Securities Industry Commentator by Bill Singer Esq

June 10, 2019
If a tree falls in the woods but no one hears it, does it make a sound? If a customer sends an order to buy mutual funds via email but the stockbroker doesn't get the message, was there a bona fide order?Welcome to the fun world of regulation, compliance, and arbitration on Wall Street.

FINRA Expels Crowdfunding Member and Bars its Chief Executive Officer. FINRA Department of Enforcement, Complainant, v. DreamFunded Marketplace, LLC and Manual Fernandez, Respondents (FINRA Office of Hearing Officers Extended Hearing Panel Decision / June 5, 2019)
As set forth in the Syllabus to the 148-page OHO Decision:

Respondent DreamFunded Marketplace, LLC, was registered with FINRA as a funding portal member, and its co-founder and Chief Executive Officer, Respondent Manuel Fernandez, was an associated person of the funding portal member. While the entity was registered and Fernandez was associated with it, they committed multiple violations of the Securities and Exchange Commission's Regulation Crowdfunding Rules and FINRA's Funding Portal Rules, as well as FINRA Rule 8210. 

First Cause of Action: Respondents failed to respond fully and completely to a FINRA Rule 8210 request. They thereby violated FINRA Rule 8210, Funding Portal Rule 800(a) (which makes FINRA Rule 8210 applicable to funding portals), and Funding Portal Rule 200(a) (which requires adherence to high standards of commercial honor and just and equitable principles of trade). For this misconduct, we expel the entity Respondent from FINRA membership as a funding portal member and bar the individual Respondent from association with any FINRA funding portal member. 

Third Cause of Action: While acting on behalf of the entity Respondent, Fernandez made false and misleading statements regarding a purported investment in an issuer. Respondents posted the misstatements regarding the purported investment on the entity's website and on social media. In doing so, they employed a deceptive device or contrivance and created a misimpression, either with intent to mislead investors or in reckless disregard of the likelihood of misleading them. This misconduct violated FINRA Funding Portal Rule 200(b), which we conclude requires scienter, and Funding Portal Rule 200(a). 

As charged in the same Cause of Action, Respondents made false and misleading statements on their website regarding the due diligence that they conducted on issuers before allowing issuers to make crowdfunding offerings on Respondents' platform. They did so either with intent to mislead investors or in reckless disregard of the likelihood of misleading them. This misconduct also violated FINRA Funding Portal Rules 200(b) and 200(a). 

As charged in the same Cause of Action, Respondents made statements on their website about real estate transactions. These statements were misleading, and violated Funding Portal Rule 200(c)(2), which we find does not require scienter, and Funding Portal Rule 200(a). 

For the two scienter-based violations charged in the Third Cause of Action, together, we expel the entity Respondent from FINRA membership as a funding portal member and bar the individual Respondent from association with any FINRA funding portal member. Separately, for the non-scienter-based violation standing alone, we would find a Letter of Caution an appropriate response to a first-time violation. In light of the expulsion and bar imposed for other violations, however, we do not impose any sanction. In addition to the sanctions imposed, we order Respondents to pay hearing costs.  

Second, Fifth, Sixth, Seventh, Eighth, Ninth, and Tenth Causes of Action: We find that Enforcement proved some or all of the violations alleged. Because we expel the entity and bar the individual Respondent in connection with the First and Third Causes of Action, we discuss the lesser sanctions that would be appropriate for the other violations but do not impose them. 

Fourth Cause of Action: We dismiss the claim that Respondents lacked a reasonable basis for believing that two issuers were in compliance with their legal and regulatory obligations. 

Summary of the Ten Causes of Action: We summarize our determinations regarding the charges and the sanctions contained in each of the ten Causes of Action in the Introduction to the Decision, under the heading Resolution of Charges.  

A very impressive bit of drafting from OHO Hearing Officer Lucinda O. McConathy, who patiently and methodically works her way through the fact pattern and produces a Decision replete with content and context. An outstanding effort!

As I suspected (and feared) the promise of so-called "crowdfunding" has proven illusive. Although there was much talk about democratizing Wall Street with the advent of the JOBS Act, that bit of legislation accomplished little beyond driving folks looking to raise modest amounts of capital into the grasp of con artists who offer little more than glitzy websites where deals either languish or attract modest sums subject to the high price-tag of the crowdfunding sites. Poorly drafted laws and rules attract con artists, crooks, and thieves because decent entrepreneurs are overwhelmed with the costs and fees of trying to understand just what you can and can't do, and with whom, and when. By the time you get down paying the lawyers and accountants, and then the fees to list on a crowdfunding site, you're paying what may amount to a usurious rate to raise seed capital. 

