Securities Industry Commentator by Bill Singer Esq

October 30, 2019

featured in today's Securities Industry Commentator:

Jay B. Ledford pled guilty in the United States District Court for the District of Maryland to  conspiracy to commit wire fraud, aggravated identity theft, and a money-laundering transaction in excess of $10,000, arising from a $550 million investment fraud scheme that operated from 2013 through September 2018. 

Ledford was sentenced to 14 years in prison plus three years of supervised release; and  he was ordered to pay restitution in the full amount of the victims' losses, which is at least $189,166,116.  An order of forfeiture will be entered, with the exact amount of forfeiture still to be determined.  On October 10, 2019,Co-Defendants Kevin B. Merrill and Cameron R. Jezierski pled guilty to their roles in the scheme, and Merrill was sentenced to 22 years in federal prison and Jezierski awaits sentencing. Also, Kevin Merrill's wife, Amanda Merrill, pled guilty to conspiracy to remove and conceal assets in violation of court orders, and awaits sentencing. The SEC filed a parallel civil complaint in this matter that is pending.  As alleged in part in the DOJ Release:

[L]edford was a certified public accountant in Texas, starting his own practice in Amarillo in 1996 and later expanding to Dallas.  In 1999, Ledford met Kevin Merrill in Dallas, when Merrill was a salesman for a Baltimore company that sold supplies for X-ray machines for hospitals and doctors' practices.  Ledford and Merrill became friends, attending sporting events and visiting casinos together.  Ledford prepared Merrill's taxes for several years.

"Consumer debt portfolios" are defaulted consumer debts to banks/credit card issuers, student loan lenders, and car/truck financers which are sold in batches called "portfolios" to third parties that attempt to collect on the debts.  Ledford and Merrill both had businesses that collected on consumer debt or purchased consumer debt.   Beginning in January 2013, Ledford and Merrill joined forces to perpetrate a Ponzi scheme to defraud investors.  Specifically, Ledford and Kevin Merrill invited investors to join them in purchasing consumer debt portfolios.  Ledford provided fictitious sales agreements and other documents, including false tax returns, to Merrill, knowing that Merrill was using them to induce individuals to invest with his companies, Delmarva Capital and Global Credit Recovery.  For 2013, Merrill took in approximately $4.3 million from investors, while Ledford raised just over $186,000 from investors.  Thereafter, Merrill's superior sales ability caused Ledford to assume a background role, while Merrill was the "front man," promoting the fraudulent investments to potential investors.

The conspirators falsely represented to investors that they would use the investors' money to buy consumer debt portfolios and make money for them by (1) collecting the payments that people made on their debts or (2) selling the portfolios for a profit to other third-party debt buyers, in a practice called "flipping."  According to court documents, the victim investors included small business owners, restauranteurs, construction contractors, retirees, doctors, lawyers, accountants, bankers, talent agents, professional athletes, and financial advisors, located in Maryland, Washington, D.C., Virginia, Colorado, Texas, Illinois, New York, and elsewhere.

Ledford admitted that to induce investors to participate, he and his co-conspirators falsely represented who they were buying the debt portfolios from and how much they were paying for the portfolios, whether they were investing their own funds, and their track record of success. According to the plea agreement, sometimes there was no underlying debt portfolio purchased with the investors' money.  To conceal the truth, Ledford, created imposter companies with names similar to actual consumer debt sellers or brokers and opened bank accounts in the names of those imposter companies.  In addition, to lend credibility to the transactions, Ledford created false portfolio overviews, sales agreements which used the names and forged signatures of actual employees of the sellers, created false collections reports, and falsified bank statements and merchant account reports.  In late 2014, Ledford transferred employee and co-defendant Cameron Jezierski to manage debt collections for the Riverwalk and DeVille companies.  DeVille had a collections center in Euless, Texas, and the conspirators began to invite prospective investors to tour Riverwalk's office and the collections center, which added substance to their claims regarding the success of their portfolio purchasing strategy and collections efforts.  In December 2017, Ledford recruited Jezierski to the criminal conspiracy because his analytical skills enabled him to contribute significantly to creating false documentation to induce investors to invest, and to conceal the mark-up Ledford and Merrill added to the purchase price charged to investors for debt portfolios.

Further, Ledford admitted that he and Merrill falsely represented that the monies the conspirators paid to investors were "proceeds" from collections and/or flipping debt portfolios, when in fact, the proceeds were paid from funds provided by other investors.  The conspirators provided monthly or quarterly reports to investors regarding the "purported progress of the portfolio and its recovery," which Ledford and Merrill created.  From 2013 to 2018, the scheme to defraud took in over $396 million; the co-conspirators spent only 14% on purchasing consumer debt portfolios. At the time of their arrests, the co-conspirators were attempting to obtain an additional $260 million from investors.  Ledford assisted Merrill to divert investors' funds to purchase a home in Naples, Florida, and also helped Merrill falsify records to the bank lender.  Ledford himself diverted fraud proceeds to purchase and renovate a home in Las Vegas, Nevada, to refinance a home in Texas, to gamble at casinos, to purchase luxury automobiles and jewelry, and otherwise to support a lavish lifestyle.

