Securities Industry Commentator by Bill Singer Esq

August 26, 2019
This is a saga that starts in 2006 with alleged business expense misconduct; and then, from 2007 through 2019 moves  -- or should we say slogs -- through an investigation, Complaint, hearings, appeals, remands, and appeals. In a bit of mathematical magic, we seem to have traveled twice around a circle only to find ourselves at the end of the beginning of the beginning of the end -- the amazing Mobius Strip of Wall Street Regulation.

Carrollwood Man Sentenced For $8 Million Investment Fraud (DOJ Release)
After pleading guilty to the sale of unregistered securities in the United States District Court for the Middle District of Florida, Larry A. Carr, 84, the frormer President and/or sole operator of Cita Trust N.A., Inc., Cita Trust Company, N.A., Cita Trust Company, Ltd., and Cita Trust Company, A.G. (collectively, "Cita Trust") was sentencedmto four years in prison and ordered to over $8 million in restitution to his victim-investors. As set forth in part in the DOJ Release:

In 2015, Carr sold unregistered securities in the form of Cita Trust Investment Notes to a victim-investor. The victim-investor used the proceeds of her late husband's life insurance policy to invest $400,000 with Cita Trust. Carr told the victim-investor that $100,000 was deposited into a money market account earning 1.77% interest, and that the remaining $300,000 was invested in a two-year Cita Trust Investment Note that earned 4.77% interest. Later in 2015, the victim-investor used proceeds from the sale of a building related to her late husband's business to invest an additional $350,000. The victim-investor gave Carr a check, which he deposited into a bank account in the name of Cita Trust. Carr claimed that the entire $350,000 was invested in an 18-month Cita Trust Investment Note that earned 4.77% interest.

In fact, Carr did not invest the victim-investor's funds. Rather, he used the funds to make purported interest payments to earlier victim-investors, to pay his employees' salaries, and to pay for personal expenses, including the lease payment for his luxury car, country club expenses, credit card bills, and a tithe to his church.

The Cita Trust Investment Notes constituted securities, which were required to be registered with the U.S. Securities and Exchange Commission (SEC). Knowing that the notes were not registered with the SEC and not exempt from registration, Carr willfully sold them to the public, including to this victim-investor. His fraud scheme resulted in losses to multiple victim-investors in the total amount of at least $8.174 million.

9Cir Affirms That EB-5 Lawyer Engaged in Securities Fraud. United States Securities and Exchange Commission, Plaintiff/Appellee, v. Hui Feng and the Law Office of Feng and Associates PC, Defendants/Appellants (Opinion, United States Court of Appeals for the Ninth Circuit; 17-56522; 15-CV-09420 / August 23, 2019)
As set forth in the 9Cir Opinion's Syllabus:

The panel affirmed the district court's summary judgment in favor of the U.S. Securities and Exchange Commission ("SEC") in its civil complaint filed against Hui Feng and his law firm, alleging securities fraud. 

The U.S. Immigrant Investor Program, also known as the EB-5 program, provides legal permanent residency in the United States to foreign nationals who invest in U.S.-based projects. Multiple foreign investors may pool their money in the same enterprise, and these pooled investments are made through "regional centers" which are regulated by the U.S. Citizenship and Immigration Services. 

Feng legally represented clients through the EB-5 process, and entered into marketing agreements with regional centers. The basis of the agreements between the regional centers and Feng's investors were known as private placement memoranda ("PPMs"). 

The panel agreed with the district court that the EB-5 investments in this case constituted "securities" in the form of investment contracts. The panel rejected Feng's argument that the transactions were not "securities" because his clients did not expect profits from their investments. Specifically, the panel held that the PPMs' identification of the investments as securities, the form of the investment entity as a limited partnership, and the promise of a fixed rate of return all indicated that the EB-5 transactions were securities. The panel rejected Feng's contention that the administrative fees upended the expectation of profits. The panel also rejected Feng's assertion that his clients lacked an expectation of profit because they were motivated to participate in the EB-5 program by the promise of visas, not by profit. 

Concerning the cause of action that Feng failed to register as a broker in violation of Section 15(a) of the Securities and Exchange Act of 1934, the panel agreed with the district court's conclusion that Feng was acting as a broker and violated the registration requirement. The panel held that the district court properly made its broker determination by utilizing the totality-of-the-circumstances approach by relying on the so-called Hansen factors. The panel rejected Feng's arguments that the broker registration requirement should not apply to his circumstances. 