There is nothing streamlined about crowdfunding. There is nothing simple or intuitive about crowdfunding. It all reeks of the worst of unsavory pennystock-promotion and unscrupulous boiler-room fraud. To underscore my point, consider the OHO Decision's characerization of Respondent Fernandez [Ed: Footnotes omitted]:

Fernandez describes himself as coming from a tough, impoverished background and becoming a success through a combination of innate intelligence, hard work, discipline, and nurturing a network of mentors and connections. According to Fernandez, he did not finish high school, but he obtained a GED, took courses at Stanford University in an executive education graduate school of business program, and obtained a paralegal certificate from Lorenzo Patino School of Law in Sacramento, California. Fernandez made a point of telling us that he has a high IQ and belongs to an organization of people with high IQs. In his twenties, Fernandez became active in political affairs and the Hispanic community in Sacramento, where he grew up. At one point, he worked at Wells Fargo as a home loan consultant. After he left that position, he started a company to buy foreclosed properties from the bank, in partnership with an agency of the Sacramento government. Starting in 2008, Fernandez and a business partner began to invest in real estate through crowdfunding.

Fernandez began to see access to capital as a critical problem for minorities, like himself, and he sought out wealthy and successful persons with whom he could network and from whom he could learn. Fernandez views marketing and social media as keys to success. As one of his mentors encouraged him, "You have to market yourself . . . ." Fernandez observed that another multibillionaire "wanted to be in the media a lot because that's how you attracted the best deals. 

Fernandez became a prolific user of social media to project an image of himself as a highly successful entrepreneur, author, and investor. As he spent time with prominent people, Fernandez promoted himself by publicizing his activities. He has posted numerous photographs of himself with well-known people on his social media accounts, including Twitter, Facebook, YouTube, and Instagram. Some of the accounts are identified as individual accounts (e.g., "mannyfernandersv") and others as corporate accounts (e.g., "dreamfunded.").Fernandez appears on television shows about investing and posts video clips from those appearances on social media.He now gives numerous speeches around the world,and portrays himself as an expert on blockchain and cryptocurrency.

Fernandez believes himself a marketing genius. He described his genius as being able to get people to believe what he wants them to believe. "I know how to get the media to consistently tell a story the way I want . . . ." He claimed he had taught some of this skill to a former employee, AH. "I taught him a lot of that. How to make it indirect to make a person think it's true."

An example of making a statement indirectly in order to make it more believable is the way that Fernandez is described in brochures advertising his speeches. He was scheduled to speak shortly after the second session of the hearing in Mexico at a program headlined "Show Me the Money Masterclass." The marketing brochure for that speech touted Fernandez as "a graduate of Stanford University, founder of DreamFunded and one of the investors in the CNBC show 'Make Me a Millionaire Inventor,' and on the Oprah Winfrey Network."Although he denied holding himself out as a Stanford graduate, Fernandez admitted that his public biography states that he is "Stanford educated." He blamed the misleading description of him as a Stanford graduate on someone who misread his biography when creating the brochure.We find that Fernandez purposely created a false impression by his vague description of his education that caused others to unknowingly publicize him falsely as something he is not. . . .

Pages 21 - 23 of the OHO Decision

SIDE BAR: See Fernandez's online biography as of June 10, 2019 at

If, in fact, both the JOBS Act and FINRA's Crowdfunding Portal rules were conducive to the launch and creation of a robust and reputable crowdfunding industry, then the OHO Decision would not have included this laughable description of the amazing, extensive, and awe-inspiring success of the DreamFunded Portal [Ed:footnotes omitted]:

Between July 2016 and October 2017, the DreamFunded Portal acted as an intermediary in approximately 15 crowdfunding offerings. Of those, two closed, with investors' funds released from escrow. The two offerings that closed raised an aggregate of only $15,000. During the Portal's 16 months of operations, Fernandez claims that he vetted and rejected over 800 other issuers that applied to make offerings using the DreamFunded Portal's platform.He produced no records corroborating that claim. Indeed, he testified that he tossed any paper records of his purported due diligence because they were not important. 

