Securities Industry Commentator by Bill Singer Esq

August 28, 2019
After some 35 years of service to NASD and then FINRA, Executive Vice President Cameron Funkhouser has announced his retirement. Among Cam's impressive accomplishments were his leadership of FINRA Office of Fraud Detection and Market Intelligence and his seminal role in the Office of the Whistleblower. A personal note from Bill Singer: As a founder of the NASD and then the FINRA Dissident Movement, I have challenged NASD/FINRA to engage in fairer and more effective regulation. Notwithstanding my role as a critic of self-regulation, I always found Cam Funkhouser to be an articulate, intelligent, and fair regulator. Cam's contribution to FINRA is immeasurable. I wish him the very best in his retirement. Job well done!
RBC Capital Markets mis-priced the value of some shares in a customer's account. The error prompted the payment of proceeds that were about $1 million higher than the fair market value. The lucky recipient of this screw-up was an RBC stockbroker -- go figure, right? Ultimately, RBC recovered every penny of its mistake. Unfortunately, FINRA barred the stockbroker. How did that happen?  Ahhhh . . . that's the fascinating tale we tell in today's blog.
In a Complaint filed in the United States District Court for the Central District of California, Adam Jones was charged with wire fraud, money laundering, and aggravated identity theft. In a fact pattern that is reminiscent of the film "The Producers," the DOJ Release alleges in part that:

[J]oiner used fake documents and forged signatures to raise millions of dollars from foreign investment firms based in South Korea and China for a project he said would be called "Legends," which is described in court papers as "an anachronistic mash-up of legendary and historical figures from nineteenth century America, such as Davy Crockett, Calamity Jane, Paul Bunyan, and John Henry." 

Joiner, who operated a company called Dark Planet Pictures, LLC, allegedly defrauded Korea Investment Global Contents Fund, a South Korean investment fund whose assets are managed by Korean Investment Partners Co., Ltd. (KIP). The complaint also accuses Joiner of defrauding a Chinese investment firm called Star Century Pictures Co., Ltd. and a related company called PGA Yungpark Capital Ltd.

The scheme allegedly began in late 2015 when Joiner met a director of KIP and provided him a script for "Legends," which Joiner said had been written by his brother. As KIP considered making an investment in the film, Joiner falsely told company representatives that Netflix had agreed to distribute the picture, a claim Joiner supported with a bogus distribution agreement that appeared to be signed by a Netflix executive, according to the complaint. After Joiner provided a copy of the purported distribution agreement, KIP agreed to invest $8 million in the project and, in April 2016, transferred the first half of the investment to Dark Planet Pictures.

During the investigation, FBI agents spoke to the Netflix executive who appeared to have signed the distribution agreement. That executive told the FBI that he had never heard of Joiner, his company or the "Legends" project, nor did he sign the purported distribution agreement, according to the affidavit.

Soon after KIP sent the $4 million to Dark Planet Pictures, Joiner entered into an agreement with the Chinese investors that was supported by the same bogus Netflix distribution agreement, according to the complaint affidavit. As a result of this fraudulent misrepresentation, Yungpark wired $6 million to Dark Planet Pictures in June 2016. 

After receiving the initial $10 million from the victim investors, Joiner provided them with updates claiming that well known Hollywood figures - such as producer Don Murphy - had agreed to work on the project, the affidavit states. While Murphy was retained to produce the film and secure a distribution agreement, no distributor was identified, no talent was secured, and no director committed to the film, the complaint alleges. Murphy terminated his arrangement with Joiner in mid-2017.

In late 2016, Joiner allegedly told his investors that he had terminated the distribution agreement with Netflix and had secured a new agreement with Amblin Partners - all of which was bogus, according to executives at both companies. However, the new distribution agreement prompted the South Korean investors to complete their investment by wiring another $4 million to Dark Planet Pictures in early 2017, the complaint alleges.

Following this final wire transfer, Joiner provided a series of excuses to his investors as to why the project was not moving forward, according to the affidavit. He also allegedly provided a forged bank statement to the South Korean investors to prove that he could repay their investment. The FBI reviewed Dark Planet Pictures bank records and determined that more than $5 million of the investors' money was used to purchase Joiner's Manhattan Beach residence and another $4.3 million was transferred to a bank account that may be linked to another film in development linked to Joiner.

In a criminal Complaint filed in the United States District Court for the Northern District of Illinois the, financial adviser Marcus E. Boggs was charged with one count of wire fraud. As set forth in part in the DOJ Release:

Boggs worked as a financial adviser in the Chicago office of a large wealth management firm, according to a criminal complaint and affidavit filed in U.S. District Court in Chicago.  From 2009 to 2018, Boggs stole at least $2 million from client funds and used the money to make mortgage payments, travel to lavish international locations, and pay other personal expenditures, the complaint states.

