Securities Industry Commentator by Bill Singer Esq

February 21, 2019

"Lazy Lion" Marijuana Business Owners Guilty Of Failing To Pay Over $3,000,000 In Federal Taxes (DOJ Release)
In January 2013, Andrew C. Poarch and his wife opened "The Lazy Lion"marijuana business in Colorado Springs, CO, which operated as a store offering a membership in a private club via a customer agreement, which allowed for members to visit the business and acquire marijuana for a set price. In addition to a one-time initial membership fee, customers paid an entry fee for each visit and a set fee for each marijuana purchase.  All of which sounds very business-like and orderly but for the fact that The Lazy Lion never registered as a State of Colorado sanctioned recreational dispensary. Otherwise, this is how the DOJ Release explains in part what went wrong, and how Poarch came to plead guilty to filing a false federal income tax return as alleged in a criminal Information filed in the United States District Court for the District of Colorado:

The Lazy Lion obtained its supply of marijuana from a series of grow operations which cultivated and prepared the marijuana for distribution at various warehouses located in the Colorado Springs area.  Poarch and his wife owned and controlled the growing operations.  Once the marijuana was received at The Lazy Lion, customers could enter the business, purchase marijuana, and if desired, consume the marijuana on the premises.

The Lazy Lion was a cash only business.  The Lazy Lion maintained an ATM within the dispensary, which allowed members to obtain cash within the premises. 

The Lazy Lion generated substantial profits during the course of its operations.  In order to track its cash revenues, the company used a point of sale program that recorded the receipt of all cash funds collected from customers at the business.  Records from the point of sale system were collected and analyzed during the investigation of the business and it was determined that during the period of the scheme, the gross revenues for the business approximated $10,792,320.  Federal agents then determined the business expenses and the income.   

On or about September 29, 2015, Poarch and his wife signed a Form 1040, Individual Income Tax Return, signed under penalties of perjury, and represented that, to the best of their knowledge, the information contained in the return was true, correct, and complete.  Among other information, the 2014 tax return stated that their adjusted gross income was $19,294 and that they were due a refund from the IRS.  In fact, Poarch was aware that their adjusted gross income was approximately $2,807,761 and the couple owed the IRS tax of $1,061,485.

The parties failed to file personal income tax returns for the 2015 and 2016 tax years.  Their net income for the 2015 tax year was $4,187,449.  Their net income for the 2016 tax year was $1,325,575. 

As a result of the conduct, Poarch and his wife failed to pay the IRS a total of $3,126,245 in taxes due and owing.
Bill Singer's Comment:  I mean, wow, how hard is it to imagine young Andrew asking his wife if she had filed federal tax returns, and she says, "What?" and then he asks, again, if she had filed the taxes, and she says, "Filed the what?" and he says you know, did you, did you . . . ummm . . . did you do that thing with that other thing, and she says"What?" and then he says things are all around us and did you know that? and she says "What?" and he asks her what were we talking about? and then she says she didn't remember talking about anything but it's okay to not talk about talking about anything, and he says I thought you had asked me a question and she says, no, I think you had asked me something, and then he says, I don't think so, and she say, uh huh, and he says nah, and she says, uh huh, and he says whatever, and then she asks him if he filed the tax returns and he says "What?" and then she asks what do you mean what, and he says I dunno . . .
To say that Amazon is just an online retailer is to miss it. Yes, Amazon sells things online, beginning with books. But that's nothing special. Amazon's real power comes from the fact that almost half of all online sales flow through it. Amazon achieved that market dominance by suffering years of losses and reinvesting all its cash into long-term infrastructure improvements. All this made Amazon more like a utility than a retailer. Utilities, like telephone, power, water and cable companies, provide essential services. No one wants to diminish what they do, because we need them. But they can only serve their purposes as natural monopolies controlling expensive large-scale infrastructures. They are all regulated, not because we want to cut them down to size, but because we understand that otherwise their bigness would allow them to say "F-you" in too many places.
Without admitting or denying the findings in an SEC Order, Gladius Network LLC agreed to return funds investors who had purchased tokens in the company's unregistered initial coin offering ("ICO"). Further, Gladius agreed to register its tokens as securities and to file required periodic reports with the SEC.  The SEC Order alleged that Gladius in late 2017 (after the SEC's issuance of its DAO Report of Investigation deeming ICOs can be securities offerings) Gladius had conducted an ICO by which it raist about $12.7 million in digital assets to finance its plan to develop a network for renting spare computer bandwidth to defend against cyberattacks and enhance delivery speed.  READ the SEC Order As set forth in part in the SEC Release:

