Securities Industry Commentator by Bill Singer Esq

May 18, 2020


Head Of Investment Management Firm Pleads Guilty In Connection With $18 Million Pre-IPO Securities Fraud Scheme / Fred Elm, Who Fled to Canada in 2017 Prior to His Original Plea Date, Was Extradited Back to the U.S. Earlier This Year (DOJ Release)


Order Seeks to Lower Curtain on Nick Steele & TheCryptoFacts (TSSB Release)

Dallas Adviser Lorintine Fined $10,000 for Charging Performance-Based Fees (TSSB Release)



https://www.sec.gov/news/press-release/2020-112
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2020/34-88880.pdf,  Morningstar Credit Ratings LLC agreed to pay a $3.5 million penalty and committed to conduct training and implement changes to its internal controls, policies, and procedures related to the charged provisions.The SEC charged Morningstar with having violated Rule 17g-5(c)(8)(i), which prohibits a rating agency from issuing or maintaining a credit rating where an analyst who participates in determining or monitoring credit ratings also participates in sales and marketing activity; and Section 15E(h)(1) of the Securities Exchange Act, which requires credit rating agencies to establish, maintain, and enforce policies and procedures reasonably designed to address and manage conflicts of interest. As alleged in part in the SEC Release:

[F]rom mid-2015 through September 2016, credit rating analysts in Morningstar's asset-backed securities (ABS) group engaged in sales and marketing to prospective clients. According to the order, Morningstar's head of business development instructed analysts to identify business targets and pursue them through marketing calls, meetings, and offers to provide indicative ratings.  For example, the order finds that one ABS analyst at Morningstar wrote a commentary specifically aimed at a potential client issuer and sent it to the issuer for the purpose of obtaining the business of the issuer, which eventually became a Morningstar client.  The order further finds that Morningstar issued and maintained ABS ratings for certain entities where an analyst who participated in determining or monitoring the credit rating also participated in the sales or marketing of a Morningstar product or service.  In addition, the order finds that between at least June 2015 and November 2016, Morningstar failed to maintain written policies and procedures reasonably designed to sufficiently separate the firm's analytical and business development functions. 

http://www.brokeandbroker.com/5221/sec-peirce-nms-cat/
In the rush to regulate, we frequently fail to discern between the "value" of various regulatory initiatives versus the "cost" of same. Indeed, the "thrill" of amassing a heretofore non-existent regulatory database has a narcotic-dependency-like effect, which drives us to find ways to obtain and archive even more and more data. That often insatiable zeal for collecting and categorizing everything about everyone, presages a world in which we have gone too far, too fast -- with no way to go back.  

https://www.justice.gov/usao-sdny/pr/head-investment-management-firm-pleads-guilty-connection-18-million-pre-ipo-securities
Elm Tree Investment Advisors LLC ("ETIA") founder/managerFred Elm a/k/a "Frederic Elmaleh" pled guilty in the United States District Court for the Southern District of New York to one count of securities fraud conspiracy and one count of securities fraud. As alleged in part in the DOJ Release:

From at least June 2013 through December 2014, ELM and Naqvi engaged in a scheme to defraud investors in funds that ELM and Naqvi created and controlled at ETIA, where ELM was the founder and manager, and Naqvi was the chief operating officer.  ELM and Naqvi raised more than $18 million from over 50 investors in four limited partnerships for which ETIA acted as the fund manager:  Elm Tree Investment Fund, LP; Elm Tree Emerging Growth Fund, LP; Elm Tree 'e'Conomy Fund, LP; and Elm Tree Motion Opportunity, LP (collectively the "Elm Tree Funds"). 

ELM and Naqvi falsely represented that the Elm Tree Funds used investor capital to purchase shares in privately held technology companies before their IPOs.  These companies included Twitter, Inc., Alibaba Group Holding Limited, Uber Technologies, Inc., Square, Inc., Pinterest, Inc., and GoDaddy Group, Inc.  Moreover, ELM and Naqvi falsely represented that they had access to these pre-IPO shares because of their relationships with leading venture capital firms, such as Kleiner Perkins Caufield & Byers, Benchmark Capital, and Silver Lake Management, L.L.C.  In truth and in fact, ELM and Naqvi did not invest in the pre-IPO shares of these companies and did not have relationships with these venture capital firms.

