Securities Industry Commentator by Bill Singer Esq

November 20, 2019

featured in today's Securities Industry Commentator:

SEC Halts Ponzi scheme Targeting Seniors and Small Business Owners (SEC Release)
Following his conviction after a six-week jury trial in the United States District Court for the Southern District of New York, former Premium Point Investments L.P. ("PPI"l trader Jeremy Shor was sentenced to 40 months in prison plus 3 years of supervised release. Also convicted and awaiting sentencing is PPI's founder/Chief Executive Officer/Chief Investment Officer Anilesh Ahuga a/k/a "Neil." As alleged in part in the DOJ Release:

Premium Point Investments

In or about 2008, Ahuja co-founded PPI, where he was the chief executive officer and chief investment officer.  PPI managed hedge funds focused primarily on structured credit products, including residential mortgage backed securities ("RMBS").   PPI's flagship mortgage credit fund (the "Hedge Fund") was launched in or about October 2009.  A segregated ERISA fund held the same positions as the Mortgage Credit Fund.  In 2013, PPI launched a new fund (the "New Issue Fund") that purchased and securitized pools of mortgages that were not issued or guaranteed by a government agency.  At various relevant times between 2008 and 2016, PPI managed billions in assets.  SHOR was employed by PPI as a trader, where he focused on non-agency RMBS - i.e., RMBS securities that were not issued by a government agency.   

The Scheme to Mismark Securities

From at least in or about 2014 through at least in or about 2016, Ahuja and SHOR participated in a scheme to defraud PPI's investors and potential investors in the Hedge Fund and the New Issue Fund by deceptively mismarking each month the value of certain securities held in these funds, and thus fraudulently inflating the NAV of those funds as reported to investors and potential investors. 

PPI fraudulently obtained inflated quotes, including from corrupt brokers, and manipulated its valuation process to inflate the purported value of securities held by the funds.    The effect of the mismarking scheme was to materially overstate the reported NAV - at times by more than $100 million across the funds managed by PPI.  This benefited PPI in at least two ways.  First, PPI was able to charge its investors higher management and performance fees.  Second, PPI was able to forestall redemptions by investors who would have requested a return of their funds had they known PPI's true performance and operating health.

The mismarking scheme evolved as a result of demands by Ahuja that PPI maintain its track record of success and keep pace with the performance of peer funds, regardless of market conditions or the actual performance of the funds.  To achieve the goal of posting competitive returns, Ahuja, along with another partner, set an inflated "target" return for the Hedge Fund and New Issue Fund at the end of each month, which was at times based in part on the performance of peer funds.  The traders at PPI were then tasked with "reverse engineering" marks to meet the "targets."

SEC Halts Ponzi scheme Targeting Seniors and Small Business Owners (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of Florida, the SEC charged Neil Bukrholz, Frank Bianco, Palm Financial Management LLC and Shore Management Systems LLC (the "Defendants") and Rhoda Burkholz and Suzanne Bianco as Relief Defendants. The Court granted the SEC a temporary restraining order and asset freeze against the Defendants. As alleged in part in the SEC Release, the Defendants:

solicited investors by falsely representing that their proprietary options trading strategies were highly profitable. In reality, as alleged in the complaint, the defendants invested less than half of investor funds and those investments resulted in near-total losses. The complaint alleges that the defendants misappropriated the remaining funds by using them to repay other investors and by transferring approximately $880,000 of investor funds to themselves and their spouses for personal use. According to the SEC's complaint, the defendants sent false reports to investors to conceal their fraudulent conduct and give the investors the false impression they were generating positive returns.
In an Indictment filed in the United States District Court for the Middle District of Florida, David John Ridling was charged with 10 counts of wire fraud, 4 counts of bank fraud, 9 counts of money laundering, and 2 counts of aggravated identity theft. As alleged in part in the DOJ Release, over the past three years, Ridling:

has attempted to defraud five financial institutions, one financial services provider, and one local Orlando business out of more than $50 million. Ridling's scheme involved the use of false brokerage account statements, fabricated tax returns, and false financial statements to obtain loans and lines of credit. As part of his scheme, Ridling falsely claimed that certain individuals served as his account representatives at a financial brokerage company. He used email accounts for two of those representatives, purporting to be them, in an effort to convince lenders that he had millions of dollars in his two brokerage accounts. In fact, Ridling only had one account, which never had more than $2,000 in it. Ridling used some of the proceeds that he had obtained from his victims to pay amounts that he had owed to other victims to prolong his scheme.
In a FINRA Arbitration Statement of Claim filed in April 2019, associated person Claimant Tockman asserted defamation on his Forms U4 and U5. Respondent Wells Fargo generally denied the allegations and asserted various affirmative defenses. In dismissing Claimant's claim pursuant to FINRA Rule 13206: Time Limits (the so-called "Six-Year Eligibility Rule"), the FINRA Arbitration Panel offered in part this rationale:

On October 22, 2019, the Panel heard oral arguments on Respondent's Motion to Dismiss and hereby grants Respondent's Motion to Dismiss pursuant to Rule 13206 of the Code. The Panel grants Respondent's Motion to Dismiss on the grounds that Claimant did not bring the action regarding the language set forth in the Form U5 filed by Respondent before the six year time period of Rule 13206(a) or the New Jersey one year statute of limitations elapsed as set forth in Rule 13206(c). 

The Panel also concluded that the California Class Action Suit cited by the Claimant and filed December 27, 2017 did not toll the six-year eligibility. 

Respondent's Motion to Dismiss pursuant to Rule 13206 of the Code is granted by the Panel without prejudice to any right the Claimant has to file in court; the Claimant is not prohibited from pursuing his claims in a court pursuant to Rule 13206(b) of the Code.

SEC Seeks Order Requiring Colorado Witness to Comply with Subpoena for Testimony (SEC Release)
The SEC filed a subpoena enforcement action in the United States District Court for the District of Colorado against Colorado municipal court judge, the Honorable James S. Kimmel, for failing to appear for testimony pursuant to an SEC subpoena; and, further, the SEC sought an Order directing Kimmel to comply with an investigative subpoena for his testimony. As alleged in the SEC Release, the federal regulator is:

investigating potential insider trading in the securities of Ampio Pharmaceuticals, Inc., a publicly traded company headquartered in Englewood, Colorado (Ampio). The SEC's application states that the SEC seeks Judge Kimmel's testimony to inquire about, among other things, Judge Kimmel's trading in Ampio securities, and his communications with individuals associated with Ampio.

On October 22, 2019, the SEC issued a subpoena for Judge Kimmel's testimony, which was scheduled for November 13, 2019.  Prior to the scheduled testimony date, Judge Kimmel's counsel notified the SEC that Judge Kimmel was declining to appear for his subpoenaed testimony, and Judge Kimmel did not appear on the scheduled date.