Securities Industry Commentator by Bill Singer Esq

April 18, 2019

SEC Says Proprietary Algorithm Wasn't As Promised. In the Matter of Matthew R. Rossi and SJL Capital, LLC, Respondents (Order Instituting Administrative And Cease-And-Desist Proceedings, Making Findings, And Imposing Remedial Sanctions And A Cease-And-Desist Order AND Notice of Hearing; '33 Act Rel. No.  10628;'34 Act Rel. No. 85683; Invest. Adv. Act Rel. No. 5224 Admin. Proc. File No. 3-19145 / April 17, 2019) In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Matthew R. Rossi and SJL Capital, LLC (a registered investment advisor, which Rossi founded, served as its managing partner, and owned 80% until his July 21, 2017 resignation)  submitted an Offer of Settlement, which the federal regulator accepted.  In part the SEC Order asserts under the heading "Summary":

1. From at least May 2016 through March 2017, Respondents defrauded certain SJL advisory clients and at least one investor in SJL's MarketDNA Hedge Fund LP ("Fund") by misleading them regarding the nature and performance of Respondents' investment strategy and by concealing trading losses. 

2. SJL and Rossi represented to Fund investors that the Fund would invest in a diversified portfolio consisting primarily of publicly traded equity securities. They further represented that the Fund would use a highly successful proprietary algorithm developed by Rossi known as MarketDNA, which allegedly had been refined over 20 years and included "safety valves" or stop losses to limit downside risk. Respondents also told certain advisory clients of SJL ("SMA Clients") that Respondents would use the same MarketDNA algorithm to invest the funds in their separately managed accounts ("SMAs"). 

3. In fact, Respondents engaged in risky, unhedged options trading, which did not comport with the purported MarketDNA strategy and did not include any safety valves or stop loss limits. Rossi had generated significant losses through such trading in the years preceding the launch of the Fund. Although the Fund achieved significant positive returns in June 2016, it lost 88% of its value in August, continued its decline in September and October, and was wiped out completely by November 2016. Respondents hid the full extent of the losses from investors in the Fund by creating and distributing phony account statements and tax documents that falsely described the Fund's assets and the supposed returns generated by the MarketDNA strategy. 

4. Respondents misled certain SMA Clients about the performance of the MarketDNA Strategy by distributing documents that falsely described the supposed returns generated by the strategy and concealed the losses suffered by the Fund. Unaware of the Fund's massive August 2016 losses and its ultimate collapse in November, Respondents' SMA Clients invested nearly $1.8 million with Rossi and SJL from August 12, 2016 through February 3, 2017. In February 2017, Rossi lost more than 70% of their remaining investment funds through more risky, unhedged options trading. When the SMA Clients discovered the losses, Rossi falsely told them that they were caused by a rogue trader whom he purportedly allowed to trade for the accounts when he underwent knee surgery in mid-February. 

5. In March 2017, after having lost over $1.5 million, the SMA Clients revoked Respondents' discretionary authority over their accounts. In total, Respondents' Fund investors lost at least $300,000. 

6. As a result of their conduct, Respondents violated Section 17(a) of the Securities Act; Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and Sections 206(1), 206(2), Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.

In settling this matter, the Respondents were ordered to cease-and-desist from future violations of cited Acts and Rules,; SJL is Censured; and Rossi is, in part:

i. barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; and 

ii. prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter.

Additionally, Respondents agreed to the following as stated in the SEC Order:

Pursuant to Respondents' Offer, Respondents agree to additional proceedings in this proceeding to determine what, if any, disgorgement, prejudgment interest, and civil penalties are appropriate and in the public interest under the Securities Act, Exchange Act, and Advisers Act. In connection with such additional proceedings: (a) Respondents agree that they will be precluded from arguing that they did not violate the federal securities laws described in this Order; (b) Respondents agree that they may not challenge the validity of this Order; (c) solely for the purposes of such additional proceedings, the findings of this Order shall be accepted as and deemed true by the hearing officer; and (d) the hearing officer may determine the issues raised in the additional proceedings on the basis of affidavits, declarations, excerpts of sworn deposition or investigative testimony, and documentary evidence. Respondent Rossi may, if he elects, also testify and present arguments at a hearing concerning issues relevant to the imposition of disgorgement, prejudgment interest and civil penalties, provided such testimony and arguments do not contravene subsections (a) through (c) of this Section IV.
After pleading guilty to access device fraud and aggravated identity theft in the United States District Court for the Eastern District of New York, Djevai Ametovks a/k/a "xhevo," "codeshop," "sindrom" and "sindromx,"was sentenced to 90 months in prison and ordered to forfeit $250,000, and to pay an amount of restitution to be determined. As set forth in part in the DOJ Release:

