours. However, as alleged, these agreements were fraudulent and had not, in fact, been entered into by the Concert Promotion Company.
The following day, the Hedge Fund and CARTON executed the revolving loan agreement (the "Revolving Loan Agreement"), under which the Hedge Fund agreed to provide CARTON with up to $10 million, for the purpose of funding investments in the purchase of tickets for events. The Revolving Loan Agreement provided, in sum and substance, that the proceeds of the loan would be used only to purchase tickets pursuant to agreements for the acquisition of tickets, including the agreements with the Concert Promotion Company and for limited business expenses. The Hedge Fund would receive a share of the profits from the resale of the tickets.
The Hedge Fund then sent $700,000 to the CC-1 Entity to finance the purchase of tickets pursuant to the agreements between the CC-1 Entity and the Concert Promotion Company. CC-1, however, then sent this money to a bank account controlled by Wright, who then, on December 12, sent $200,000 to CARTON's personal bank account (the "CARTON Bank Account"), which CARTON then wired to a casino. Also on December 12, Wright sent another $500,000 to an individual who had previously lent CARTON $500,000, which was due to be repaid that day.
Later in December 2016, the Hedge Fund sent an additional $1.9 million to the CC-1 Entity, to finance the purchase of tickets pursuant to agreements between the CC-1 Entity and the Concert Promotion Company. Once again, the Concert Promotion Company had not entered into any such agreements. CC-1, Wright, and CARTON engaged in text messages regarding the disposition of these funds. Some of the money was used by CC-1 to repay two individuals who had previously invested with CC-1 in a related scheme involving the purported investment in the resale of tickets, and by CARTON to pay casinos and to pay Investor-1 a purported return on an earlier investment in a ticket-related venture.
CARTON also induced the Hedge Fund to wire $2 million to the Sports and Entertainment Company, based purportedly on an agreement he had with the Sports and Entertainment Company (the "Sports and Entertainment Company Agreement"). The Sports and Entertainment Company Agreement purportedly gave an entity controlled by CARTON (the "CARTON Entity") the right to purchase $2 million of tickets to concerts at one of the venues operated by the Sports and Entertainment Company. CARTON, among other things, sent the Hedge Fund a copy of the Sports and Entertainment Company Agreement that purportedly had been signed by the chief executive officer of the Sports and Entertainment Company. However, this agreement was fraudulent and had never been entered into by the Sports and Entertainment Company or signed by the chief executive officer.
On December 20, 2016, when the Hedge Fund wired the $2 million to the Sports and Entertainment Company, CARTON contacted the Sports and Entertainment Company and told them, in sum and substance, that the wire had been sent in error and should be sent to the bank account for an entity operated by CARTON and Wright, for which Wright is the signatory. After the money was rewired to that account, Wright wired $966,000 to Wright's personal bank account and $700,000 to the CARTON Bank Account. CARTON then wired approximately $188,000 from the CARTON Bank Account, including at least $133,000 in wires to several casinos.
In the Matter of Citibank, N.A., Respondent
(Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanction and a Cease-and-Desist; '33 Act Rel. No. 10571; Admin. Proc. File No. 3-18886) https://www.sec.gov/litigation/admin/2018/33-10571.pdf
In anticipation of the institution of proceedings, and without admitting or denying the findings, Respondent Citibank, N.A. submitted an Offer of Settlement, which the SEC accepted. In determining to accept the Offer, the SEC considered Citibank's voluntary remediation and cooperation afforded staff. In addition to the ordered cease-and-desist, Citibank will pay disgorgement of $20,903,858.25 and prejudgment interest of $4,258,893.71; and a civil money penalty in the amount of $13,587,507.86. As set forth in the Order's "Summary" [Ed: footnotes omitted]:
1. These proceedings arise out of Citibank's improper practices involving the prerelease
of American Depositary Receipts ("ADRs").
2. ADR facilities, which provide for the issuance of ADRs, are established by a
depositary bank (the "Depositary"), such as Citibank, pursuant to a deposit agreement ("Deposit Agreement").
3. As part of its role, a Depositary issues ADRs to a market participant that contemporaneously delivers the corresponding number of foreign ordinary shares to the Depositary's foreign custodian ("Custodian"). However, in certain situations, Deposit Agreements may provide for "pre-release" transactions in which a market participant can obtain newly issued ADRs from the Depositary before delivering ordinary shares to the Custodian. Only brokers (or other market participants) that have entered into pre-release agreements with a Depositary ("Pre-Release Agreements") can obtain pre-released ADRs from the Depositary. The Pre-Release Agreements, consistent with the Deposit Agreements, require the broker receiving the pre-released ADRs ("Pre-Release Broker"), or its customer on whose behalf the Pre-Release
Broker is acting, to beneficially own the ordinary shares represented by the ADRs, and to assign all beneficial right, title, and interest in those ordinary shares to the Depositary while the pre-release transaction is outstanding. In effect, the broker or its customer becomes the temporary custodian of the ordinary shares that would otherwise have been delivered to the Custodian.
