Securities Industry Commentator by Bill Singer Esq

June 24, 2020

Defendant Charged in Fraudulent ICO Ordered to Pay $450,000 (SEC Release)

Albany Man Pleads Guilty to Wire Fraud Conspiracy in Connection with Romance Scams (DOJ Release)

Burlington County Couple Charged with Conspiracy to Defraud 33 Victims of Over $6 Million in Romance Fraud Scheme (DOJ Release)

FINRA NAC Affirms OHO Sandlapper Findings and Sanctions

FINRA Announces Passing of Thomas Gira, Executive VP, Market Regulation and Transparency Services (FINRA Release)

BREAKING NEWS/FULL TEXT OPINION In re: Michael T. Flynn, Petitioner (Opinion on Emergency Petition for a Writ of Mandamus, United States Court of Appeals for the District of Columbia Court, No, 20-5143 / June 24, 2020)
DCCir grants Flynn's petition for a writ of mandamus in part and directs the district court to grant the government's Rule 48(a) motion to dismiss. Accordingly, DCCir vacates the district court's order appointing an amicus as moot. In summary, the Majority Opinion (Henderson, J. and Rao, J. for the Majority; Wilkins, J. dissenting) finds that:

[R]ather, it is about whether, after the government has explained why a prosecution is no longer in the public interest, the district judge may prolong the prosecution by appointing an amicus, encouraging public participation, and probing the government's motives. On that, both the Constitution and cases are clear: he may not. 

at Page 18 - 19 of the DCCir Opinion

Pointedly, the Majority admonishes that [Ed: footnote omitted]:

Finally, each of our three coequal branches should be encouraged to self-correct when it errs. If evidence comes to light calling into question the integrity or purpose of an underlying criminal investigation, the Executive Branch must have the authority to decide that further prosecution is not in the interest of justice. As the Supreme Court has explained, "the capacity of prosecutorial discretion to provide individualized justice is firmly entrenched in American law. . . . [A] system that did not allow for discretionary acts of leniency would be totally alien to our notions of criminal justice." McCleskey v. Kemp, 481 U.S. 279, 311-12 (1987) (quotation marks omitted); see also United States v. Smith, 55 F.3d 157, 160 (4th Cir. 1995) ("[T]he duty of the United States Attorney [is] not simply to prosecute but to do justice.") (quotation marks omitted). In the third branch, when a district court oversteps, the mandamus remedy allows the court of appeals to prevent encroachment on a coequal department. See Cheney, 542 U.S. at 382 ("Accepted mandamus standards are broad enough to allow a court of appeals to prevent a lower court from interfering with a coequal branch's ability to discharge its constitutional responsibilities."). 

at Pages 10 - 11 of the DCCir Opinion 

The Dissent notes in pertinent part that:

It is a great irony that, in finding the District Court to have exceeded its jurisdiction, this Court so grievously oversteps its own. This appears to be the first time that we have issued a writ of mandamus to compel a district court to rule in a particular manner on a motion without first giving the lower court a reasonable opportunity to issue its own ruling; the first time any court has held that a district court must grant "leave of court" pursuant to Federal Rule of Criminal Procedure 48(a) without even holding a hearing on the merits of the motion; and the first time we have issued the writ even though the petitioner has an adequate alternative remedy, on the theory that another party would not have had an adequate alternate remedy if it had filed a petition as well. Any one of these is sufficient reason to exercise our discretion to deny the petition; together, they compel its rejection. I therefore respectfully dissent from the majority's grant of the writ. 

at Page 1 of the Dissent
It's a rare moment when I am reading through a Securities and Exchange Commission Opinion and I recognize it as earth-shattering, precedent setting, historic, and a turning the regulatory world on its head event. So . . . as I worked my way through the allegations, the arguments, the findings, and the rationale in Gregory Acosta's appeal of FINRA's deeming him to be statutorily disqualified, I came to the end of the SEC's Opinion and was stunned. I don't do stunned. Well, not a lot of it. Regardless, I was stunned. And in a good way. It's encouraging to see that the SEC doesn't merely go through the motions when adjudicating appeals from FINRA.
A very fair and timely opinion piece by Smith that largely echoes my sentiments about the sheep-being-led-to-slaughter nature of day trading and how newbies are largely fodder for professional traders. That being said, Smith's admonitions tend to bring us to a fairly consistent and persistent point: 

A large amount of empirical evidence confirms that most day traders lose money. A very large 2004 study of Taiwanese day traders, for example, found that more than 80% lost money. A tiny number -- about 0.03% -- earned consistently large profits, but the odds of possessing this kind of skill are slim. Most studies of day traders in the U.S. and Finland yield similar results -- a few traders are consistently good, but most lose out.

