Securities Industry Commentator by Bill Singer Esq

February 1, 2019
After a 12-day jury trial in the United States District Court for the District of Colorado, attorney Guy M. Jean-Pierre was found guilty on all but one of twenty-nine counts of securities fraud, mail fraud, wire fraud, money laundering and conspiracy. As set forth in part in the DOJ Release:

Evidence presented at trial demonstrated that beginning in late 2010, defendant Jean-Pierre's co-conspirators endeavored to establish a business that would obtain and retrofit steel shipping containers so that they could be used to grow plants hydroponically. With defendant Jean-Pierre's help, the co-conspirators acquired a dormant publicly traded penny stock company and changed its name to FusionPharm as part of plans to develop and capitalize the business. The main business plan was to resell these repurposed shipping containers, which FusionPharm called "pharm pods," to hydroponic growers. The pharm pods were, at times, marketed as effective vehicles to get fresh produce, such as lettuce, quickly and efficiently to restaurants and local groceries in urban markets.  Over time, however, the pharm pods were marketed to marijuana or cannabis growers in Colorado and other states.

An object of the conspiracy was to conceal the co-conspirators' role in the management and operation of FusionPharm, due to one of the co-conspirators' prior securities felony conviction.  Defendant Jean-Pierre prepared and transmitted documents that allowed FusionPharm to sell stock in violation of securities laws, falsely portrayed deposits of proceeds from the sale of FusionPharm common stock as convertible debt obligations, falsely portrayed other entities as non-affiliates of FusionPharm, concealed the role of other co-conspirators in the FusionPharm business, falsely represented that disclosure documents and financial statements constituted adequate current information about FusionPharm, and failed to disclose defendant Jean-Pierre's role in drafting documents for another attorney to sign and represented as the other attorney's own work product. 

Retrophin Lead Outside Counsel Greebel Suspended From Practce Before SEC
In the Matter of Evan Louis Greebel, Esq. Respondent (Order of Forthwith Suspension; '34 Act Rel. No. 85012; Admin. Proc. File No. 3-18978 / January 31, 2019)
Pursuant to SEC Rule of Practice 102(e)(2), the SEC suspended attorney Evan Louis Greebel's right to appear or practice before it. After pleading guilty in the United States District Court for the Eastern District of New York  to one count of conspiracy to commit wire fraud and one count of conspiracy to commit securities fraud, Greebel was sentenced  to 18 months in prison plus three years of supervised release; and ordered to pay $116,462.03 in forfeiture and $10,447,979 in restitution.  As set forth in pertinent part in Rule 102((e)(2): 

[a]ny attorney who has been suspended or disbarred by a court of the United States or of any State . . . or any person who has been convicted of a felony or a misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the Commission.

As set forth in pertinent part in the SEC Order

2. Between 2011 and 2014, Greebel represented Retrophin, Inc. ("Retrophin"), a pharmaceutical company, as its lead outside counsel. In 2013 and 2014, Martin Shkreli ("Shkreli"), the former CEO of Retrophin, with assistance from Greebel, fraudulently induced Retrophin to issue stock and make cash payments to certain disgruntled investors in a hedge fund operated by Shkreli who were threatening legal action against Shkreli. Shkreli and Greebel arranged for those hedge fund investors to enter into agreements with Retrophin that misleadingly stated that the payments and securities they received from Retrophin were for consulting services when in fact the purpose of the agreements was to settle and to release potential claims against Shkreli. Greebel and Shkreli did not seek or obtain approval from the Retophin board of directors for these agreements. Greebel and Shkreli caused Retrophin to pay more than $11 million in cash and Retrophin stock through these fraudulent agreements even though Retrophin was not responsible for those investors' claims. 

3. In addition, between 2012 and 2014, Greebel and Shkreli engaged in a scheme to defraud investors and potential investors in Retrophin by manipulating trading in its shares. Greebel and Shkreli executed this scheme by, among other things, concealing Shkreli's beneficial ownership and control of the majority of Retrophin's free-trading shares so as to enable Shkreli to surreptitiously exercise control and manipulate the price and trading volume of Retrophin's stock. Greebel and Shkreli recruited associates of Shkreli to be nominees for the majority of Retrophin's free-trading shares. On December 2012 and February 2013, Greebel and Shkreli also filed false Schedule 13D forms with the Commission to hide the fact that Shkreli controlled 2.4 million free trading shares.

