Securities Industry Commentator by Bill Singer Esq

October 15, 2019

featured in today's Securities Industry Commentator:

Former New Silk Route Advisors' CCO/CFO Files Whistleblower Retaliation Complaint. Rishi K. Gupta, Plaintiff, v. New Silk Route Advisors, L.P. et al. (Complaint, United States District Court for the Southern District of New York, 19-CV-09284 / October 7, 2019)
As alleged under the "Nature of the Action" heading of the Complaint (filed by Aegis J. Frumento and Stephanie Korenman, Esqs. of Stern Tannenbaum & Bell LLP; and Kevin D. Galbraith and Christopher D. Warren Esqs. of The Galbraith Law Firm):

1. This action is brought under the whistleblower protection provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, codified at Section 21F(6)(h) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78u-6(h) ("Dodd-Frank"). 

2. Gupta was the chief compliance officer ("CCO") and chief financial officer ("CFO") of Defendant New Silk Route Advisors, LP ("NSR Advisors"), an investment advisor registered with the U.S. Securities and Exchange Commission (the "SEC") under the Investment Advisers Act of 1940. Gupta was also the corporate secretary of NSR Advisor's general partner, Defendant New Silk Route Partners, Ltd. ("NSR Partners") (NSR Advisors and NSR Partners are referred to collectively as the "Employer Defendants"). 

3. NSR Partners was the ultimate general partner of all the other entity defendants named in this Complaint. The entire business structure over which NSR Partners presided (the "NSR Funds") comprised over a dozen investment funds and special purpose vehicles that collectively held or to which investors had committed, at the times here relevant, assets under management of approximately $1.3 billion. 

4. NSR Partners was controlled by Defendant Parag Saxena ("Saxena"). NSR Partners, in turn, directly or indirectly controlled the actions of the Entity Control Defendants identified in this Complaint, who in their turn controlled the actions of the Relief Defendants. Gupta was a director of each of the Relief Defendants. 

5. In the months and years prior to January 2017, Gupta reported what he reasonably believed to be violations of federal securities law by NSR Advisers (and by extension  the NSR Funds) to Saxena and his close confidants Andrew Dworkin ("Dworkin") and Margaret Riley ("Riley"). Dworkin and Riley were long-time close confidants of Saxena, and their livelihood depended on his good will. Saxena, aided and assisted by Dworkin and Riley, failed and refused to take corrective action or to self-report the violations to the SEC, and instead attempted to silence Gupta and impede his ability to fully perform his duties as CCO and CFO of NSR Advisors and the NSR Funds. 

6. Facing resistance from Saxena, Dworkin and Riley, Gupta then reported the information to the SEC by filing several Form TCRs with the SEC's Whistleblower Office beginning in March 2016. Those TCRs were significant to SEC investigations that ultimately led to two administrative sanctions against NSR Advisors, the first on December 14, 2016 (In the Matter New Silk Route Advisors, L.P., SEC Admin. Proc. No. 3-17722 (Dec. 14, 2016)) (the "2016 SEC Order"), and the second on July 17, 2018 (In the Matter New Silk Route Advisors, L.P., SEC Admin. Proc. No. 3-18599 (July 17, 2018)) (the "2018 SEC Order"). Both SEC Orders substantiated Gupta's concerns of Securities Law violations that he reported to the SEC. 

7. Meanwhile, Saxena, Dworkin and Riley had grown suspicious of Gupta and accused him of disloyalty for his insistence on good compliance. They retaliated against him personally by publicly harassing and denigrating him within the offices, and by hampering his ability to function as CCO. Saxena further caused NSR Partners and NSR Advisors to retaliate against him by failing to compensate him at market rates of pay. The SEC's second examination, which began in December 2016 and focused on conduct that Saxena had expressly ordered Gupta not to report to the SEC, convinced Saxena, Dworkin and Riley that Gupta was a whistleblower-and thus a traitor in their midst.