Day trading might therefore be a fun way of gambling for those who are locked inside waiting out the pandemic. But if regular Americans start betting large amounts of their money on individual stocks and options, they're courting financial ruin. If you want to day trade, the best thing to do is to bet only a small percent of your money to learn whether you're one of the few who has the skill to beat the market. Day trading should be treated like an expensive video game, not like a way of getting rich quick.

The percentage of successful day traders is abysmally small -- so what? As best I can remember, the odds of winning the Powerball or Mega Millions lotteries were somewhere about 1 in 300,00, 000. If we end day trading (which neither I nor Smith appear to be proposing), should we also end lotteries, fantasy sports leagues, OTBs, etc.? And while we're crunching some numbers. what percentage of high school athletes become professionals in the NBA, WNBA, NFL, and MLB? The challenge for regulating day trading is not whether to eliminate it, which I oppose, but to figure out where to best draw lines, where to best impose limits, and how to best monitor trading and traders to ensure that folks are not going to be brought to the brink of suicide, or beyond.
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged UnitedData, Inc. d/b/a "Shopin" and its founder, Eran Eyal, with violating the antifraud and registration provisions of the federal securities laws, and seeks permanent injunctions, disgorgement with interest, and civil penalties, as well as an officer-and-director bar against Eyal and a bar against Eyal and Shopin prohibiting them from participating in any future offering of digital-asset securities. As part of an Initial Coin Offering ("ICO"), the Defendants fraudulently raised $42.5 million worth of virtual currency from the unregistered sales of securities called Shopin tokens based on a series of false and misleading statements to potential and actual investors, including misrepresentations about purported successful pilots of the Shopin application. As alleged in part in the SEC Release:

On June 19, 2020, the U.S. District Court for the Southern District of New York entered a final judgment against Eyal. Without admitting or denying the allegations of the SEC's complaint, Eyal consented to the entry of the order, which enjoins him from future violations of the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933 and the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, bars him from acting as an officer or director of a public company, enjoins him from engaging in any offering of digital asset securities, and orders him to disgorge $422,100 in ill-gotten gains plus $34,940 in prejudgment interest, which is deemed satisfied by Eyal's payment of approximately 3,105.78 Ether tokens pursuant to a prior plea agreement in a New York State criminal action that addressed conduct including the acts at issue in the SEC's action. The SEC voluntarily dismissed its claim against Shopin.

READ the FINAL Judgments: 
  • Eyal
  • Shopin
In the Matter of the Claim for Award in Connection with [REDACTED] (SEC Order Determining Whistleblower Award Claims'34 Act Rel. No. 89124; Whistleblower Award Proc. File No. 2020-22)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending that Claimant receive about a $125,000 award, which the SEC adopted and so ordered. That Award was based upon monetary sanctions collected in a covered SEC action and in a "related enforcement action." In pertinent part, the SEC Order states that Claimant's original information [Ed: footnotes omitted]: 

led to the successful enforcement of both the Covered Action and the Related Action. Applying the award criteria specified in Rule 21F-6 of the Securities Exchange Act of 1934 to the specific facts and circumstances here, we find that the proposed award percentages for both the Covered Action and the Related Action are appropriate. In reaching that determination, we positively assessed the facts that (i) Claimant's information was highly significant because Claimant's tip caused the opening of both the Commission's and the Other Agency's investigations and provided both staffs with important information about the company's fraudulent securities offering; (ii) Claimant reported information that resulted in the Commission and the Other Agency discovering a fraudulent scheme that preyed on a vulnerable investor community; (iii) Claimant provided assistance to both the SEC and the Other Agency during the investigation; and (iv) collections from the defendants of the monetary sanctions ordered in both the Covered Action and the Related Action were low. 