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Today's blog arises from a FINRA Arbitration Decision that tells us next to nothing about the substance of a multi-million dollar complaint filed against 10 respondents. The Decision dutifully ticks off the many causes of action but they are left suspended in mid-air without being tied to any specific facts. Moreover, we got two arbitrators ruling one way and a third arbitrator dissenting but we don't have any idea as to what the three adjudicators didn't agree about and why. As such, we don't know what prompted the litigation and there's no rationale presented for the ensuing Award. How did Winston Churchill put it? A riddle wrapped up in an enigma. Our publisher Bill Singer criticized the hide-and-seek nature of the arbitration. A reader took Bill to task. Presented for your consideration is the debate.
In an Indictment filed in the United States District Court for the District of Massachusetts, Edward Withrow III and Marco Babini were charged with conspiring with Samuel Brown in an alleged  market manipulation scheme. Allegedly, between approximately July 2012 and March 2013, Brown conspired to manipulate the securities of Endeavor. Power Corp. In September 2013, Brown provided sworn testimony to the SEC relating to questions about trading in the stock.  In July 2015, Brown pled guilty to one count of conspiracy to commit securities fraud and wire fraud, and one count of making false statements to the SEC. Brown was sentenced bo three years of probation with the first five months to be served in home detention; and he was ordered to pay $22,237 restitution. In October 2015, In December 2017, Withrow's trial ended in a hung jury but he subsequently pled guilty to also making false statements to the SEC. Babini remains at large and is charged with one count of conspiracy, one count of securities fraud and two counts of wire fraud.

Oddball Expungement Granted by FINRA Panel In Case Not Involving Customer But Her Daughter
In the Matter of the Arbitration Between Ivan Shore, Claimant, v. Oppenheimer & Co., Inc., Respondent (FINRA Arbitration Decision 18-02592 / January 30, 2019)
In a FINRA Arbitration Statement of Claim filed in July 2018, associated person Claimant Shore sought the expungement of a customer complain from his Central Registration Depository record ("CRD")Respondent Oppenheimer did not oppose Claimant's expungement request. Claimant Shore provided proof to FINRA that he had notified the customer's daughter of her right to participate and testify at the expungement hearing; however, the daughter did not participate or contest the requested relief.  In recommending expungement, the FINRA Arbitration Panel made a FINRA Rule 2080 finding that the claim, allegation, or information is factually impossible or clearly erroneous. The Panel offered this rationale:

The customer's daughter's allegations against the Claimant are clearly erroneous because her Statement of Claim related to arbitration matter 17-00992 failed to allege a customer-broker relationship between herself and Claimant. Claimant testified that he was the broker of the deceased mother, not the daughter. He further testified that he never had a customer-broker relationship with the daughter. In fact, the IRA Application shows that the deceased mother was the customer, and supports Claimant's testimony. 

North Carolina Man Sentenced for Stock Manipulation Scheme (DOJ Release)
In a criminal Complaint filed in the United States District Court for the District of Massachusetts, 
David Aubel and Robert Raffa, of Penacook were charged with their alleged involvement in a pennystock market manipulation involving Green Energy Renewable Solutions, Inc, which claimed to be developing and operating waste processing and recycling facilities. In a parallel action, the SEC charged Aubel and Raffa with securities fraud in connection with the scheme. Raffa pled guilty and was sentenced in January 2018 to two years in prison and two years of supervised release.  In November 2017, Aubel pled guilty to one count of conspiracy to commit securities fraud and wire fraud, one count of securities fraud, and three counts of wire fraud, and was sentenced to 87 months in prison plus five years of supervised release; and ordered to pay $242,553 restitution. As set forth in part in the DOJ Release:

In early 2012, Raffa and Aubel used four foreign entities to covertly acquire nearly all of Green Energy's unrestricted stock without reporting their controlling interest as required by law.  They then hired a promoter to send blast e-mails touting Green Energy to potential investors, all while selling shares without disclosing that they had orchestrated the campaign encouraging investors to buy. 

The initial promotion enabled Raffa and Aubel to sell more than 1.5 million shares of Green Energy stock for proceeds of about $900,000. However, Raffa and Aubel continued to control a substantial amount of Green Energy stock after the promotion ended, and they used manipulative trading techniques to stabilize Green Energy's stock price while they searched for another promoter to run a second touting campaign. Their search led them to a stock promoter who was secretly cooperating with federal agents and an undercover agent who claimed to have access to a network of corrupt stockbrokers who would buy their shares in exchange for kickbacks. Raffa and Aubel executed a trade in which they sold 174,000 shares of their Green Energy stock to an account purportedly controlled by a corrupt broker, which was in fact controlled by federal authorities. Following the trade, the conspirators wired a $6,000 kickback payment to an account they believed to be controlled by the corrupt broker, but which was actually controlled by federal authorities.

FINRA Fines Silver Leaf Partners for Transaction-Based Compensation Payments
FINRA Department of Enforcement, Complainant, v. Silver Leaf Partners, LLC, Respondent (Extended Office of Hearing Officers Panel Decision, Disciplinary Proceeding No. 2014042606902 / January 29, 2019)
As set forth in the Syllabus to the FINRA Decision:

Respondent Silver Leaf Partners, LLC, is fined $100,000 for paying transaction-based compensation to non-FINRA members and for supervisory failures. Further, Respondent is prohibited from engaging in certain business lines, required to retain an independent consultant to review its supervisory procedures, and ordered to pay costs.

