Securities Industry Commentator by Bill Singer Esq

December 11, 2019

featured in today's Securities Industry Commentator:

Testimony on "Oversight of the Securities and Exchange Commission" Before the U.S. Senate Committee on Banking, Housing, and Urban Affairs by SEC Chair Clayton (SEC Release)

15 Defendants Charged In Manhattan Federal Court For $18 Million Fraud Scheme (DOJ Release)

Three Men Arrested in $722 Million Cryptocurrency Fraud Scheme (DOJ Release)

CFTC Charges New Mexico Resident with Fraud in Long-Running Ponzi Scheme (CFTC Release)

Stock Promoter Sentenced to 7 Years in Prison in Multi-Million Dollar Securities Fraud Case (DOJ Release)

East Bay Residents Sentenced In Scheme To Sell Fraudulent Financial Instruments / Defendants Ordered to Pay Restitution to Victims (DOJ Release)

SEC Obtains Asset Freeze to Halt Alleged Offering Fraud (SEC Release)

2Cir Says Plaintiffs Failed to Plead the Chicken Or the Egg in Poultry Antitrust Case. Gordon Gamm and Don Pritchard, Plaintiffs/Appellants, v. Sanderson Farms, Inc., Joe F. Sanderson, Jr., Michael D. Cockrell, and Lampkin Butts, Defendants/Appellees (Opinion, United States Court of Appeals for the Second Circuit, 18-CV-0284)

Customer Carries 31 Year Old Grudge Into Broker Expungement Case ( Blog)

The end of the traditional IPO: Airbnb, Gitlab and others consider direct listings as banks begin to come around (
  • Venture capitalists and bankers say that almost every tech company pursuing a public offering is considering a direct listing.
  • GitLab, which has announced plans to go public next year, is leaning towards a direct listing, according to people familiar with the matter. 
  • Because companies still can't raise cash in direct listings, many will still choose IPOs, but with less restrictive lockup periods.
SEC Chair Clayton touched about an extensive number of topics during his testimony, and I commend his full-text remarks to all industry professionals and serious investors. 

15 Defendants Charged In Manhattan Federal Court For $18 Million Fraud Scheme (DOJ Release)
In a criminal Complaint filed in the United States District Court for the Southern District of New York, Oladayo Oladokun, Farouk Kukoyi, Baldwin Osuji, Henry Ogbuokiri, Joshua Hicks, Anthony Lee Nelson, Derrick Banks, Ibrahiima Doukoure, Jamar Skeete, Paul Yaw Osei Jr., Kowan Poole, Darrel Williams, Daryl Bartley, Garnet Steven Murray-Sesay, a/k/a "Steven Garnet Murray-Sesay," and Andrew Heaven were charged with conspiracy to commit bank fraud and wire fraud; and Ogbuokiri, Hicks, Banks, Poole, Williams, Barlety, and Murray-Sesay were also charged with aggravated identity theft. As alleged in part in the DOJ Release, the Defendants allegedly:

participated in an $18 million fraud scheme consisting of three key phases.  First, members of the conspiracy opened more than 60 business bank accounts using the real personal identifying information, including names and social security numbers, of identity theft victims.  Second, members of the conspiracy deposited money into these bank accounts that they obtained by defrauding victims.  Third, members of the conspiracy accessed the fraud proceeds by transferring the proceeds into other bank accounts or by withdrawing cash. 

Members of the conspiracy typically defrauded their victims in one of two ways.  In some instances, members of the conspiracy deposited stolen or forged checks.  For example, members of the conspiracy obtained three checks that had been mailed by a national sports league from New York, New York, and deposited those stolen checks into bank accounts that were opened in the names of the intended recipients.  In other instances, members of the conspiracy deceived victims into making electronic transfers.  For example, a member of the conspiracy posing as a victim's financial adviser caused the victim to wire money from a bank branch in New York, New York, to a bank account controlled by members of the conspiracy. 

