Securities Industry Commentator by Bill Singer Esq

September 25, 2019
Brothers Salvatore Esposito and Joseph Esposito pled guilty in the United States District Court for the Middle District of Florida to an Information charging them with conspiracy to commit wire fraud and mail fraud. Read the Salvatore Esposito Plea Agreement and the Joseph Esposito Plea Agreement As set forth in part in the DOJ Release:

[T]he Espositos operated U.S. Coin Bullion, a local Orlando company formed in 2012. From 2014 to July 2019, the Espositos engaged in a conspiracy to defraud U.S. Coin Bullion's customers. Instead of using the customers' funds to purchase precious metals as had been promised, the Espositos caused U.S. Coin Bullion to use customer funds to pay other customers, to pay commissions and other business expenses, and to purchase silver for the company itself. 

U.S. Coin Bullion used its customers' funds to purchase silver on "margin," or "leverage," by which it acquired an interest in the silver by paying only a portion of its full price. The company took out loans to purchase the silver on margin and then used more customer funds to pay the interest associated with those loans, as well as storage fees for the silver. And, because it was buying on margin, U.S. Coin Bullion was subject to "margin calls"; if the market price for silver declined, the company might immediately have to deposit more (customer) funds into its accounts to maintain its interest in the silver.

U.S. Coin Bullion never told its customers that their funds were being used in this way. By at least 2016, it was regularly using its customers' funds to buy millions of dollars worth of silver. When the price for silver fell from more than $35 an ounce (in 2012) to less than $15 an ounce during the conspiracy, the company experienced massive losses and had to spend customer funds due to margin calls.

To cover up U.S. Coin Bullion's losses, the Espositos provided customers with false account statements making it appear that the company had purchased the silver for the customers (not itself) and that their accounts maintained value despite any drop in the market price of silver. Ultimately, U.S. Coin Bullion's margin purchases resulted in a loss of nearly all the market value of the silver that its customers believed they had purchased and held.

SEC Brings New Charges in Multimillion Dollar Boiler-Room Schemes (SEC Release)
In a Complaint filed in the United States District Court for the Eastern District of New York, the SEC charged Benjamin Conde with violating the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act and the market manipulation and antifraud provisions of Sections 9(a)(1) and 10(b) of the Exchange Act and Exchange Act Rules 10b-5(a) and (c). The SEC is seeking a permanent injunction, return of allegedly ill-gotten gains with interest, civil penalties, and a penny stock bar. Essex Global Investment Corp. and Facultas Capital Management, Inc., allegedly Conde-controlled entities, were named as Relief Defendants. As alleged in part in the SEC Release:

[W]hen Conde, a securities fraud recidivist, acquired large blocks of RBNW shares through convertible notes purchased from RBNW by Essex Global Investment Corp., an entity that Conde controlled. As alleged, from approximately March to July 2017, Conde paid a New York boiler room to promote RBNW stock to seniors and unsophisticated retail investors, fraudulently "pumping" the market price and trading volume of RBNW. According to the SEC's complaint, Conde engaged in manipulative trading, including by coordinating trading on the opposite side of the boiler room victims through encrypted messaging, which further artificially raised RBNW's market price. The SEC alleges that Conde sold more than 8 million shares of RBNW, generating millions in illicit profits. Conde allegedly disguised the source of his payments to the boiler room by making payments to an intermediary pursuant to fabricated invoices.

. . .

The SEC's charges today follow two related actions in which the same affiliated boiler rooms were used to carry out the alleged schemes. In July 2017, the SEC charged two boiler rooms and 13 individuals with bilking victims out of more than $10 million in penny stock scams, and in November 2018, the SEC charged one of the boiler rooms and four individuals with a separate manipulation that generated over $3.3 million in illegal profits. The SEC's litigation in the two actions are continuing. The U.S. Attorney's Office for the Eastern District of New York filed parallel criminal charges in these matters and in a parallel action filed today.
A former Raymond James employee alleged, in part, that she had been wrongfully terminated and defamed. A FINRA Arbitration Panel awarded her six-figures in cumulative damages, costs, fees, and sanctions. As to the sanctions, the arbitrators considered slamming Raymond James with a $500,000 sanction for Discovery abuse. See how it all finally played out.
In a Complaint filed in the Southern District of Texas, the SEC charged SEC charged Brian D. Barrilleaux with violating the anti-fraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Without admitting or denying the charges, Barrilleaux agreed to the settlement whereby he will be permanently enjoined, and will be subject to a 5-year officer-and-director bar, a 5-year penny stock bar. Additionally, Barrilleaux will pay $157,075.08 in disgorgement and prejudgment interest and a $50,000.00 penalty. As set forth in part in the SEC Release, Barrileaux assisted a:

penny stock fraud ring ("the Group") through recklessly arranging materially misleading penny stock promotional campaigns for the Group. According to the complaint, between at least March 2013 and December 2016, when arranging penny stock promotional campaigns for the Group, Barrilleaux recklessly disregarded that the Group had already acquired shares of the relevant penny stocks and planned to, and did, sell its shares into the share price and trading volume rises triggered by the promotional campaigns. Barrilleaux likewise recklessly failed to include in the promotional materials any disclosure of the Group's ownership of the shares, its plans to sell, or its selling of, such shares. Five members of the Group already settled charges with the SEC in May 2019, and also pleaded guilty in a parallel criminal action.
Without admitting or denying the findings, TMC Bonds LLC, the operator of a fixed-income-securities alternative trading System ("ATS") consented to the entry of an SEC Order finding that it violated Rules 301(b)(10) and 301(b)(2) of Regulation ATS; directing that TMC Bonds to cease and desist from committing or causing any future violations of those provisions;  censuring TMC Bonds; and ordering the company to pay a $2.1 million penalty. As alleged in part in the SEC Release:

[B]etween at least January 2016 and June 2018, TMC Bonds publicly touted its anonymous trading platform, but, in fact, disclosed the identities of certain firms seeking to trade corporate bonds to potential counterparties over 2,500 times during a two-and-a-half year period.  According to the order, these disclosures occurred because TMC Bonds failed to establish and implement adequate safeguards or procedures to protect the confidential trading information of its subscribers. The SEC's order also finds that TMC Bonds failed to provide notice to the SEC that it was operating in a way that was inconsistent with its SEC filings. 

SEC Charges Microcap Company and Executives for Fraudulently Inflating Reported Interests in Gold Mines (SEC Release), the SEC charged Efuel EFN Corp., its Chief Executive Officer Ljubica Stefanovic, and its Chief Financial Officer Slavoljub Stefanovic with violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder.  The Complaint seeks permanent injunctions, disgorgement plus prejudgment interest, penalties, as well as officer-and-director and penny stock bars against the individual defendants. As set forth in part in the SEC Release:

[I]n its first quarter through third quarter reports for 2017 and in its 2017 annual report, Efuel stated that it owned $500 million in assets comprised of "land, minerals and gold deposit," and that such financial reports were prepared in accordance with generally accepted accounting principles ("GAAP"). In addition, the complaint alleges the defendants issued numerous press releases over the course of over a year that claimed that the mines contained "substantial mineral, gold, silver and other precious gems and minerals" worth $500 million, that the mines could reap as much as $2-$3 billion in mineral deposits, that the company's valuation claims were supported by geologic and scientific studies, and that a recent scientific study proved that there was more than $5 billion worth of gold in the mines. The complaint further alleges that the defendants told the public that it had scientists conducting detailed studies on the gold mines, and that exploratory and development efforts were ongoing.

The SEC alleges that, in reality, the defendants had simply acquired the right to lease the land for six years, allowing the company to explore for and extract minerals, after which it had the option to purchase the land for the price of $750,000. The complaint further alleges that defendants had no basis to claim that these mining interests were worth $500 million, nor did they take any steps to determine the appropriate manner to account for the transaction in accordance with GAAP. Furthermore, the complaint alleges that, contrary to what the defendants told the public, they had not begun any exploratory or development efforts on the land.
In a Complaint filed in the United States District Court for the Southern District of Alabama, the SEC charged real estate developer James Wallace Nall, III, Michael Hale Smith, Michael Dwaine Smith, Robert Walter Smith,  and Walter Vice Tutt with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Without admitting or denying the SEC's allegations, the three Smiths and Tutt consented to entry of a final judgment enjoining him from future violations of Section 10(b) and Rule 10b-5 and ordering him to pay the following amounts:
  • Michael Smith: disgorgement of $139,774.17, with prejudgment interest of $19,920.55 and a civil penalty of $139,774.17; 
  • Hale Smith: disgorgement of $220,625.84 with prejudgment interest of $31,443.51 and a civil penalty of $220,625.84;
  • Robert Smith: disgorgement of $32,733.98 with prejudgment interest of $4,665.25 and a civil penalty of $32,733.98; and
  • Walter Tutt: disgorgement of $43,995.32 with prejudgment interest of $6,264.50 and a civil penalty of $43,995.32.
As alleged in part in the SEC Release:

[J]ames Wallace Nall, III misappropriated material nonpublic information concerning the merger of potato chip manufacturer Golden Enterprises, Inc. with privately-held Utz Quality Foods, LLC. According to the SEC's complaint, Nall received the information for a legitimate purpose from a member of Golden Enterprises' board of directors. Nall did not trade on the information, but he tipped his close friend and business partner, Michael Hale Smith, who did trade on it. Smith's father, Michael Dwaine Smith; his brother, Robert Walter Smith; and his boss, Walter Vice Tutt, also traded on the information. As alleged, Tutt and the three Smiths all knew Nall and understood his relationship with a director of Golden Enterprises when they traded Golden Enterprises' stock in advance of the merger announcement, collectively realizing profits of approximately $437,000.
Without admitting or denying the SEC's findings, global information and media analytics firm Comscore, Inc. and its former Chief Executive officer Serge Matta agreed to cease-and-desist from future violations of the antifraud provisions of the federal securities laws and to pay penalties of $5 million and $700,000, respectively. Also, Matta agreed to reimburse Comscore $2.1 million representing profits from the sale of Comscore stock and incentive-based compensation pursuant to Section 304(a) of the Sarbanes-Oxley Act; and he further consented to the entry of an order barring him from serving as an officer or director of a public company for 10 years. READ the SEC Comscore Order and the SEC Matta Order As alleged in part in the SEC Release:

[F]rom February 2014 through February 2016, Comscore, at the direction of its former CEO Serge Matta, entered into non-monetary transactions for the purpose of improperly increasing its reported revenue. Through these transactions, Comscore and a counterparty would negotiate and agree to exchange sets of data without any cash consideration. Comscore recognized revenue on these transactions based on the fair value of the data it delivered, which had been improperly increased in order to inflate revenue. The SEC's orders also find that Comscore and Matta made false and misleading public disclosures regarding the company's customer base and flagship product and that Matta lied to Comscore's internal accountants and external audit firm. This scheme enabled Comscore to artificially exceed its analysts' consensus revenue target in seven consecutive quarters and create the illusion of smooth and steady growth in Comscore's business.

FINRA Fines Firm Over Initial Margin Rate Disclosures to Customers. In the Matter of Hilltop Securities Inc., Respondent (FINRA AWC 2018060195201)
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, Hilltop Securities, Inc submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Summit Brokerage Services, Inc a Censure, $250,000 fine, and an undertaking to review its SEC Rule 10b-16(a) systems and procedures. As set forth in part in the the "Overview" section of the AWC:

From 2015 through the present (the "Relevant Period"), Hilltop failed to establish procedures reasonably designed to assure that customers received the initial margin interest rate disclosures and failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with Rule 10b-16(a)(1). In fact, many customers did not receive the initial disclosure stating the annual rate or rates of margin interest that could be imposed. As a result, Hilltop violated SEC Rule 10b16(a)(1) and FINRA Rules 3110(a) and (b) and 2010.
In part, Commissioner Roisman ponders the following [Ed: footnotes omitted]:

When it adopted Regulation ATS, over 20 years ago, the SEC chose not to require compliance with these rules by venues that limit their activity to government securities. The basis for this decision appears to be that, while Treasury-only venues present regulatory considerations similar to those in the equities markets, the multiple layers of regulatory oversight of the U.S. Treasury market reduced the need for the SEC to apply Regulation ATS. I am neither questioning the basis for the SEC's decision 20-plus years ago, nor disputing the conditions that existed in the U.S. Treasury market at that time.  However, given the conditions and practices that exist in 2019 and in the foreseeable future, I think it is worth considering whether the Commission should apply Regulation ATS to U.S. Treasury venues that fit within the definition of "alternative trading system."  

Oversight of the Securities and Exchange Commission: Wall Street's Cop on the Beat (SEC Testimony before the House of Representatives Committee on Financial Services)
For the first time since 2007, the Chair and all sitting Commissioners of the SEC testified before Congress.  Their remarks touch upon regulatory policy, enforcement, examinations, and investor education.  
  • Commissioner Jackson's Statement
    I believe that a critical part of the SEC's mission is to make sure that ordinary investors stand on a level playing field in today's complex markets. Gaps in our securities laws that allow insiders to trade before key information comes to light; pursue stock buybacks that maximize executive pay but not long-run performance; and spend investor money on politics in secret undermine the trust that ordinary Americans have in our financial system. I am delighted that this Committee is considering how best to close those gaps. And, of course, on all of these matters I remain open to the views of my exceptional colleagues on the Commission-and feel privileged to be a part of their work.