The panel affirmed the district court's finding that Feng engaged in securities fraud in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 based on two theories of fraud liability: material omissions, and schemes to defraud. Concerning material omissions, the panel held that where Feng worked as both a broker and an immigration attorney, he had fiduciary duties to his clients, including the obligation to disclose conflicts of interest. Here, there was a risk that Feng's judgment would be swayed by the promise of a commission from the regional center, and this presented a conflict with Feng's representation of a client, which he failed to disclose to his clients, and this failure was material. Concerning schemes to defraud, the panel affirmed the district court's findings that Feng defrauded the regional centers that refused to pay commissions to U.S.-based attorneys not registered as brokers, and defrauded clients who sought a reduction in their administrative fees. 

Finally, the panel held that the district court did not abuse its discretion in entering a disgorgement order. The district court calculated that Feng received $1.268 million for commissions in connection with the EB-5 program, and ordered disgorgement of the entire amount.

Westwood Man Agrees to Plead Guilty to Federal Narcotics, Money Laundering Charges for Running Unlicensed Bitcoin Exchange and ATM (DOJ Release)
Kunal Kalra a/k/a  "Kumar," "shecklemayne" and "coinman" pled guilty in the United States District Court for the Central District of California to a four-count criminal Information filed in United States District Court that charged him with  distribution of methamphetamine, operating an unlicensed money transmitting business, laundering of monetary instruments, and failure to maintain an effective anti-money laundering program. Additionally, as part of his plea, Kalra agreed to plead guilty federal criminal charges pending in San Antonio, Texas charging him with having conspired to commit money laundering for a drug trafficking network that sold fraudulent prescription tablets, including some laced with methamphetamine and fentanyl. The DOJ Release asserts that this is "believed to be the first federal criminal case charging an unlicensed money remitting business that used a Bitcoin kiosk.; As set forth in part in the DOJ Release: 

[F]rom May 2015 through October 2017, Kalra knowingly operated a virtual currency exchange business where he exchanged U.S. dollars for Bitcoin and vice versa. Kalra charged commissions for exchanging dollars for Bitcoin, and he only dealt with high-volume customers willing to exchange at least $5,000 per transaction. Kalra admitted in his plea agreement that he exchanged Bitcoin for cash from criminals, including those who received Bitcoin from selling narcotics on the Darknet.

Kalra established bank accounts in the names of others, including fake businesses, which allowed him, for a time, to conceal his illicit business activities, court papers state. Kalra also admitted to operating a kiosk - essentially an ATM - where his customers could exchange Bitcoin for cash and vice versa. Kalra profited from every transaction conducted on the ATM. Customers who sought to do an exchange using this ATM were not required to provide their identities and Kalra did not install a camera or implement any features requiring customers to identify themselves, the plea agreement states.

Kalra also admitted that in 2017 he exchanged approximately $400,000 in cash for Bitcoin for an undercover agent who contacted him online and later met him in person on multiple occasions at a coffee shop in Los Angeles. The undercover agent told Kalra that his virtual currency were proceeds of drug trafficking, and Kalra continued with various transactions, according to the plea agreement.

In June 2017, Kalra sold nearly two pounds of methamphetamine to an undercover law enforcement official in exchange for $6,000. Kalra and the undercover agent later met at a coffee shop in Signal Hill to exchange $50,000 in Bitcoin for cash, which the undercover agent represented to Kalra was the proceeds of the sales of the methamphetamine that Kalra had sold to the agent, the plea agreement states.

Law enforcement seized nearly $889,000 in cash from Kalra's bank accounts and vehicle, as well as approximately 54.3 Bitcoin and other cryptocurrencies.   
Australian National Headed to Prison for Money Laundering through Bitcoin (DOJ Release)
After pleading guilty to money laundering in the United States District Court for the District of Colorado, Emilio Testa was sentenced to one year and a day in prison plus 12 months on supervised release. As set forth in part iun the DOJ Release:

[B]eginning in approximately April 2016, Testa was in contact with undercover agents about the need to convert U.S. dollars into Bitcoin because he preferred not to use banks or deal with taxes.  On two occasions in 2016, the defendant and undercover agents conducted money exchanges.  Testa and the undercover agents remained in contact throughout 2016 and 2017.  Subsequently in March 2018, Testa contacted an undercover agent about selling Bitcoin for U.S. dollars.  During this meeting, Testa agreed to exchange Bitcoin for cash from narcotics proceeds.  He completed a second such transaction in May 2018, while understanding that the transaction would conceal or disguise the nature, location, source, ownership or control of money he believed to be the proceeds of narcotics trafficking.