ELM and Naqvi comingled the approximately $18 million that was invested in the Elm Tree Funds in a single investment account and then invested only a portion of the money, approximately $7.1 million.  At no point did any of the Elm Tree Funds return a profit.  Instead, for example, between January 2014 and November 2014, the Elm Tree Funds lost approximately $3.9 million in trading.

Moreover, of the investor funds that ELM and Naqvi did not lose in securities trading, ELM routinely converted investor funds to his own use in the form of cash withdrawals and to pay personal expenses, including to purchase a multimillion-dollar home, high-end furnishings, and other personal items, such as jewelry, daily living expenses, and luxury automobiles, including a Bentley, a Maserati, and a Range Rover.

The conversion of investors' funds was contrary to the representations that ELM and Naqvi made to investors concerning their and ETIA's fees.  ELM and Naqvi falsely represented that they and ETIA would take a two percent annual management fee plus a performance fee of 20 percent of any profits that the Elm Tree Funds earned.  In truth and in fact, ELM converted investor money that far exceeded the two percent management fee.  Moreover, because the Elm Tree Funds never returned a profit, ELM, Naqvi, and ETIA were not entitled to a percentage of any profits.

ELM and Naqvi also used approximately $5.2 million of new investor funds to make payments to earlier investors in a Ponzi-like fashion.  To prevent or forestall redemptions, and continue to raise money to fund their scheme, ELM and Naqvi also generated fictitious account statements and made oral and written misrepresentations that their trading strategies were generating consistently positive returns. 

For example, beginning in mid-2013, ELM and Naqvi began to solicit Victim-1 to invest with ETIA in the Elm Tree Funds.  On June 11, 2013, Naqvi sent Victim-1 a series of emails regarding the Elm Tree Emerging Growth Fund, in which he falsely represented, among other things, that the fund would invest in pre-IPO Twitter shares, and that ELM, Naqvi, and ETIA had "key contacts" with venture capital firms like Kleiner Perkins Caufield & Byers and Benchmark Capital.  ELM and Naqvi subsequently had in-person meetings and telephone calls with Victim-1 about this investment.  On October 9, 2013, Victim-1 invested approximately $52,500 in the Elm Tree Emerging Growth Fund.  Following Twitter's IPO on November 6, 2013, Twitter's stock price rose, and Naqvi subsequently told Victim-1 that ELM, Naqvi, and ETIA had used an options strategy to lock in Victim-1's profits in Twitter.  Because the fund had not invested in pre-IPO Twitter shares, there were no profits to lock in.  Thereafter, ELM and Naqvi sent fraudulent account statements to Victim-1, including one sent on March 7, 2014.  The statement falsely indicated that Victim-1's investment in the fund was valued at $274,550 (up from $52,500), and that the Elm Tree Emerging Growth Fund was valued at $68,115,855. 

ELM and Naqvi made similar misrepresentations with respect to Victim-1's subsequent investments in the Elm Tree 'e'Conomy Fund and Elm Tree Motion Opportunity, falsely indicating that those funds invested in Alibaba, Uber, Square, Pinterest, and GoDaddy, and that Victim-1's investments were growing.  ELM and Naqvi also falsely represented that the value of the Elm Tree 'e'Conomy Fund as of December 12, 2014, was $125,484,750 and that the value of Elm Tree Motion Opportunity as of December 18, 2014, was $77,286,220 - falsely claiming that the total value of the Elm Tree Funds was more than $270 million.

ELM was initially arrested in April 2016 and released on bail.  In June 2017, approximately one week before his then-scheduled guilty plea, ELM fled to Canada.  ELM was subsequently arrested in Canada and extradited to the United States in January 2020.  Naqvi, who had been a fugitive since his indictment in 2016, was arrested in Canada and extradited to the United States in November 2019.