In addressing the issue of sanctions for the payments to non-members, the Decision offers, in part, this analysis [Ed: footnotes omitted]:

There are no Guidelines directly applicable to Silver Leaf's violative payments to nonmembers. We therefore looked to the Guidelines for the most analogous violation. Because Silver Leaf's conduct perpetuated unregistered activities, it is appropriate to analogize Silver Leaf's conduct to a registration violation. So we used those Guidelines to assist our formulation of sanctions. They recommend a fine of $2,500 to $73,000 and, in egregious cases, the Panel should consider suspending the firm in any or all activities or functions for up to 30 business days. The Guideline for this violation contains two Specific Considerations: (1) whether the respondent has filed a registration application; and (2) the nature and extent of the unregistered person's responsibilities. We also considered the Principal Considerations applicable to all violations. 

There are numerous aggravating factors present here. The Firm did not accept responsibility for its misconduct, which occurred over an extended period, and involved a pattern of misconduct.The misconduct was also intentional. Silver Leaf obtained monetary benefit from the misconduct, as the Firm made payments to non-members in connection with transactions in which it received compensation. The compensation paid to the unregistered entities was substantial. A highly aggravating factor is that Silver Leaf resumed payments to the LLCs just months after SEC staff notified it that the conduct was improper, and after Silver Leaf, in response, assured the staff that it would not make these payments unless it received an SEC no-action letter. Finally, there is no evidence that the unregistered entities, whose owners played an important role in the Firm's business, ever tried to become registered.

Counterbalanced against these aggravating factors, the Panel found it somewhat mitigating that the payments to the LLCs benefited the persons who rightfully earned the compensation, namely, the Firm's brokers who owned the LLCs. We found no other mitigation.. . .
After a three-week trial in the United States District Court for the Western District of North Carolina, a  federal jury convicted Robert Leslie Stencil and Michael Allen Duke of one count of conspiracy to commit mail and wire fraud; additionally, Stencil was convicted of 13 counts of mail fraud, 13 counts of wire fraud and four counts of money laundering; and Duke was convicted of three counts of mail fraud, one count of wire fraud and one count of money laundering. Nicholas Fleming, Martin Delaine Lewis, Paula Saccomanno, and Dennis Swerdlen pled guilty to their roles in the conspiracy with Stnecil and Duke and are awaiting sentencing. Kristian F. Sierp was sentenced to 102 months in prison in connection with his role, and Daniel Thomas Broyles, Sr. was also charged and remains a fugitive.  As set forth in part in the DOJ Release:

According to the evidence presented at trial, from 2012 through 2016, Stencil, Duke and their co-conspirators sold millions of dollars of worthless stock in a sham company named Niyato Industries Inc. ("Niyato").  Stencil played the role of Niyato's Chief Executive Officer.  Duke was Stencil's top salesperson.  Together with their co-conspirators, Stencil and Duke portrayed Niyato as a leader in its field, manufacturing electric vehicles and converting gasoline vehicles to run on compressed natural gas.  Stencil, Duke and their co-conspirators told victims that Niyato was run by a team of high-profile executives, and that Niyato had patented technology, state-of-the-art facilities, and valuable contracts.  Further, they told victims that Niyato would use 97 percent of the money it raised selling stock to grow its business and expand operations.  Stencil, Duke and their co-conspirators used high-pressure tactics when pitching Niyato stock to victims.  Among other things, they sold victims on the opportunity to get in on the ground floor, offering them a portion of a supposedly limited supply of pre-IPO stock at $.50 per share and promising them a 10- to 16-fold return when Niyato went public.  From 2012 to 2016, Stencil, Duke and their co-conspirators repeatedly told victims that an IPO was imminent.

In reality, the evidence showed that Niyato had no patents, facilities, products, or plans to commence an IPO.  Niyato's true business was the sale of worthless stock.  Stencil, Duke and their co-conspirators used nearly all of the money raised by selling Niyato stock for their own personal benefit, with Stencil paying salespeople - like Duke - half or nearly half of the money they solicited from each investor on behalf of Niyato.  Moreover, Stencil used Niyato's bank account as his own personal piggybank.  The evidence further established that Stencil, Duke and their co-conspirators sold approximately $2.8 million in stock to around 140 victims, many of whom were elderly.  Duke was Stencil's top salesperson, selling over $1.4 million of worthless Niyato stock to around 70 victims.  For his role in the fraudulent scheme, Duke received over $700,000.   

SEC Imposes Bars In Settlements Involving Matters Related to Woodbridge Group of Companies, Inc.