To date, law enforcement has identified more than 100 fraudulent transactions in furtherance of the scheme, totaling more than $18 million.
In an Indictment filed in the United States District Court for the District of New Jersey, Matthew Brent Goettsche and Jobadiah Sinclair Weeks with conspiracy to commit wire fraud; and Goettsche, Weeks, and Joseph Frank Abel are charged with conspiracy to offer and sell unregistered securities. Two defendants remain at large and their identities remain under seal. As alleged in part in the DOJ Release:

From April 2014 through December 2019, the defendants operated BitClub Network, a fraudulent scheme that solicited money from investors in exchange for shares of purported cryptocurrency mining pools and rewarded investors for recruiting new investors. Goettsche, Weeks, and others conspired to solicit investments in BitClub Network by providing false and misleading figures that BitClub investors were told were "bitcoin mining earnings," purportedly generated by BitClub Network's bitcoin mining pool. Goettsche discussed with his conspirators that their target audience would be "dumb" investors, referred to them as "sheep," and said he was "building this whole model on the backs of idiots." Goettsche directed others to manipulate the figures displayed as "mining earnings" during the course of the conspiracy.

For example, in February 2015, Goettsche directed another conspirator to "bump up the daily mining earnings starting today by 60%," to which his conspirator warned "that is not sustainable, that is ponzi teritori [sic] and fast cash-out ponzi . . . but sure." In September 2017, Goettsche sent an email to another conspirator in which he suggested that Bitclub Network "[d]rop mining earnings significantly starting now" so that he could "retire RAF!!! (rich as fuck)." Weeks sent an email in June 2017 to Goettsche and another conspirator in which he remarked that BitClub selling shares in BitClub and then not using the money to purchase mining equipment was "not right." Goettsche, Weeks, and others obtained the equivalent of at least $722 million from BitClub Network investors.    

Goettsche, Weeks, Abel, and others also conspired to sell BitClub Network shares - which were securities - notwithstanding that BitClub Network did not register the shares with the U.S. Securities and Exchange Commission. Weeks and Abel created videos and traveled around the United States and the world to promote BitClub Network. In one video, a conspirator espoused that BitClub Network was "the most transparent company in the history of the world that I've ever seen." In another video, Abel assured investors that BitClub Network was "too big to fail."
In a Complaint filed in the United States District court for the District of New Mexico, the CFTC charged Douglas Lien (d/b/a Westend Investments) with fraud and failing to register with the CFTC. As alleged in part in the CFTC Release:

[S]tarting in at least 2002, Lien solicited and accepted funds from friends and acquaintances for the purpose of trading commodity futures contracts, primarily U.S. Treasury bond futures. The complaint alleges that since at least September 2014, Lien accepted at least $827,650 from his clients, issued periodic account statements showing false trading profits, and reported more than $1.6 million in profits on annual tax forms he issued to clients. In reality, during that time, Lien made no deposits into his futures trading account and placed only three trades in commodity futures contracts, for a combined loss of approximately $200, according to the complaint. The complaint also alleges that Lien misappropriated client funds, using them to pay other clients, in the manner of a Ponzi scheme, and for management fees he charged based on false trading profits.

The complaint further alleges that throughout 2019, several of Lien's clients have requested the return of their funds, but Lien has strung clients along with false excuses. According to the complaint, Lien falsely advised clients that a broker placed client funds in long-term investments that Lien cannot access without incurring penalties, when, in fact, no client funds are, or were, locked up in such investments.

Stock Promoter Sentenced to 7 Years in Prison in Multi-Million Dollar Securities Fraud Case (DOJ Release)
After pleading guilty to four counts of securities fraud in the United States District Court for the Eastern District of Pennsylvania, Dino Paolucci was sentenced to 84 months in prison and ordered to pay $2 million in forfeiture. As alleged in part in the DOJ Release:

Paolucci's sentence arose from what is commonly referred to as a "pump and dump" scheme, stemming from his manipulation of the price and trading volume of the stock of five public companies: AGR Tools, Inc. ("AGRT"), LiveWire Ergogenics ("LVVV"), YaFarm Technologies ("YFRM"), Resource Ventures ("REVI"), and Medical Cannabis Payment Solutions ("REFG").  As part of these manipulations, Paolucci and his co-schemers obtained control over the companies, distributed shares of stock to themselves and their nominees through fraudulent means, issued false and misleading press releases and promotions regarding the companies in order to artificially inflate the price and/or trading volume of the stocks, and then sold their shares into the manipulated markets - thereby reaping millions.  For good measure, they also concealed all of their illegal activity from the U.S. Securities and Exchange Commission (the "SEC").