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, Brandon Rolle submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Rolle was first registered in 2015 with FINRA member firm Longbow Securities, LLC. The AWC alleges that Rolle "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization." In accordance with the terms of the AWC, FINRA found that Rolle had violated FINRA Rule 2010, and the regulator imposed upon Rolle a $5,000 fine and a one-month suspension from associating with any FINRA member in any capacity. As set forth in part in the AWC [Ed: footnote omitted]:

While associated with Longbow, Rolle was a research analyst who researched certain sectors and companies. Longbow would ultimately publish research reports to institutional customers who paid a fee for access to the reports. In February 2019, while associated with Longbow, Rolle sent himself five emails using a personal email account. Attached to those emails were thirty-one documents that contained confidential and/or proprietary information obtained from Longbow's computer system. The documents included financial models, industry channel contact information, research reports, and surveys for the companies that Rolle researched and analyzed at Longbow. 

Rolle's actions in emailing himself confidential and proprietary information violated provisions in Longbow's employee handbook and compliance manual. It was also in violation of a confidentiality agreement executed by Rolle when hired at Longbow. 

Rolle ended his association with Longbow shortly after emailing himself copies of Longbow's files. Rolle then associated with another member firm and used the information he had taken from Longbow to assist him in carrying out his duties as an analyst for his new firm.

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, Jason N. Dukas submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Dukas was first associated in 2000 with a FINRA member firm and by August 2011, he was registered with FINRA member firm Wells Fargo Clearing Services, LLC. The AWC alleges that Dukas "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization." In accordance with the terms of the AWC, FINRA found that Dukas had violated FINRA Rules 3280 and 2010, and the regulator imposed upon Dukas a $15,000 fine and a nine-month suspension from associating with any FINRA member in any capacity. As set forth in part in the AWC, during the relevant period between October and December 2016 [Ed: footnote omitted]:

[D]ukas participated in an investment by a Firm customer in a start-up motion-analytics company away from the Firm. Dukas solicited the transaction by recommending the investment to the customer, arranging for the customer to attend a promotional meeting about the company, and providing advertising materials about the company to the customer. He helped facilitate the transaction by, in November 2016, forwarding a promissory note and other investment-related documents to the customer. In December 2016, the customer, who was wealthy and sophisticated, invested in the company by wiring $1.5 million to the company. The customer has not complained about the investment and Dukas received no compensation in connection with same. 

Dukas did not provide written notice, or otherwise inform the Firm, of his participation in the transaction. 

Bill Singer's Comment: Oh for godsakes -- $15,000 and nine months for that? Seriously? Stripped down to its basics, Dukas' purported Private Securities Transaction ("PST") misconduct took place over what seems to be "between" October and December of 2016, so that's like what a month or so? Also, note that the sanctions are being imposed in May 2020, which is about four years after the alleged misconduct and FINRA is tagging this guy during the COVID-19 pandemic. As to Dukas' dastardly misconduct, it amounted to nothing more per the AWC than that he 
  • recommended the investment (whatever the hell "recommending" means in this context because the AWC doesn't offer any explanation beyond the mere allegation of the act);
  • arranged for the customer to attend a meeting (again, what exactly is involved in "arranging" a meeting?);
  • provided advertising materials; and
  • forwarded a promissory note and other documents to the customer.
Being the cynic that I am and emboldened by the cursory and circular nature of the AWC allegations, I don't see that much misconduct, particularly given that it all supposed transpired within a one-mont or so timespan. As I would infer the alleged misconduct, Dukas may have said to the customer "Hey, I know about this investment opportunity, let me call and see if I can arrange for you to speak to someone, here's some info about the company that I downloaded from their website, and here's the draft of the Note that they may want you to sign." That's a $15,000 fine and a nine-month suspension? Before you come to FINRA's defense, note that the "customer has not complained about the investment and Dukas receiverd no compensation . . ."