The complaint describes the misappropriation of funds from four of Boggs's clients.  One of those clients received approximately $5 million in a 2014 settlement after being wrongfully convicted of murdering a 14-year-old girl, the complaint states.  The man invested some of the settlement funds with Boggs's firm on the understanding that Boggs would manage the money and ensure that he had enough funds for the rest of his life.  Boggs instead stole approximately $815,000 from the man's accounts to pay personal credit card debt, the complaint states.

Another victim cited in the complaint sold his home and invested the proceeds with Boggs.  The victim understood that Boggs would manage the funds in safe investments to generate retirement income, the complaint states.  When the value of his accounts began decreasing, Boggs misrepresented that it was due to fluctuations in the stock market, the complaint states.  In reality, Boggs had used approximately $127,000 from the man's accounts to pay personal credit card debt, the charge alleges.

In a Complaint filed in the United States District Court for  the Northern District of Illinois, the SEC alleged that Boggs violated the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Without his clients' knowledge or authorization, Boggs allegedly misappropriated their money by selling securities in their advisory accounts and then transferring the proceeds to his personal credit card account. Further, from 2016 to 2018, Boggs allegedly made more than 200 illegal transfers from three advisory clients' accounts to his personal credit card account.

South Carolina Man Indicted for Running $1.1 Million Foreign Currency Ponzi Scheme (DOJ Release)
In an Indictment filed in the United States District Court for the District of New Jersey, Thomas Lanzana was charged with two counts of wire fraud and one count of commodities fraud. As set forth in part in the DOJ Release:

From at least 2013, Lanzana solicited approximately $1.1 million from at least 45 customers to invest in what he claimed were highly successful, algorithm-based trading pools in foreign currency derivatives (forex) and other financial instruments. He misrepresented to prospective customers that he was a successful forex trader when he was not. To keep his customers' trust, Lanzana sent them false account statements, posted false monthly account statements to his companies' websites showing balances - some in excess of $800,000 - for forex trading accounts that did not exist, and sent false tax documents to customers reporting earnings that did not exist.

Lanzana misappropriated at least $350,000 in customer funds, using some to repay earlier investors in the manner of a Ponzi scheme, and to pay for his personal expenses, including purchases on, payments to a luxury car dealer and a jewelry retailer, and golf expenses.

In a Complaint filed in the United States District Court for the District of New Jersey, Brenda Smith was charged with four counts of wire fraud and one count of securities fraud. As set forth in part in the DOJ Release:

From February 2016 to August 2019, Smith allegedly orchestrated a scheme using her investment fund, Broad Reach Capital, in which she lied to investors about the assets and performance of the fund and falsely stated that she would invest their funds in particular trading strategies. Smith collected more than $100 million in investments. Instead of investing the money as she promised, she diverted millions of dollars of investor funds out of Broad Reach Capital for other purposes, including paying other investors. When confronted with redemption requests by several large investors in Broad Reach Capital, Smith failed to honor the redemption requests and lied about the status of their investment and the fund.

In one instance, Smith allegedly induced Victim 1 to invest in Broad Reach Capital, telling Victim 1 that it was a trade-focused investment fund that employed particular trading strategies. Smith provided a one-page summary "tear sheet" about Broad Reach Capital that contained purported historical performance information, including a claim that the fund had a 1.76 percent return in February 2018. In reality, Broad Reach Capital's brokerage accounts lost approximately 50 percent of their value in February 2018. Smith also told Victim 1 that the assets of Broad Reach Capital were tens of millions of dollars higher than they actually were. Victim 1 invested millions of dollars. Smith did not invest Victim 1's money in the trading strategies as promised, but instead transferred Victim 1's money to non-Broad Reach Capital bank accounts that Smith controlled and paid other investors with Victim 1's money. Victim 1 eventually made a redemption request for more than $46 million. Smith failed to pay any portion of the redemption request, providing a series of shifting false excuses and explanations for the lack of redemption.