At today's hearing, the government presented evidence that over the course of the scheme, Ledford used more than $42 million in investors' funds to gamble at casinos throughout the United States.  Generally, Ledford would deposit a cashier's check with the casino, which provided Ledford with chips up to the value of the check.  At the end of the gambling trip, if Ledford won, the casino would pay any winnings to Ledford by cash or check, and return the "front money" cashier's check to Ledford.  If Ledford lost at the casinos, the casino deposited the "front money" cashier's check to cover his losses, and paid Ledford the difference by cash, check, or chips. Ledford returned over $18 million in casino wires or checks to the Ponzi scheme. Currency Transaction Reports filed by the casinos show that Ledford took $14.9 million in cash out of casinos and paid over $9 million in cash into the casinos. Over the six years of the fraud, according to casino records, Ledford had net losses of more than $16 million.

For example, on December 28, 2017, a group of investors paid over $14 million into a Merrill account to invest in credit portfolios.  Of those funds, Ledford spent over $3.5 million on actual credit portfolios purchases, but he also paid Merrill, gave a bonus to Jezierski, and bought a $2.5 million cashier's check which he gambled against at the Las Vegas Sands, home of The Venetian and The Palazzo casinos.  Ledford lost over $1.5 million of the investors' monies on that gambling trip.
In a recent SEC Order, Administrative Law Judge ("ALJ") Jason S. Patil discussed character witnesses and respondents' alleged inability to pay. Given ALJ Patil's concise explanations and rationale, this is a superb opportunity to briefly consider those two issues that often arise during regulatory proceedings.
The United States District Court for the District Court of Massachusetts entered final judgments  by default against Rojo Filho, Romildo Da Cunha, Wanderley L. Dalman and Gaspar C. Jesus, and Eduardo N. Da Silva enjoining them from violating the registration and antifraud provisions of Sections 5 and 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Purusant to the judgments, Filho, Da Cunha, Dalman, Jesus, and Da Silva were ordered to pay disgorgement and prejudgment interest of , $170,765, $98,064, $104,504, and $266,006, respectively. Further, Filho was ordered to pay a $1 million civil penalty, and Da Cunha, Dalman, Jesus, and Da Silva were each ordered to pay civil penalties of $160,000. Previously, the SEC obtained final judgments against DFRF Enterprises LLC of Massachusetts and Florida; and Heriberto C. Perez Valdez. SEC litigation continues against Jeffrey A. Feldman. As alleged in part in the SEC Release:

In June 2015, the SEC charged Daniel Fernandes Rojo Filho, Heriberto C. Perez Valdes, Eduardo N. Da Silva and Jeffrey A. Feldman of Florida, Romildo Da Cunha of Brazil, Wanderley L. Dalman and Gaspar C. Jesus of Massachusetts, Massachusetts-based DFRF Enterprises LLC, and Florida-based DFRF Enterprises, LLC for their roles in a pyramid and Ponzi scheme that targeted investors in Spanish and Portuguese-speaking communities. The SEC alleged that investors were falsely told that the DFRF entities, purported gold mining companies, owned more than 50 gold mines in Africa and Brazil, and that an investment in these companies would be fully insured and guaranteed. The defendants allegedly raised more than $15 million from at least 1,400 investors between 2014 and 2015 by recruiting new members in pyramid scheme fashion to keep the fraud afloat. Commissions were allegedly paid to earlier investors in a Ponzi-like fashion to encourage their recruitment efforts.
After a three-week jury trial in the United States District Court for the District of Massachusetts, PixarBio Corp. Chief Executive Officer Frank Reynolds was convicted on one count of securities fraud and three counts of obstructing an agency proceeding. As alleged in part in the DOJ Release:

The jury convicted Reynolds of defrauding PixarBio investors through manipulative trading of the company's shares and false and misleading statements about the company's finances, the timeline for FDA approval of its key drug, and Reynolds's own background, which he claimed included curing his own paralysis. In fact, the evidence at trial showed that Reynolds was never paralyzed.

Among the false and misleading statements introduced into evidence was a December 2015 email and private placement memorandum, in which Reynolds promised investors that PixarBio's drug, NeuroRelease, would end "thousands of years of morphine and opiate addiction." In fact, the evidence at trial demonstrated that the drug would not end opioid addiction, and was simply an existing drug for which PixarBio claimed to have developed an additional means of delivery in a time-release form for post-operative pain. 