8. Saxena, acting directly and through Dworkin and Riley, and through his direct and indirect control of the Employer Defendants and the Entity Control Defendants, finally effected the ultimate retaliation against Gupta by firing him on January 5, 2017. This occurred two months after Saxena, Dworkin and Riley learned that as part of his compliance function, Gupta routinely reviewed their emails, and one month after the SEC began its second investigation of NSR Advisors based directly on Gupta's whistleblower information. Defendants terminated Gupta's employment as CCO of NSR Advisors and as corporate secretary of NSR Partners, and removed him as a director of each of the Relief Defendants. In doing so, they deprived Gupta of his livelihood. Being over 65 years old, and now professionally tainted by the SEC sanctions against NSR Advisors while Gupta was its CCO, Gupta has not and is not likely to find comparable employment elsewhere.

9. By their retaliation, the Defendants violated Dodd-Frank's anti-retaliation provisions and damaged Gupta.
The Texas State Securities Commission revoked on consent the investment adviser representative registration of George A. "Gus" Marwieh, President of Marwieh Advisory Services, LLC,  and the investment adviser registration of the LLC, for alleged fraudulently sales in excess of $5 million in pension-linked investments and real estate development notes to clients without disclosing his allegedly excessive commissions, misuse of client funds, and conflicts of interest. READ the TSSB Order
As alleged in part in the TSSB Release:

[F]rom mid-2013 through 2017, Marwieh almost exclusively recommended and sold two securities: investments from Future Income Payments LLC (FIP), which were supposedly based on the payout from pensions, and promissory notes issued by real estate developers that Marwieh said would pay 18% annually.

The investments paid off - for Marwieh. He reaped $343,431 in commissions from selling the pension income investments and the real estate notes.

Marwieh collected $228,109 in commissions from selling $2.2 million in the real estate notes and $115,322 from selling pension income investments totaling $1.8 million.

Marwieh also charged his clients an annual management fee of 1% to 2% of the value of their assets - even though the pension-linked and real estate investments required no managing. 

Marwieh violated his fiduciary duty to clients by not disclosing the conflicts of interest that gave him a financial incentive to recommend the investments. 

In the Form ADV Part 2, which an investment adviser must provide to clients as the primary disclosure document, Marwieh stated that neither he nor his firm receives any external compensation for the sale of securities to clients.

In fact, his advisory business was based almost entirely on investments he sold while concealing the costs and conflicts of interest.

Marwieh also misused funds intended to purchase interests in the real estate notes. 

Marwieh opened what he said was an escrow account to hold investor funds, but he operated it like his personal account. Marwieh controlled the account, it was never audited, and investors never received monthly statements about the real estate notes.

In a one-week period in 2017, Marwieh took in $189,881 from three clients who intended to invest in the development notes. Marwieh never transferred the money to the developers.

Instead, Marwieh used the money to pay $194,918 to a different investor whose development note had reached maturity.

Investor funds in the escrow account also paid for Marwieh's personal expenses, including credit card payments, rent, automobile loans, and insurance.

SEC Halts Alleged $1.7 Billion Unregistered Digital Token Offering (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC alleged that Telegram Group Inc. and its wholly-owned subsidieary TON Issuer Inc. violated the registration provisions of Sections 5(a) and 5(c) of the Securities Act; and the federal regulator seeks certain emergency relief, as well as permanent injunctions, disgorgement with prejudgment interest, and civil penalties. As alleged in the SEC Release, the two Defendants:

began raising capital in January 2018 to finance the companies' business, including the development of their own blockchain, the "Telegram Open Network" or "TON Blockchain," as well as the mobile messaging application Telegram Messenger. Defendants sold approximately 2.9 billion digital tokens called "Grams" at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 U.S. purchasers. Telegram promised to deliver the Grams to the initial purchasers upon the launch of its blockchain by no later than October 31, 2019, at which time the purchasers and Telegram will be able to sell billions of Grams into U.S. markets. The complaint alleges that defendants failed to register their offers and sales of Grams, which are securities, in violation of the registration provisions of the Securities Act of 1933.
The SEC's Office of Investor Education and Advocacy and Retail Strategy Task Force released two videos, which, the federal regulator asserts will "help show investors what fraud looks like." Moreover, the SEC Release claims that the videos will "provide practical information that Main Street investors can use to avoid fraud and become empowered to make the best investment decisions possible for a strong financial future." 
Bill Singer's Comment: The public is incessantly bombarded with high-production-value content that is of little use -- and the SEC's recently posted videos only add to this morass.  I'm sure that you've laughed when admonished that an offer is "void where prohibited," or wondered about the point of warning patients "Do Not Take This Drug If You Are Allergic To It." Prepare to laugh at the idiocy of Wall Street's regulators warning investors to avoid investing in fraudulent schemes and not to trust crooks with their money! Wow -- what useless guidance. What a colossal, shameful waste of tax dollars and a mis-allocation of staff resources. Worse, whistleblower claims flounder in the brackish waters of the SEC Whistleblower process -- WB-APPs are endlessly pending without any updates or guidance from Staff, Awards that have been authorized remain unpaid without explanation. Instead of tackling this enervating failure to timely process its own docket, the SEC diverts time, money, and attention to crap such as these videos:

Georgia Man Pleads Guilty to Operating Ponzi Scheme on University of Georgia's Campus (DOJ Release)
Former University of Georgia undergraduate student Syed Arham Arbab, 22, pled guilty in the United States Distrcit Court for the Middle District of Georgia to a one-count Information charging him with securities fraud. Also, Arbab remains the subject of an SEC Complaint alleging a Ponzi scheme and offering fraud. As alleged in part in the DOJ Release:

[A]rbab admitted that from May 2018 through May 2019, while enrolled as an undergraduate student at the University of Georgia campus in Athens, Georgia, he solicited investors, many of whom were his fellow students, to invest in his entities, Artis Proficio Capital Management and Artis Proficio Capital Investments (collectively, APC), which he told investors were "hedge funds."  Arbab admitted that he convinced approximately 117 investors in Georgia and other states to invest funds with him and APC.

Arbab admitted that he made a number of misrepresentations in order to persuade victims to invest with him, including misrepresenting the funds' returns, the number of investors, the total funds invested and the nature of the investment plays being made.  He also admitted fabricating account statements.  Victims invested approximately $1 million with Arbab in the course of his scheme, with Arbab falsely promising rates of returns as high as 22 percent or 56 percent, when his overall returns were nowhere near these amounts.  Arbab offered some investors a seemingly risk-free "guarantee" on the first $15,000 invested, and the majority of investors, especially those who were students or younger professionals, invested less than this amount, believing that even if Arbab's investment choices proved unsound or the market behaved unpredictably, they would still be paid back their entire principal investment. 

Arbab admitted that knew he did not have the liquid capital to make good on these guarantees when he made them, but he did not disclose this to his investors.  Further, when Arbab learned that some prospective investors were UGA football fans, he told them that a famous NFL player and UGA alumnus was an investor in the fund, when in fact the football player had never invested with APC.  Arbab also misrepresented that he was an MBA candidate at UGA's Terry College of Business. In fact, ARBAB had applied to and been rejected by UGA's MBA program and was operating the fund primarily from his fraternity house as an undergraduate.