Paolucci played a critical role in the scheme by orchestrating the false and misleading promotions used to "pump up" the stocks in question.  He issued most of his promotions by widely distributing email newsletters ("email blasts") touting the stocks under various business names, including the Bull Exchange, Market Bulls, Best Penny Newsletter, Gain the Green, Insane Pennies, OTC Market Alerts, and Penny Players Club.  While Paolucci was disseminating the email blasts, he was also coordinating with his co-schemers regarding the press releases being issued and the stock that they were selling.  All of this coordination, however, was hidden from the market and the SEC.  For example, Paolucci and his fellow schemers used offshore corporations and brokerage accounts, as well as fake corporations, intermediaries, and even fake names, causing tens of millions of dollars of losses to investors while gaining millions in profits for themselves.
In 2017, indictments were filed in the United States District Court for the Northern District of California charging Kenneth Taylor, Sharon Ringgenberg, and Craig Scott with one count of conspiracy to commit wire fraud, two counts of wire fraud, and two counts of subscribing to a false tax return; and all three defendants pled guilty.  Ringgenberg was sentenced to 15 months in prison plus three years of supervised release, and ordered to pay $705,000 restitution and to forfeit $295,000. Scott was sentenced to five years of probation with a year of home confinement, and ordered to pay $527,575 restitution and to forfeit $20,000, and he is prohibited from selling securities during his probation. Taylor was sentenced to 36 months in prison plus three years of supervised release, and ordered to pay $1,100,774 to the IRS and $90,000 to a victim, and to forfeit $3,436,002. As part of their respective plea agreements:

[R]inggenberg admitted that from November 2008 through May 2012, she and Taylor sold fraudulent standby letters of credit and proof of funds statements to clients of a company called Success Bullion USA, LLC ("Success Bullion").  These financial instruments were fraudulent because they reported false client creditworthiness and client balances that exceeded Success Bullion's assets.  Success Bullion falsely purported to be a subsidiary of a large Hong Kong financial institution.  Ringgenberg acted as an officer of Success Bullion and signed and provided false documents on behalf of the company.  Success Bullion used brokers, including co-defendant Scott, to find clients.  

. . .

[S]cott admitted that from 2009 to May 2012, he was a broker for Success Bullion.  Scott solicited customers and acted as a broker for fraudulent standby letters of credit and proof of funds statements sold by Success Bullion. . . .
In a Complaint filed in the United States District Court for the District of Columbia, the SEC charged Nanotech Engineering Inc., Chief Financial Officer Michael James Sweaney a/k/a "Michael Hatton," Chief Executive Officer David Sweaney, and Chief Operating Officer Jeffery Gange charges with violating the antifraud provisions of the federal securities laws; and further names entities controlled by the defendants, Nanotech Finance LLC, Omni Golf LLC, and 3 Dragons LLC, as Relief Defendants.
The Court granted the SEC a temporary restraining order and asset freeze against the Defendants, who allegedly defrauded over 100 investors. As alleged in part in the DOJ Release, the Defendants:

have been engaged in an ongoing fraudulent offering of Nanotech's securities. While raising capital purportedly to fund Nanotech's development of solar panels using nanotechnology, the defendants allegedly diverted more than $2.4 million of investor funds for personal expenses, including luxury vehicles, a yacht named the Bella Vita, and cosmetic surgery. The complaint also alleges that the defendants are actively concealing from investors Michael Sweaney's prior felony securities fraud conviction.
Appeal from a judgment of the United States District Court for the Southern District of New York (Richard M. Berman, Judge), granting appellees' motion to dismiss appellants' complaint for failure to plead, with the requisite particularity, securities fraud under Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. The complaint alleged that, as a predicate for appellants' securities fraud claim, appellees had engaged in an illegal antitrust conspiracy, the nondisclosure of which rendered various statements and SEC filings false and misleading. The law is well established that a party, when making securities fraud allegations on information and belief, must plead material misstatements and omissions with particularity. We clarify that if statements were rendered false or misleading through the nondisclosure of illegal activity, the facts of those underlying illegal acts must also be pleaded with particularity. Because appellants have failed to allege the details of the underlying antitrust conspiracy with particularity, the judgment of the district court is AFFIRMED.
Some folks carry grudges. Some folks will get a wheelbarrow or pick-up truck to carry a grudge. No matter the time. No matter the weight. In a recent FINRA expungement arbitration, we come across a public customer who is still in a lather about a 1988 investment for which she paid $5,300. Ask her, she says that she only got $1,600 back in distributions. Ask the broker seeking expungement, and he says she got at least $6,272. It's the difference between a loss or a profit. It may explain why the customer opposed the requested expungement and even showed up with counsel at the hearing.