In August 2016, Reynolds caused PixarBio to issue a press release announcing that a private securities offering underway at the time was oversubscribed, and that the maximum offering amount would be increased from $20 million to $30 million. Two months later, Reynolds caused PixarBio to issue another press release announcing that, due to oversubscription, the maximum offering amount would be increased again from $30 million to $40 million. In fact, the evidence at trial showed that the securities offering was never fully subscribed and had raised less than $10 million. 

Reynolds also misrepresented the timeline to FDA approval for NeuroRelease.  In a November 2016 securities filing that Reynolds signed as PixarBio's CEO, the company stated that clinical trials were expected to begin "in late 2017 and US FDA approvals for the NeuroRelease 14-day product are expected in 2018," despite the fact that PixarBio managers had told Reynolds that this timeline was not achievable. 

Reynolds also directed two co-conspirators, Kenneth Stromsland and Jay Herod, to engage in manipulative trading in PixarBio shares that artificially pushed up the stock's trading price. The evidence demonstrated that Herod shared the proceeds of his trading with Reynolds and PixarBio. Reynolds then misled the SEC about the trading and his prior misstatements in sworn testimony, during which he introduced a backdated document as purported evidence that $300,000 in trading proceeds Herod had given him was actually an investment unrelated to Herod's trading. Reynolds also induced Herod and Stromsland to mislead the SEC in their own sworn testimony. Herod and Stromsland previously pleaded guilty to securities fraud and obstruction charges and testified at the trial.
Merrill Robertson, Jr., 39, was convicted by a jury in the United States District Court for the Eastern District of Virginia on conspiracy, mail fraud, wire fraud, bank fraud, and money laundering. Robertson was a former University of Virginia football player; and he co-founded with Sherman Carl Vaughn the Cavalier Union Investments, LLC, and Black Bull Wealth Management, LLC. As alleged in part in the DOJ Release:

[F]rom 2008-2016, Robertson and Vaughn solicited individuals to invest money in private investment funds that they managed, as well as distinct investment opportunities that they proposed. Robertson identified potential investors through various contacts; including contacts he developed playing football at Fork Union Military Academy, the University of Virginia, and in the National Football League, while Vaughn focused on developing investment opportunities.

Among other things, Robertson led investors to believe he was an experienced investment advisor, that his company was qualified to serve as a custodian of retirement accounts, that investor money was deposited into individual tax-deferred retirement accounts, and that investor money was secured by tangible cash-producing assets owned by his company.

As a result of this conspiracy, Robertson and Vaughn fraudulently obtained more than $10 million from over 60 investors, spending much of the money on their own personal living expenses, including mortgage and car payments, school tuitions, spa visits, restaurants, department stores, and vacations.

By 2015, Robertson and his partner had spent most of the money they collected from investors.  And Robertson was unable to raise new investor capital.  So Robertson approached Cavalier investors and other friends and offered to help them get loans in exchange for a portion of the loan proceeds.  Mr. Robertson and others then caused falsified loan applications to be submitted to various banks and credit unions on behalf of these individuals, which included false statements about the borrower's personal financial status, the real purpose of the loan, and whether the loan was secured by collateral.  In doing so, Robertson and others obtained nearly $250,000 by submitting falsified loan applications to at least 5 financial institutions.
%20Ronald%20Ramone%20J.%20Knight%20CRD%205265446%20AWC%20va.pdfFor 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, E: Ronald "Ramone" J. Knight submitted a Letter of Acceptance, Waiver and Consent ("AWC") finding that he had violated FINRA Rule 2010, which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Knight a Bar from association with any FINRA member firm in ay capacity. As set forth in part in the AWC, during the relevant period between February 2015 and August 2016:

[K]night falsified 31 expense reports that he then submitted to his Firm in order to obtain reimbursement to which he was not entitled in the amount of approximately $3,900. Out of the $3,900 in reimbursement requests, approximately $1,100 related to expenses, such as dinners and drinks, that Knight had not personally incurred because those expenses were paid for by someone other than Knight. Knight obtained the remaining approximately $2,800 in reimbursement for personal expenses, such as personal meals, that Knight charged to his Firm-issued credit card and then mischaracterized as business-related. 

For each expense submitted by Knight, the Firm required Knight to submit a receipt with an expense report identifying the business purpose and attendees for each expense. The Firm's policies stated that Firm funds could "be used only to pay for reasonable and necessary business expenses" and that the Firm's funds could "not be used to pay for any personal expenses." To obtain reimbursement for the 31 expense reports, Knight misrepresented that the expenses were for business purposes, such as recruiting events and client meetings and, in some instances, misrepresented the attendees at the events to make it appear as though he was conducting a recruiting event or client meeting. For the approximately $1,100 in expenses that were not paid for by Knight, Knight additionally misrepresented to the Firm that he had incurred those expenses.