Ametovski and his co-conspirators operated Codeshop between August 2010 and January 2014, victimizing hundreds of thousands of individuals around the world by hacking into the computer databases of financial institutions and other businesses and through "phishing" scams designed to induce accountholders to unwittingly surrender private identification information.  They packaged this stolen data for sale and posted it on the Codeshop website, a fully indexed and searchable website that allowed users to search by bank identification number, financial institution, country, state and card brand to find the data they wanted.  The stolen data could then be used to make online purchases and to encode plastic cards to withdraw cash at ATMs.  Ametovski used a network of online money exchangers and anonymous digital currencies, including Bitcoin, to reap revenues from the Codeshop website and to conceal all participants' identities, including his own.  Over the course of the scheme, Ametovski obtained and sold stolen credit and debit card data for more than 1.3 million cards.
The Big Eight accounting firms gobbled up smaller practices, and then became the Big Seven, then the Big Six, and now the Big Four. Today, Delloite, the largest, has over 56,000 employees and earns over $13 billion in yearly revenue; the smallest, KPMG, has over 24,000 and earns almost $6 billion. At last count, 40 Big Law firms had achieved a billion dollars in annual revenue through their aggregate of 80,000 lawyers -- all of which yields millions in compensation for Big Law's partners. Notwithstanding those impressive numbers, Aegis Frumento, Esq. warns of the dangerous degree of the legal profession's structural inequality caused by Big Law.
After pleading guilty to an Information in the United States District Court for the District of New Jersey charging her with two counts of wire freaud, Alisa Adler was sentenced to 27 months in prison plus three years of supervised release and ordered to pay $1,254,000 in restitution. As set forth in part in the DOJ Release:

From January 2009 through August 2014, Adler took loans and investments from multiple victims and told them that their money would be used for certain specified investments through her company, ASG Real Estate Services Group Inc. To induce potential investors to give her money, Adler provided them with promotional materials and other documents, and told them that their money would be repaid within a certain amount of time. Adler did not use the majority of invested funds for the specific real estate investments she had presented to the victims. Instead, she used it to, among other things, repay prior investors and pay her own personal expenses.
Marcella Drakeford, the business manager of an assisted living facility pled guilty in the United States District Court for the District of New Jersey to mail fraud in connection with having stolen about $237,000 from an elderly victim under her care. As set forth in part in the DOJ Release:

Beginning in December 2016, Drakeford allegedly agreed to help manage her victim's financial affairs and pay for her care. She was granted limited access to the victim's checking account. Unbeknownst to victim or the victim's guardian, Drakeford already had fraudulently gained access to the victim's credit card account and had several cards issued in her name. Drakeford then used the credit cards for personal expenditures, including luxury clothing, jewelry, and automobiles, dental work, rent, and utilities. Drakeford paid off the credit card bills with checks drawn on the victim's checking account, all without permission.
Eric Weller was among nine defendants charged in the united States District Court for the Northern District of Illinois with participating in an insider trading conspiracy that used inside information about an impending corporate acquisition to earn trading profits. Five defendants pled guilty to conspiracy to engage in insider trading and are awaiting sentencing; three other defendants entered into deferred prosecution agreements. After a jury trial, Weller was found guilty of one count of conspiracy to engage in insider trading but acquitted on three counts of securities fraud. As set forth in part in the DOJ Release:

Evidence at trial revealed that a vice president of corporate sales at Minnesota-based Life Time Fitness Inc. obtained material, non-public information about the potential sale of the company in 2015.  The executive knew that a sale would likely cause an increase in the company's stock price, and the executive shared the inside information with a longtime friend so that the friend could trade and profit.  The friend shared the information with three co-conspirators, one of whom then shared it with Weller and three others.          

After receiving the material, non-public information, Weller purchased Life Time Fitness securities before news of the potential sale became public via a media report.  The report caused the stock price to increase substantially.  During a three-week period, the defendants earned more than $860,000 in illegal profits from the trades, including more than $550,000 earned by Weller.