Arbab further admitted that he spent investor funds on personal expenses, including clothing, shoes, retail purchases, fine dining, alcoholic beverages, adult entertainment and interstate travel, including spending thousands of dollars gambling during three trips to Las Vegas in 2018 and 2019.
The FINRA Foundation and GFLEC investigated whether human beings with "low financial literacy levels" were equipped to manage their personal finances. They published a report replete with statistics and findings. I mean, seriously? You needed to do research on that -- and just what the hell did you expect to do with the results of such research? On top of that nonsense, "SEC Educational Videos Aim to Help Investors Spot and Avoid Fraud" claims that two childish videos "provide practical information that Main Street investors can use to avoid fraud and become empowered to make the best investment decisions possible for a strong financial future." All of this wasted time, effort, and funding is a poor simulacrum of investigation and prosecution.
In a Complaint filed in the United States District Court for the Southern District of Florida, the SEC charged Richard Andrew Mallion with violating the broker-dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act, the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and the registration provisions of Section 5 of the Securities Act. Without admitting or denyiing the Complaint's allegations, Mallion consented to the entry of a final judgment that permanently enjoins him from violations of the charged provisions and from soliciting the purchase or sale of any security; and orders him to pay $634,511 in disgorgement, $18,606 in pre-judgment interest, and a civil monetary penalty of $150,000. As alleged in part in the SEC Report:
[F]rom at least May 2016 until October 2018, Mallion solicited individual investors throughout the United States to invest in securities issued by Virtual MediClinic and LXRT/USLG. Mallion, who used the alias Richard Burnstein when soliciting investors, allegedly earned transaction-based compensation for his solicitation activities and was not registered with the Commission as a broker or dealer. In connection with his promotion of Virtual MediClinic, Mallion allegedly misled at least one investor into believing the company would soon be going public and that investor proceeds would be used to fund the offering. Mallion also allegedly personally obtained and sold LXRT/USLG shares by hiring solicitors to call prospective investors and convince them to purchase LXRT/USLG shares in their own brokerage accounts at prices that were coordinated between Mallion and the solicitors.

The heads of the CFTC, FinCen, and SEC issued a statement affirming that Anti-Money Laundering/Countering the Finance of Terrorism ("AML/CFT") obligations apply to financial institutions and SEC-registered broker-dealers and mutual funds. Among the AML/CFT obligations underscored in the Joint Statement is the requirement to establish/implement an effective AML program, and to maintain the attendant recordkeeping/reporting requirements (such as Suspicious Activity Reports ("SARs"). As asserted in part in the Joint Statement [Ed: footnotes omitted]:

For the purpose of this joint statement, "digital assets" include instruments that may qualify under applicable U.S. laws as securities, commodities, and security- or commodity-based instruments such as futures or swaps. We are aware that market participants refer to digital assets using many different labels. The label or terminology used to describe a digital asset or a person engaging in or providing financial activities or services involving a digital asset, however,may not necessarily align with how that asset, activity or service is defined under the BSA, or under the laws and rules administered by the CFTC and the SEC. For example, something referred to as an "exchange" in a market for digital assets may or may not also qualify as an "exchange" as that term is used under the federal securities laws. As such, regardless of the label or terminology that market participants may use, or the level or type of technology employed, it isthe facts and circumstances underlying an asset, activity or service, including its economic reality and use (whether intended or organically developed or repurposed),that determines the general categorization of an asset, the specific regulatory treatment of the activity involving the asset, and whether the persons involved are "financial institutions" for purposes of the BSA. 

The nature of the digital asset-related activities a person engages in is a key factor in determining whether and how that person must register with the CFTC, FinCEN, or the SEC. For example, certain "commodity"-related activities may trigger registration and other obligations under the Commodity Exchange Act (CEA), while certain activities involving a "security" may trigger registration and other obligations under the federal securities laws. If a person falls under the definition of a "financial institution," its AML/CFT activities will be overseen for BSA purposes by one or more of the Agencies (and potentially others). For example, the AML/CFT activities of a futures commission merchant will be overseen by the CFTC, FinCEN, and the National Futures Association (NFA); those of an MSB will be overseen by FinCEN; and those of a broker-dealer in securities will be overseen by the SEC, FinCEN and a self-regulatory organization, primarily the Financial Industry Regulatory Authority (FINRA).