4. Contrary to how pre-release transactions were supposed to work, Citibank at
times pre-released ADRs to Pre-Release Brokers in circumstances where Citibank was negligent with respect to whether the Pre-Release Brokers, or the parties on whose behalf the pre-released ADRs were being obtained, actually beneficially owned the corresponding number of ordinary shares, as they represented to Citibank in their Pre-Release Agreements. The result of this conduct was the issuance of ADRs that in many instances were not backed by ordinary shares as required by the ADR facility. This conduct violated Section 17(a)(3) of the Securities Act.
Who, besides the SEC's Division of Investment Management, reads risk disclosures? Most investors read the business plan so they can rationalize their decision to invest. They read the managers' bios so that they can feel warm and fuzzy that the managers aren't thieves or nincompoops. And they read the projections so that they can fantasize about how much money they're going to make. But the risk disclosures just sit there, all caps and boldfaced, like fortress walls defying to be scaled. They are like the narrator of every drug commercial. While the ad hypes the benefits of a Xarelto or a Chantix with uplifting music and video, the narrator drones on that the stuff could kill you. We remember the four-hour erection thing only because we can't decide if it's risk or hype.
Let's start off with the somewhat innocuous disclosure that Paul Manafort's former son-in-law, Jeffrey Craig Yohai had pled guilty to his role in a $15 million fraud involving his defaulting on real estate loans that were supposed to be used to purchase and rehabilitate Hollywood Hills properties.
In a criminal Complaint filed in the United States District Court for the Central District of California, Yohai was charged with conspiracy to commit wire fraud and aggravated identity theft. In this second case, the Complaint alleges, in part, that Yohai submitted a loan request that contained inflated appraisals. On top of that, Yohai allegedly attempted to defraud another lender as he attempted to refinance, and he contacted another lender with inflated appraisals to obtain refinancing - an effort that was rebuffed when that third lender learned of Yohai's earlier guilty plea. The Complaint not only references the prior loan fraud case but describes additional frauds including a $6 million investment scheme and a check-kiting scheme involving more than $500,000 in checks that bounced. The Complaint alleges that when victims demanded repayment, Yohai often sent checks with insufficient funds; and when the victim complained about the NSF Check, Yohai would typically claim that he had wired the money to the victim, a claim he would support with bogus documentation of a wire transfer.
Without admitting or denying the findings, ITG Inc. and its affiliate AlterNet Securities Inc.consented to the entry of an SEC Order finding that they violated the antifraud provisions of the securities laws as well as the rules governing the requirements for dark pools. The Order directs ITG and AlterNet to cease and desist from committing or causing any future violations of those provisions, censures ITG and AlterNet, and orders them to pay the $12 million penalty.
As set forth in part in the SEC Release:
The SEC's order finds that despite assuring subscribers that it would maintain the confidentiality of their trading information, ITG improperly disclosed the confidential dark pool trading information of firm clients. For example, from 2010 to 2015, ITG sent daily Top 100 Reports for the prior day's trading activity. The reports identified the top 100 stocks for which certain orders were submitted to POSIT and the top 100 stocks for which certain orders were executed. ITG informed some high frequency trading firms that they could use these Top 100 Reports to identify "potential unsatisfied liquidity needs" in the dark pool, despite assuring subscribers that ITG would not signal their trading intentions.
According to the SEC's order, ITG misleadingly omitted important structural features of the dark pool. From 2010 to mid-2014, ITG split the dark pool into two separate pools, which prevented certain orders in the two pools from interacting with one another. ITG failed to disclose the separate pools, which had different performance and fill rates, despite specific questions from subscribers about whether ITG "tiered" or segmented the dark pool in any way. The SEC's order further finds that from mid-2014 to late 2016, ITG failed to disclose that the firm applied a "speedbump" to slow down interactions involving orders from certain high frequency trading firms.