Page 29 of the OHO Decision

Bill Singer's Comment: The FINRA Complaint was filed on February 23, 2018, with ten -- count 'em: 10 -- Causes of Action. The OHO hearings began on September 24, 2018, and concluded on November 16, 2018 -- which resulted in a total of eight days of hearings in two sessions per day.  A 148-page Extended OHO Hearing Panel Decision was published in June 2019, about 18-months after the filing of the Complaint. And all this for a lousy crowdfunding portal that existed for 16 months, intermediated about 15 offerings of which only two closed for an aggregate raise of $15,000. When you get a chance, howsabout you send me the same forensics for FINRA's investigation of Wells Fargo's unauthorized account openings, which I think impacted more than 15 customers and, I'm just guessing here, but, off the top of my head, I think the damages were a tad in excess of $15,000. Not that FINRA would ever have its priorities wrong.
Followng a jury trial in the United States District Court for the Eastern District of North Carolina, Stephen Condon Peters was convicted nine counts of Wire Fraud, four counts of Engaging in Monetary Transactions in Criminally Derived Property, and one count each of Investment Advisor Fraud; Fraud in the Sale of Unregistered Securities; Corruptly Endeavoring to Influence a Federal Agency; Aggravated Identity Theft; Conspiracy to Make and Use False Documents and to Falsify and Conceal Records; Making and Using False Documents; and  Falsifying and Concealing Documents During an SEC Examination. Also, the jury found that Peters  was to forfeit multiple assets for the benefit of victims, including: his primary residence (known as "Whispering Hope Farm"), his luxury vacation home in Costa Rica (known as "House of the Beloved Princess"), the financial accounts tied to the fraud he committed, and numerous watches and firearms. As set forth in part in the DOJ Release:

[B]eginning in 2009, and continuing into 2017, PETERS orchestrated the sale of VisionQuest Capital LLC promissory notes (the "Capital LLC Notes"), primarily to VisionQuest Wealth Management LLC clients.  In exchange for an investment of funds, the Capital LLC Notes purported to promise investors an 8% or 9% annual return on principal over a five year term.  In connection with the sale of the Capital LLC Notes, PETERS represented and caused to be represented to investors that the Capital LLC Notes were a low risk investment, and that the note proceeds would be invested into revenue generating or income-producing businesses.  In fact, PETERS stole large portions of the investor proceeds and carried out a "Ponzi" scheme on investors.

PETERS, both directly and through his staff at VisionQuest Wealth Management, LLC, forged, fabricated, and concealed documents and records in an effort to thwart an examination by the United States Securities and Exchange Commission (SEC) in late 2016.  Additionally, PETERS forged and backdated a letter to his former compliance officer purporting to place the burden of disclosing PETERS' conflicts of interest upon the compliance officer.  PETERS further directed the fabrication of numerous other records given to the SEC examiners, including client balance sheets, wealth management contracts, outside business activity disclosures, and internal compliance memoranda. 

Attorney Indicted For Investment Fraud / Defendant was arrested in Reno, Nevada and then transferred to Colorado (DOJ Release)
In an Indictment filed in the United States District Court for the District of Colorado, David Kaplan was charged with 7 counts of securities fraud, 36 counts of wire fraud, 9 counts of mail fraud, and 19 counts of money laundering.  As set forth in the DOJ Press Release:

[B]eginning around September 14, 2014, and continuing until approximately April 2016, Kaplan operated a scheme to defraud and to obtain money and property from investors by means of materially false and fraudulent representations.  Kaplan obtained money from investors by representing that investors could invest risk-free in off-shore investments with a sometimes guaranteed return on investment of 10% per month.  Kaplan utilized entities, including several charitable organizations, which he established and controlled as part of the scheme.  He also used his position as an attorney to gain the trust of investors and used his attorney trust account to create the pretense that investor monies were held in trust.  Kaplan made payments to investors in order to lull them into a sense of legitimacy and to encourage the recruitment of additional investors.  

Kaplan then made payments to himself and others for personal expenses, from accounts which he controlled, in which proceeds of the scheme were deposited.  He similarly made payments to entities, corporations, and foundations he controlled, from accounts he controlled, in which proceeds of the scheme were deposited.  Kaplan never disclosed to investors that: he would receive a financial benefit from the investment; the terms of his compensation; that he would divert investor monies for his personal benefit through entities he controlled; the pertinent risks associated with the securities; or his relationship with purported beneficiaries of investor funds.