https://www.ssb.texas.gov/news-publications/order-seeks-lower-curtain-nick-steele-thecryptofacts
The Texas State Securities Board filed an Emergency Cease and Desist Order https://www.ssb.texas.gov/sites/default/files/Steele_ENF_20_CDO_1804.pdf against Kickolas Steele a/k/a Nick Vop Steele and Nick Steele. TSSB alleges that As alleged in part in the TSSB Release

Steele is soliciting investments of between $5,000 and $50,000, according to the order, and repeatedly promising potential investors that he can generate returns of at least 100%. Steele has been directing investors to TheCryptoFacts, a public group hosted by Facebook and the place where Steele touts his prowess in trading cryptocurrencies.

The pandemic-caused economic downturn and volatility in the markets is a boon for his trading business, Steele is allegedly telling potential investors.

Steele is claiming he earned "huge profits" on bitcoin trades in February and March 2020. According to TheCryptoFacts page, Steele is purportedly using cryptocurrency trading funds to benefit COVID-19 relief programs.

After the Enforcement Division of the State Securities Board warned Steele that he was violating the registration and disclosure provisions of the Texas Securities Act, Steele began describing himself as a "consultant." The new description is a way to avoid "scrutiny" by the "Texas SEC," according to the order.

According to the order, however, Steele continued to represent that he will trade cryptocurrencies on behalf of investors.

After being warned by the Enforcement Division, Steele allegedly told potential investors that they may "actually lose some money" due to the risks associated with trading cryptocurrencies.

According to the order, Steele is charging investors 20% of the "trade consulting profits" as a fee. He promises to pay investors at the end of a 12-month investment period.

Steele is directing investors to send their principal to a business account at PayPal held by a company called Nuvop Inc., which Steele controls.

Steele is telling potential investors that he does not mix business and personal funds, according to the order, but that is precisely what he is doing.

Steele is commingling funds to pay for expenses unrelated to the trading of cryptocurrencies and making payments to online dating services, ride-sharing services, and restaurants. He is also allegedly using a debit card associated with the PayPal account to withdraw cash from ATMs.

Dallas Adviser Lorintine Fined $10,000 for Charging Performance-Based Fees (TSSB Release)
https://www.ssb.texas.gov/news-publications/dallas-adviser-lorintine-fined-10000-charging-performance-based-fees
In a TSSB Disciplinary Order https://www.ssb.texas.gov/sites/default/files/Lorintine_Order_05142020.pdf, investment adviser Lorintine Capital LP was fined $10,000. As alleged in part in the TSSB Release:

Lorintine Capital charged a performance-based fee to five clients who invested in LC Diversified Fund I LLC, a private fund. The fee was 1% of the value of a client's holdings in the fund and 10% on capital gains generated by the fund's returns.

State and federal securities laws generally allow investment advisers to charge fees based on performance only to "qualified clients." Federal law mandates that a qualified client must meet at least one of several requirements, such as a net worth of $2.1 million or $1 million invested with the adviser after making the private fund investment.

In contrast, to qualify as an "accredited investor" a person must have a $1 million net worth or an annual income of at least $200,000.

The investment agreement for the LC Diversified Fund did not contain any way for clients to represent that they were qualified investors - only that they were accredited.

Lorintine Capital received $2,845 in performance fees from five non-qualified clients from November 2015 through December 2017.

With TV ad commitments plummeting, the advertising business may never look the same (CNBC by Julia Boorstin)
https://www.cnbc.com/2020/05/15/upfronts-canceled-tv-ad-commitments-plummeting.html
As CNBC's Boorstin notes in part:

A new report from Advertiser Perceptions forecasts that Covid-19 will cut 33% from Upfront commitments as advertisers shy from long-term commitments and shift to short-term ad buying. Of the more than 150 advertisers surveyed in early May, half say they feel they can replace the reach of linear TV with ads within streaming services and digital video ads. And 41% of the surveyed advertisers say that networks will be forced to abandon the Upfront model of committing to a year's worth of ad buys in advance.