Peggy Ann Fulford pled guilty in the United States District Court for the Sourthern District of Texas to one count of interstate transportation of stolen property, and she was sentenced to 120 months in prison plus three years of supervised release, and ordered to pay $5,794,870 in restitution. That brief description doesn't even remotely do the facts in this case justice. For starters, Fulford, also known as Peggy King, Peggy Williams, Peggy Simpson, Peggy Rivers, Peggy Barard, Devon Cole and Devon Barard, falsely told her victims that she was a Harvard Law School and Harvard Business School graduate, who had made millions buying and selling hospitals or via real estate. Touting that impressive resume, Fulford offered her services as a financial advisor and money manager who would manage their expenses, pay their bills, and invest for their retirement. Fulford used her victims money for her personal use and raided their bank accounts to such purchases as luxury cars, real estate, jewelry and airline tickets. Among her victims were former NBA players Travis Best and Dennis Rodman and NFL football players Ricky Williams and Lex Hilliard. While on bond in this case and after pleading guilty, Fulford, using the name "Peggy Jones" swindled another victim out of $25,000 to invest in a bogus medical company in Arizona.
The Texas State Securities Board entered emergency Cease-and-Desist orders against AWS Mining PTY Ltd., and EXY Crypto,which describe themselves as cryptocurrency mining companies.
AWS Mining PTY is the Australian business name holder for AWS Mining and MyCoinDeal. which provides digital wallet services for AWS Mining-issued cryptocurrency investments. The companies and the sales agents named in the AWS Mining order are issuing investments in cryptocurrency mining, which they are calling crypto mining power contracts. AWS Mining claims it is mining cryptocurrency in computing facilities in China, Russia, and Paraguay and that its investment contracts are "guaranteed to 200% return on purchase price." According to the order, AWS Mining is using a multilevel marketing network of sales agents to sell the mining power contracts (not registered in Texas) and are paying as many as six different types of bonuses and commissions to these sales agents.
EXY Crypto promotions manager Morgan Nolan, is offering investments through LinkedIn with claims that investors will earn a weekly return of at least 10%, which is guaranteed "100% safe and secure." On its website EXY Crypto is promoting four levels of investments in cryptocurrency mining' and is recruiting investors to act as sales agents, promising them they can earn commissions based on the amount of new investment they bring in.Although Nolan claims to be based in the United Kingdom, he is from San Antonio. Texas and is asking potential investors to contact him by calling a number with an area code assigned to the San Antonio region. EXY Crypto is intentionally not disclosing material facts about the investment, including the identity of the principals of the company, its place of business, and the costs and fees investors will incur in purchasing an investment in the mining program. Nor is the company disclosing the risks in the mining of cryptocurrencies. READ the:
EXY Order https://www.ssb.texas.gov/sites/default/files/EXY%20Crypto%20ENF-18-CDO-1772.pdf AWS Order https://www.ssb.texas.gov/sites/default/files/AWS%20Mining%20ENF-18-CDO-1771.pdf
Following a 12-day trial in the United States District Court for the Southern District of New York, Andrew Owimrin a/k/a "Andrew Owens," a/k/a "Jonathan Stewart," and Shahram Ketabchi a/k/a "Steve Ketabchi," were found guilty of conspiring to commit wire fraud and conspiring to commit money laundering in connection with a telemarketing scheme in which they solicited investors (mainly elderly) for purported business development, website design, grant applications, or tax preparation services. When the promised returns did not materialize and the victims sought refunds, or fought credit card charges, misrepresentations and false documents were provided to the credit card companies asserting that the promised services were provided. Owirin worked as a sales representative for telemarketers Olive Branch Marketing and A1 Business Consultants; and Ketabchi for A1 Business Consultants. Thirteen other individuals have been convicted in connection with this case.
Chairman Jay Clayton
In commenting on the proposed Regulation Best Interest and our proposed Customer Relationship Summary (or CRS), Chair Clayton noted, in part, that:
Since the Committee last addressed this topic at the June 2018 meeting, we have received well over 6,000 comment letters (approximately 3,000 of which are unique) on our proposed rulemaking package. In addition, we have been seeking input from retail investors through a Commission website, www.sec.gov/tell-us, where investors can view examples of the proposed Customer Relationship Summary and submit feedback on key questions from the proposal. We have hosted a series of open-forum roundtables across the country, where Main Street investors have had the opportunity to speak directly with me, my fellow Commissioners and senior staff about the proposed rules and a host of related matters. Finally, the Office of the Investor Advocate engaged RAND Corporation to perform investor testing of the proposed Customer Relationship Summary. That testing has now been completed, and the results will be made available in the comment file within the next few days.
Our staff has been carefully reviewing all of this information and working diligently to develop a recommendation for the final rules. I would like to take this opportunity to thank the staff for their tremendous work on this important rulemaking. I am very pleased with the progress we have made in achieving the goals of our proposals to address investor confusion and to raise the standard of conduct for broker-dealers when they provide recommendations to retail investors while at the same time preserving retail investor access (in terms of choice and cost) to a variety of types of investment services and investment products.