Finally, we find that the contributions made by Claimant to the Covered Action are similar to Claimant's contributions to the success of the Related Action, and, therefore, it is appropriate that Claimant receive the same award percentage for both actions.
William Y. Asiedu pled guilty to wire fraud conspiracy in the United States District Court for the Northern District of New York and agreed to pay $445,333 in restitution and forfeit over $10,000 in currency. As alleged in part in the DOJ Release:

Between October 2018 and May 2019, two victims, one from Arizona and the other from Switzerland, sent a total of $445,333 to bank accounts standing in the name of Community Youth Development Council Incorporated, an entity that Asiedu incorporated in New York.  Asiedu's co-conspirators falsely led each victim to believe that she was sending the money for the benefit of a man she met through an online dating web site.  In fact, Asiedu's co-conspirators posed as these fake lovers, and fraudulently induced the victims to send money to Asiedu.
In Complaints filed in the United States District Court for the District of New Jersey, Martins Friday Inalegwu,, and his wife, Steincy Mathieu,, were each charged with one count of conspiracy to commit wire and mail fraud. As alleged in part in the DOJ Release:

Between October 2016 and May 13, 2020, Inalegwu, Mathieu and their conspirators, several of whom reside in Nigeria, allegedly participated in an online romance scheme, defrauding victims throughout the country. The conspirators made initial contact with victims through online dating and social media websites, corresponded with them via email and phone, pretended to strike up a romantic relationship with them. They requested the victims send money to them, or their associates, for fictitious emergency needs. For example, the conspirators duped victims into believing that they needed money for customs fees and taxes, medical expenses, travel expenses or business expenses. The individuals whom the victims believed they were speaking to did not exist, and instead they were speaking to the conspirators.

Inalegwu, Mathieu and their conspirators also engaged in apartment rental scams with at least three of the victims. They advertised a property, not owned or controlled by them, for the purpose of collecting money from the victims in the form of application fees and security deposits. The conspirators listed advertisements online, enticed victims with information about the properties, pretended they were authorized to rent the properties, and then directed that the victims complete applications and send money to either Inalegwu, Mathieu or conspirators, in the form of down payments to reserve the properties. After Inalegwu, Mathieu and conspirators collected the money, the victims never heard from them again.

Conspirators used myriad email accounts and phone numbers to communicate with the victims and instruct them on where to wire the money, including recipient names, addresses, financial institutions and account numbers. Victims wired money to bank accounts held by Inalegwu and Mathieu in the United States, and also mails checks directly to Inalegwu and Mathieu. Some victims transferred money to the conspirators via money transfer services, such as Western Union or MoneyGram, and others wired money to bank accounts held by conspirators overseas.

Federal law enforcement agents have identified more than 33 victims, who sent over $6 million to conspirators, $3.1 million of which was sent directly to Inalegwu and Mathieu. Inalegwu and Mathieu spent the victims' money on personal expenses, withdrew money in cash, transferred money to other bank accounts they personally controlled, and transferred money to bank accounts held by conspirators in Nigeria and Turkey. 
Congress enacted the federal securities laws to protect investors from fraud and overreach in all manner of investments, in "countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." This case involves investments marketed on the promise of profits flowing from wells in the oil country of the Permian Basin of Texas- without the associated risk of drilling a dry hole. 

When an operating oil well brings oil to the surface, it also surfaces formation water, mostly composed of saltwater. After separating the valuable oil from this saltwater byproduct, the well operator must dispose of the water in an environmentally responsible way. A saltwater disposal well meets this need by taking unwanted saltwater away from nearby oil well operators and returning it back into the ground. The operator of a disposal well can make money in two ways: (1) by separating any remaining remnants of oil from the saltwater and selling this "skim" oil for a profit, and (2) by charging oil well operators a fee for each barrel of saltwater the disposal well pumps back into the ground. 

