Securities Industry Commentator by Bill Singer Esq

June 7, 2019
In recent divorce proceedings, a Wall Street employee sought the modification of his alimony and child-support payments because he had lost his jobs and the new job wasn't firing on all cylinders yet and, well, you know, things are tough and he's doing his best but, your honor, help me out here, please. Two courts heard his plea. Both courts essentially told him to try a little bit harder. 

Final Defendant Pleads Guilty to $550 Million Ponzi Scheme-One of the Largest Ever Charged in Maryland / Jay Ledford Created False Documents to Conceal the Fraud; SEC Has Related Civil Action (DOJ Release)
Jay B. Ledford pled guilty in the United States District Court for the District of Maryland to  conspiracy to commit wire fraud, aggravated identity theft, and a money-laundering transaction in excess of $10,000, arising from a $550 million investment fraud scheme that operated from 2013 through September 2018. Ledford is required to pay restitution in the full amount of the victims' losses and to forfeit property acquired with the proceeds of the offenses. Previously,  Co-Defendants Kevin B. Merrill and Cameron R. Jezierski pled guilty to their roles in the scheme.  The SEC filed a parallel civil complaint in this matter.  As set forth in part in the DOJ Release:    

[L]edford was a certified public accountant in Texas, starting his own practice in Amarillo in 1996 and later expanding to Dallas, Texas.  In 1999, Ledford met Kevin Merrill in Dallas, when Merrill was a salesman for a Baltimore company that sold supplies for X-ray machines for hospitals and doctors' practices.  Ledford and Merrill became friends, attending sporting events and visiting casinos together.  Ledford prepared Merrill's taxes for several years.

As stated in his plea agreement, in 2001, Ledford began purchasing consumer debt portfolios, forming a company which did business as Platinum Capital Investments, to hold the debt portfolios.  "Consumer debt portfolios" are defaulted consumer debts to banks/credit card issuers, student loan lenders, and car/truck financers which are sold in batches called "portfolios" to third parties that attempt to collect on the debts.  Ledford also solicited investors to supply capital to buy a portfolio or invest in his company.  After learning of Ledford's financial success with Platinum Capital, Merrill expressed interest in getting started in the business.  Ledford sold Merrill a few credit portfolios and introduced Merrill to his contacts with the debt reporting services.  Merrill formed his own debt collection business, had capital investors, and purchased debt portfolios.

Beginning in January 2013, Ledford and his co-conspirators perpetrated a Ponzi scheme to defraud investors of more than $394 million.  Specifically, Ledford and Kevin Merrill invited investors to join them in purchasing consumer debt portfolios.  Ledford provided fictitious sales agreements and other documents, including false tax returns, to Merrill, knowing that Merrill was using them to induce individuals to invest in his companies, Delmarva Capital and Global Credit Recovery.  For 2013, Merrill deposited approximately $4.3 million from investors, while Ledford raised just over $186,000 from investors.  Thereafter, Merrill's superior sales ability caused Ledford to assume a background role supplying Merrill with fictitious documents, while Merrill was the "front man," promoting the fraudulent investments to potential investors.

Specifically, the conspirators falsely represented to investors that they would use the investors' money to buy consumer debt portfolios and make money for them by (1) collecting the payments that people made on their debts or (2) selling the portfolios for a profit to other third-party debt buyers, in a practice called "flipping."  According to the related complaint in the civil action filed by the SEC, the victim investors included small business owners, restauranteurs, construction contractors, retirees, doctors, lawyers, accountants, bankers, talent agents, professional athletes, and financial advisors, located in Maryland, Washington, D.C., Northern Virginia, Denver, Texas, Chicago, New York, and elsewhere.

At today's hearing, Ledford admitted that to induce investors to participate, he and his co-conspirators falsely represented who they were buying the debt portfolios from and how much they were paying for the portfolios, whether they were investing their own funds, and their track record of success. According to the plea agreement, sometimes there was no underlying debt portfolio purchased with the investors' money.  To conceal the truth, Ledford, Merrill, and Jezierski, created imposter companies with names similar to actual consumer debt sellers or brokers and opened bank accounts in the names of those imposter companies.  In addition, to lend credibility to the transactions, Ledford created false portfolio overviews, sales agreements which used the names and forged signatures of actual employees of the sellers, created false collections reports, and falsified bank statements and merchant account reports.  In late 2014, Ledford transferred Cameron Jezierski to manage debt collections for Riverwalk/DeVille.  DeVille had a collections center in Euless, Texas, and the conspirators began to invite prospective investors to tour Riverwalk's office and the collections center, which added substance to their claims regarding the success of their portfolio purchasing strategy and collections efforts.  In December 2017, Ledford recruited Jezierski to the criminal conspiracy because his analytical skills enabled him to contribute significantly to creating false documentation to induce investors to invest, and to conceal the mark-up Ledford and Merrill added to the purchase price charged to investors for debt portfolios.

Further, Ledford admitted that he and Merrill falsely represented that the monies the conspirators paid to investors were "proceeds" from collections and/or flipping debt portfolios, when in fact, the proceeds were paid from funds provided by other investors.  Merrill and Ledford provided monthly or quarterly reports to investors regarding the "purported progress of the portfolio and its recovery," which Ledford and Merrill created.  From 2013 - 2018, the scheme to defraud took in over $394 million, and at the time of their arrests, the co-conspirators were attempting to obtain an additional $260 million from investors.  Ledford assisted Merrill to divert investors' funds to purchase a home in Naples, Florida, and also helped Merrill falsisfy records to the bank lender.  Ledford diverted fraud proceeds to purchase and renovate a home in Las Vegas, Nevada, to refinance a home in Texas, to gamble at casinos, purchase luxury automobiles, jewelry, and to support a lavish lifestyle.
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged Kik Interactive Inc. with violating the registration requirements of Section 5 of the Securities Act; and the federal regulator seeks a permanent injunction, disgorgement plus interest, and a penalty.
conducting an illegal $100 million securities offering of digital tokens.  As set forth in part in the SEC Release:

[K]ik had lost money for years on its sole product, an online messaging application, and the company's management predicted internally that it would run out of money in 2017.  In early 2017, the company sought to pivot to a new type of business, which it financed through the sale of one trillion digital tokens.  Kik sold its "Kin" tokens to the public, and at a discounted price to wealthy purchasers, raising more than $55 million from U.S. investors.  The complaint alleges that Kin tokens traded recently at about half of the value that public investors paid in the offering.