Gladius self-reported to the SEC's Enforcement staff in the summer of 2018, expressed an interest in taking prompt remedial steps, and cooperated with the investigation.  The SEC did not impose a penalty because the company self-reported the conduct, agreed to compensate investors, and will register the tokens as a class of securities.  The case follows the Commission's two recent ICO registration cases, in which companies agreed to pay penalties for similar registration violations and agreed to similar undertakings. 

Victims of that other Ponzi scheme -- Stanford -- say they have been short-changed (
An excellent recap of how victims of Bernie Madoff and R. Allen Stanford have see dramatically differing recoveries of their losses. In part, the article asserts that:

According to the most recent figures from Ralph Janvey, the court-appointed receiver rounding up funds for the victims, about $500 million of the roughly $5 billion in investor losses had been recovered as of Oct. 31, 2018. Out of that, a court has approved about $224 million in fees and expenses for Janvey and his team. That leaves about $275 million - or about five cents on the dollar - for the victims. 

. . .

Even if all of Janvey's efforts are successful, Stanford's investors are likely to receive only pennies on the dollar, while Madoff investors have recovered about 75 cents on the dollar in principal - and counting. Sadler said the difference is the result of different treatment of the two frauds by the agencies that normally look out for investors.

"Sadly, unlike in the Madoff case, Stanford investors were not eligible for SIPC coverage for their losses," Sadler told CNBC in an email. He was referring to the Securities Investor Protection Corporation, which compensates investors for securities and cash that are lost when a brokerage firm fails.

In the case of Madoff, SIPC oversaw the liquidation of the firm, made payments to thousands of investors, and covered the fees of court-appointed trustee Irving Picard. But in the case of Stanford, whose U.S. brokerage arm was a SIPC member, the agency argued that the securities in question - bogus CDs issued by a foreign bank - were not covered under the law. Thus, neither were the victims. . . .
In an Indictment filed in the United States District Court for the Southern District of New York, Roberto Rodriguez, Michael Siva, Rodolfo Sablon, Jhonatan Zoquier, and Jeffrey Rogiers were charged in a 54-count Indictment for their involvement in three overlapping insider trading schemes utilizing information misappropriated by Daniel Rivas, a technology consultant in an investment bank's Research and Capital Markets Technology Group. Rivas and an additional participant, James Moodhe, pled guilty and cooperated in the ensuing investigation; and, thereafter, all defendants pled guilty. Rodriguez pled guilty to one count of conspiracy to commit securities fraud and fraud, and he was sentenced to one year and one day in prison plus two years of supervised release. As set forth in part in the DOJ Release:

From August 2014 through April 2017, Rivas violated the duties of confidentiality he owed to the Investment Bank by serially misappropriating material, nonpublic information from the Investment Bank's Deal Tracking System and passing that information along to friends so that they could utilize it to make profitable trades.  On more than 50 occasions between August 2014 and April 2017, Rivas provided Inside Information about contemplated but unannounced merger and acquisition transactions and tender offer transactions involving clients and prospective clients of the Investment Bank to friends who used that information to purchase and sell securities.  In total, the insider trading based on Inside Information misappropriated by Rivas resulted in illicit profits of more than $5 million through trading in more than two dozen securities. The Inside Information was passed through three tipping chains.    

US Supreme Court Says 14th Amendment Incorporates 8th Amendment's "Excessive Fines Clause" Against States Tyson Timbs, Petitioner, v Indiana ( United States Supreme Court Slip Opinion, 17-1091;  586 U. S. ____ (2019) / February 20, 2019)
Ginsburg, J delivered the Opinion and was joined by Roberts, Breyer, Alito, Sotomayor, Kagan, Gorsuch, and Kavanugh; Thomas the judgment. The Court vacated the judgment of the Indiana Supreme Court and remanded. As set forth in the Syllabus:

Tyson Timbs pleaded guilty in Indiana state court to dealing in a controlled substance and conspiracy to commit theft. At the time of Timbs's arrest, the police seized a Land Rover SUV Timbs had purchased for $42,000 with money he received from an insurance policy when his father died. The State sought civil forfeiture of Timbs's vehicle, charging that the SUV had been used to transport heroin. Observing that Timbs had recently purchased the vehicle for more than four times the maximum $10,000 monetary fine assessable against him for his drug conviction, the trial court denied the State's request. The vehicle's forfeiture, the court determined, would be grossly disproportionate to the gravity of Timbs's offense, and therefore unconstitutional under the Eighth Amendment's Excessive Fines Clause. The Court of Appeals of Indiana affirmed, but the Indiana Supreme Court reversed, holding that the Excessive Fines Clause constrains only federal action and is inapplicable to state impositions. 

Held: The Eighth Amendment's Excessive Fines Clause is an incorporated protection applicable to the States under the Fourteenth Amendment's Due Process Clause. Pp. 2-9. 
(a) The Fourteenth Amendment's Due Process Clause incorporates and renders applicable to the States Bill of Rights protections "fundamental to our scheme of ordered liberty," or "deeply rooted in this Nation's history and tradition." McDonald v. Chicago, 561 U. S. 742, 767 (alterations omitted). If a Bill of Rights protection is incorporated, there is no daylight between the federal and state conduct it prohibits or requires. Pp. 2-3. 
(b) The prohibition embodied in the Excessive Fines Clause carries forward protections found in sources from Magna Carta to the English Bill of Rights to state constitutions from the colonial era to the present day. Protection against excessive fines has been a constant shield throughout Anglo-American history for good reason: Such fines undermine other liberties. They can be used, e.g., to retaliate against or chill the speech of political enemies. They can also be employed, not in service of penal purposes, but as a source of revenue. The historical and logical case for concluding that the Fourteenth Amendment incorporates the Excessive Fines Clause is indeed overwhelming. Pp. 3-7. 
(c) Indiana argues that the Clause does not apply to its use of civil in rem forfeitures, but this Court held in Austin v. United States, 509 U. S. 602, that such forfeitures fall within the Clause's protection when they are at least partially punitive. Indiana cannot prevail unless the Court overrules Austin or holds that, in light of Austin, the Excessive Fines Clause is not incorporated because its application to civil in rem forfeitures is neither fundamental nor deeply rooted. 
The first argument, overturning Austin, is not properly before this Court. The Indiana Supreme Court held only that the Excessive Fines Clause did not apply to the States. The court did not address the Clause's application to civil in rem forfeitures, nor did the State ask it to do so. Timbs thus sought this Court's review only of the question whether the Excessive Fines Clause is incorporated by the Fourteenth Amendment. Indiana attempted to reformulate the question to ask whether the Clause restricted States' use of civil in rem forfeitures and argued on the merits that Austin was wrongly decided. Respondents' "right, . . . to restate the questions presented," however, "does not give them the power to expand [those] questions," Bray v. Alexandria Women's Health Clinic, 506 U. S. 263, 279, n. 10 (emphasis deleted), particularly where the proposed reformulation would lead the Court to address a question neither pressed nor passed upon below, cf. Cutter v. Wilkinson, 544 U. S. 709, 718, n. 7. 
The second argument, that the Excessive Fines Clause cannot be incorporated if it applies to civil in rem forfeitures, misapprehends the nature of the incorporation inquiry. In considering whether the Fourteenth Amendment incorporates a Bill of Rights protection, this Court asks whether the right guaranteed-not each and every particular application of that right-is fundamental or deeply rooted. To suggest otherwise is inconsistent with the approach taken in cases concerning novel applications of rights already deemed incorporated. See, e.g., Packingham v. North Carolina, 582 U. S. ___, ___. The Excessive Fines Clause is thus incorporated regardless of whether application of the Clause to civil in rem forfeitures is itself fundamental or deeply rooted. Pp. 7-9. 

84 N. E. 3d 1179, vacated and remanded.
Former bank employee Jessica Vargas pled guilty in the United States District Court for the District of Massachusetts to one count of bank fraud and two counts of bank embezzlement.Vargas made unauthorized cash withdrawals of about $108,000 from customer accounts including over $53,000 from the account of an 84-year-old and almost $13,000 from the account of an 88-year-old.