In Complaints filed in the United States District Courts for the Southern District of Florida and the Southern District of California, the SEC charged Core Performance Management LLC ("CPM"), RMR Asset Management Co. ("RMR"), their principals, and certain of their associates with misrepresenting their identities to gain priority over retail invdestors in new issue municipal bond allocations. Known in the industry as "flippers," the Defendants purchased new issue municipal bonds, often by posing as retail investors to gain priority in bond allocations, and then sold their allocations to broker-dealers for a fee. The SEC also charged a municipal underwriter for accepting kickbacks from one of the flippers. The SEC alleges that Core Performance Management LLC ("CPM"), its principal James P. Scherr, and associates Deborah B. Dora, Sharlene F. Mesite, and Anadel R. Pinzon violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; that CPM and Dora also aided and abetted violations of Section 10(b) and Rule 10b-5(b) thereunder; that Scherr and CPM violated Sections 17(a)(1) and (3) of the Securities Act of 1933 ("Securities Act"); that CPM, Scherr, Dora, Mesite, Pinzon, and associate James J. O'Neil violated Section 15(a)(1) of the Exchange Act; that CPM, Dora, Mesite, Pinzon, and Scherr violated Rule G-17 of the Municipal Securities Rulemaking Board ("MSRB"); and that Scherr is liable as a control person under Section 20(a) of the Exchange Act for CPM's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Additionally, he SEC alleges that RMR Asset Management Co. ("RMR"), its principal Ralph M. Riccardi, and associates Bruce A. Broekhuizen, Douglas J. Derryberry, David R. Frost, Neil P. Kelly, John M. Kirschenbaum, Timothy J. McAloon, Jocelyn M. Murphy, Dewey T. Tran, and Philip A. Weiner violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; that RMR, Riccardi, Frost, and Kirschenbaum also aided and abetted violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder; that RMR, Riccardi, Broekhuizen, Derryberry, Frost, Kelly, Kirschenbaum, McAloon, Murphy, Tran, and Weiner, as well as associates Richard C. Gounaud, David S. Luttbeg, Michael S. Murphy violated Section 15(a)(1) of the Exchange Act; and that RMR, Broekhuizen, Derryberry, Frost, Kelly, Kirschenbaum, McAloon, Jocelyn Murphy, Riccardi, Tran, and Weiner violated MSRB Rule G-17. Without admitting or denying the allegations, CPM, Scherr, Dora, Mesite, O'Neil, and Pinzon settled the SEC's charges, and agreed to injunctions, to return allegedly ill-gotten gains with interest, pay civil penalties, be subject to industry bars or suspensions, and to cooperate with the SEC's ongoing investigation. In addition, without admitting or denying the the allegations, RMR, Riccardi, Broekhuizen, Derryberry, Frost, Kelly, Kirschenbaum, Luttbeg, McAloon, Tran, and Weiner settled the SEC's charges and agreed to injunctions, to return allegedly ill-gotten gains with interest, pay civil penalties, be subject to industry bars or suspensions, and to cooperate with the SEC's ongoing investigation.The SEC's charges against RMR associates Gounaud and the Murphys remain unsettled.In a related action, the SEC instituted settled proceedings against Charles Kerry Morris, the former head of municipal underwriting at broker-dealer NW Capital Markets Inc. The SEC found that Morris took kickbacks from Scherr and engaged in a parking scheme in which Morris allocated new issue bonds to Scherr with the understanding that Morris would repurchase them. As a result of this trading, the SEC found that Morris and NW Capital caused Scherr and Core Performance's improper unregistered broker activity. Specifically, the SEC found that Morris willfully violated Sections 17(a)(1) and (3) of the Securities Act, Section 10(b) and Rules 10b-5(a) and (c) thereunder, MSRB Rule G-17, and caused violations of Section 15(a)(1) of the Exchange Act. The SEC also found that NW Capital willfully violated MSRB Rule G-17, Section 15B(c)(1) of the Exchange Act, and caused violations of Sections 15(a)(1) of the Exchange Act. The SEC found that Morris's supervisor, James A. Fagan, failed reasonably to supervise Morris's activities within the meaning of Section 15(b)(6) of the Exchange Act, incorporating Section 15(b)(4)(E) of the Exchange Act, and willfully violated MSRB Rule G-27. Without admitting or denying the SEC's findings, Morris, NW Capital, and Fagan agreed to settle the charges, and to pay a total of $254,009 and to consent to an industry bar. NW Capital agreed to be censured and pay a total of $87,065 and Fagan agreed to pay a $10,000 penalty and to consent to a six-month supervisory suspension.