In a Complaint filed in the United States District Court for the District of New Jersey, the SEC charged Smith, the fund, Broad Reach Capital, LP, its general partner, Broad Reach Partners, LLC, and the adviser, Bristol Advisors, LLC with violating the anti-fraud provisions of the federal securities laws. The Court granted the SEC's request for an asset freeze and temporary restraining order; and the SEC is seeking disgorgement of ill-gotten gains and prejudgment interest, and civil penalties against the defendants. As set forth in part in the SEC Release:

[B]renda Smith, and her fund Broad Reach Capital, LP, raised approximately $105 million from approximately 40 investors by representing that she would invest their money in publicly traded securities through various trading strategies that she championed as providing consistent high returns. However, Smith made very few investments in these trading strategies, and instead largely used investors' money to repay other investors and for her own personal investments. The complaint alleges that Smith, and the entities she controls, also disseminated false statements touting positive returns and most recently fabricated documents in an attempt to inflate Broad Reach's assets and lull her investors into believing their capital is safe.

SEC Charges Real Estate Company and its Founder with $8.75 Million Offering Fraud (SEC Release)
In a Complaint filed in the United States District Court for the District of Colorado, the SEC charged  Hartman Wright Group, LLC and it founder Tytus W. and Harkins with violating the registration and antifraud provisions of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Complaint seeks permanent injunctions, disgorgement plus prejudgment interest, and penalties. As set forth in part in the SEC Release, the Defendants:

operated a fraudulent scheme since January 2015, raising more than $8 million from at least 25 investors. The complaint alleges that Hartman Wright Group and Harkins solicited investors through paid finders, mailing lists, seminars, and the company's website, telling investors that the company found distressed or undervalued mobile home parks, purchased them and made capital improvements, and then sold them for a profit. The SEC alleges that Hartman Wright Group and Harkins promised investors a specified rate of return, and equity ownership in some cases. According to the SEC's complaint, investors received monthly interest payments, which were often paid using other investor funds. The complaint further alleges that Hartman Wright Group and Harkins overstated the purchase price on properties to hide fees Hartman Wright Group paid itself, failed to use investor money for the specific properties as represented, misrepresented amounts invested in properties, and overstated Hartman Wright Group's financial position.

SEC Charges Brixmor Property Group Inc. and Former Senior Executives with Accounting Fraud  (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged Brixmor Property Group Inc.'s former Chief Executive Officer Michael Carroll, Chief Financial Officer Michael Pappagallo, Chief Administrative Officer Steven Splain, and Senior Vice President of Account Michael Mortimer with Carroll, Pappagallo, Splain, and Mortimer with violating or aiding and abetting violations of the antifraud and books and records provisions of the Securities Exchange Act of 1934, as well as with violating Rule 100(b) of Regulation G, which pertains to the reporting of non-GAAP performance measures.  The Complaint seeks permanent injunctions, disgorgement plus interest and penalties, and officer-and-director bars.  Subject to court approval, Splain and Mortimer have agreed to the entry of partial judgments against them in which they consent to injunctive relief with other monetary relief and bars to be determined. Also, the Defendants pled guilty to criminal charges in a parallel federal criminal actions. As set forth in part in the SEC Release:

[F]rom the third quarter of 2013 to the third quarter of 2015, Brixmor CEO Michael Carroll, CFO Michael Pappagallo, CAO Steven Splain and Senior VP of Accounting Michael Mortimer improperly adjusted Brixmor's same property net operating income ("SP NOI") in order to report quarterly numbers that hit the Company's publicly-issued growth targets. According to the complaint, certain of the defendants described their manipulation of the non-GAAP measure as "mak[ing] the sausage," using tactics such as selectively recognizing income from a "cookie jar" account, incorporating certain income that the company had represented was excluded, and improperly lowering the prior year's SP NOI to give the appearance of stronger growth in the current year.

FINRA Bars Allstate Insurance Agency Owner Over IRA Witholdings. In the Matter of Kari Ann Buckles, Respondent (FINRA AWC 2018058777101)
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, Kari Ann Buckles submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Kari Ann Buckles, a Bar from association with any FINRA member in any capacity. As set forth in part in the "Overview" section of the AWC:

When she registered with Allstate, Buckles owned an Allstate Insurance Company insurance agency. Buckles's agency employed an individual who had a SIMPLE (Savings Incentive Match Plan for Employees) IRA brokerage account through Allstate and who, therefore, was a customer of Allstate. Buckles agreed to withhold money from the employee's paycheck and then contribute that money to the SIMPLE IRA account. After initially making those contributions, Buckles intentionally ceased payments rot over two years, leaving the withholdings in the agency's operating account and using them to pay other expenses, including her own, personal expenses. By virtue of the foregoing, Buckles converted Funds in violation of FINRA Rule 2010 

Additionally, Buckles failed to provide testimony requested by FINRA pursuant to FINRA Rule 8210. As a result, Buckles violated FINRA Rules 8210 and 2010