The complaint further alleges that Kik marketed the Kin tokens as an investment opportunity.  Kik allegedly told investors that rising demand would drive up the value of Kin, and that Kik would undertake crucial work to spur that demand, including by incorporating the tokens into its messaging app, creating a new Kin transaction service, and building a system to reward other companies that adopt Kin.  At the time Kik offered and sold the tokens, the SEC alleges these services and systems did not exist and there was nothing to purchase using Kin.  Kik also allegedly claimed that it would keep three trillion Kin tokens, Kin tokens would immediately trade on secondary markets, and Kik would profit alongside investors from the increased demand that it would foster.  The Kin offering involved securities transactions, and Kik was required to comply with the registration requirements of the U.S. securities laws.

FINRA Arbitrators Cite Improper Submission of Claim in Dismissing Customer's Case. In the Matter of the Arbitration Between Tom K. Nomeland, Claimant, v. Theodore Allocca, William Michael Quigley, Robert Paul Solow, and Trident Partners Ltd., Respondents (FINRA Arbitration  Decision 18-00195) In a FINRA Arbitration Statement of Claim filed in March 2018, public customer Claimant Nomeland asserted:

[U]nsuitable Transactions (Qualitative Suitability), Failure to Supervise, and Respondeat Superior. The claims relate to the management of Claimant's brokerage account, including investments in Convera Corporation, Leading Brands, Inc., ON Semiconductor, Bank of America Warrants, Canadian Solar, DryShips Inc., and Huntsman Corporation. Claimant alleged that trading in his account was reckless and beyond his designated risk tolerance. Claimant further alleged that Allocca wrongfully solicited Claimant to invest $50,000.00 in a private placement in MEKA Associates, LLC, the parent company of Trident.

Claimant Nomeland sought in excess of $320,486 plus "$50,000 relating to the wrongful solicitation by Allocca of the investment in MEKA Associates, LLC, case preparation fees, and punitive damages."  Respondents moved to dismiss citing that the claims were more than six years old and ineligible under FINRA Rule 12206. The FINRA Arbitration Panel granted the Motion and offered the following rationale:

The latest date of any activity in Claimant's account was January 31, 2012 when the account was closed. The last trade was January 12, 2012. The Statement of Claim was dated March 23, 2018 and purportedly filed March 23, 2018 or soon thereafter, but more than 6 years after the last activity in the account. 

The arbitrators note that originally the claim was submitted for filing in early January 2018 but the claim could not be filed until put into proper form. Claimant was notified by FINRA Office of Dispute Resolution in January 2018, but the problem was not corrected within 30 days, so there is no relation back to the original date of filing under FINRA Rule 12307(b). The fact that Claimant may not have been aware of his claim until April 2012 does not toll the six-year limitation of eligibility under the rules.

Stockbroker Fined and Suspended for UIT Sales. In the Matter of Ron Ray Willoughby, Jr., Respondent (FINRA AWC 2017055692301)
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Ron Ray Willoughby, Jr. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Ron Ray Willoughby, Jr. a $5,000 fine and a three-month suspension from association in any and all capacities with any FINRA membef firm. As set forth in the "Overview" section of the AWC:

Between July 1, 2012 and December 31, 2014 (the "Relevant Period"), Willoughby engaged in an unsuitable pattern of short-term trading of Unit Investment Trusts in customer accounts. Based on the foregoing, Willoughby violated NASD Rule 2310 (for conduct before July 9, 2012), FINRA Rule 2111 (for conduct on or after July 9, 2012), and FINRA Rule 2010. 

As more fully illustrated in the AWC:

During the Relevant Period, Willoughby recommended his customers roll over UITs more than 100 days prior to maturity on more than 900 occasions.2Indeed, although his customers' UlTs generally had 15- or 24-month maturity periods, Willoughby recommended that they sell their UITs after holding them for, on average, only 191 days, and use the proceeds to purchase a new UIT. 

Of the more than 900 early rollovers recommended by Willoughby, more than 100 were "series-to-series" rollovers. In other words, on more than 100 occasions, Willoughby recommended that his customers roll over a UIT before its maturity date in order to purchase a subsequent series of the same UIT, which, as noted above, generally had the same or similar investment objectives and strategies as the prior series. 

As one example of a recommended "series-to-series" rollover, Willoughby recommended that a customer purchase a UIT issued in the fourth quarter of 2012 that had an investment objective of "capital appreciation" and an investment strategy of investing in stocks derived from the "S&P 500 Dividend Aristocrats Index," which includes companies in the S&P 500 Index that had increased their dividends for 25 consecutive years (the "2012 Q4 Series"). Although the 2012 Q4 Series UIT had a 24-month maturity period, Willoughby recommended that his customer sell it after holding it for fewer than 11 months and use the proceeds to purchase a later series of the same UIT issued in the third quarter of 2013 (the "2013 Q3 Series"). The 2013 Q3 Series had the same or a similar investment objective and strategy as the 2012 Q4 Series. . . .