FINRA member firm Sandlapper Securities, LLC ("Sandlapper" or the "Firm"), acting through its CEO Trevor Gordon, and the Firm's President Jack Bixler (collectively, "Respondents"), sought to create an investment opportunity in this corner of the oil industry by purchasing fractional interests in several saltwater disposal wells from the disposal well operator and then reselling those interests to investors. This disciplinary proceeding arises from the Department of Enforcement's ("Enforcement") claim that certain of these sales to investors were fraudulent. Enforcement's central allegation is that the sales prices charged to investors were substantially higher than market value, as reflected by what Respondents paid for the interests, and amounted to excessive and undisclosed markups. Through these improper markups, Respondents allegedly fraudulently overcharged investors by more than $8 million across the investments now at issue. Respondents disagree, maintaining that the prices investors paid for their disposal well interests were fair, the investments have proven profitable, and no additional disclosure was required. This Extended Hearing Panel held a hearing on the claims and defenses in Washington, D.C.

As to the specific charges filed by Enforcement, the OHO Decision sets forth the following:

Enforcement's Complaint sets forth the alleged misconduct across multiple claims. Cause one alleges that Gordon, Bixler, and Sandlapper willfully defrauded the Fund by fraudulently interposing another entity between an investment fund and the market and by charging undisclosed, excessive markups. Cause two alleges that in connection with these same sales to the investment fund, Gordon and Bixler breached fiduciary duties of loyalty and care to the fund. The third cause relates to sales of well interests to individual investors, asserting that Gordon and Sandlapper committed securities fraud by charging excessive markups when selling the interests as securities through the Firm between late 2014 and November 2015. The fourth cause alleges that Gordon committed securities fraud by charging excessive markups when selling the interests as "real estate" to investors between January 2013 and November 2015. Cause five alleges that Gordon and Bixler willfully caused the entity interposed into the sales transaction to operate as an unregistered securities dealer. Finally, cause six alleges that Gordon and Sandlapper failed to establish and implement supervisory procedures adequate to address the conflicts of interests inherent to the sales transactions, and cause seven claims that Gordon and the Firm failed to adequately supervise the private securities transactions.
As summarized in the Syllabus, following 11-days of hearings, the OHO found that:

Sandlapper Securities, through its Chief Executive Officer Trevor Gordon and President Jack Bixler, willfully defrauded investors by charging unreasonable and undisclosed markups on sales of fractional interests in saltwater disposal wells. By improperly interposing an affiliate entity when selling the interests, Gordon and Bixler willfully caused the entity to act as an unregistered dealer. Sandlapper and Gordon also failed to adequately supervise sales of the investments. For their misconduct, Gordon and Bixler are barred from association with any FINRA member and Sandlapper is expelled. Respondents are ordered to pay restitution and hearing costs. 

The OHO fined Gordon and Sandlapper $73,000 on a joint and several basis, and ordered restitution as follows:
  • $901,418 plus interest on a joint and several basis among Sandlapper, Gordon and Bixler;
  • $2,429,664 plus interest on a joint and several basis between Gordon and Sandlapper;
  • $4,682,201 plus interest against Gordon;
Respondents appealed the OHO Decision to FINRA's National Adjudicatory Council ("NAC").
FINRA Department of Enforcement, Complainant, v. Sandlapper Securities, LLC, Trevor Lee Gordon, and Jack Charles Bixler, Respondents (FINRA National Adjudicatory Council Decision, Disciplinary Proceeding No. 2014041860801 / June 23, 2020)
As set forth in the NAC Syllabus:

Member firm, its chief executive officer, and its vice-president misrepresented and omitted material facts concerning sales of fractional interests in saltwater disposal wells. In addition, the firm's chief executive officer and president breached their fiduciary duties to an investment fund and caused an affiliate entity to act as an unregistered securities dealer, and the member firm and chief executive officer failed to establish, maintain, and enforce written supervisory procedures and failed to supervise the firm's registered representatives. Held, findings and sanctions affirmed.

Note that the NAC applied the most recent version of FINRA's "Sanctions Guidelines" and increased the OHO fine from $73,000 to $77,000.

FINRA Announces Passing of Thomas Gira, Executive VP, Market Regulation and Transparency Services (FINRA Release)
FINRA Executive Vice President of Market Regulation and Transparency Services Thomas GIra, 58, died on June 20th. As noted in part in FINRA's Release:

"Tom was a beloved and devoted husband and father, as well as a tremendous leader, colleague and friend, and we are enormously heartbroken by his passing. We extend our most sincere condolences to Tom's family, who are in our thoughts and prayers during this difficult time," said President and CEO Robert Cook.

"Tom leaves behind an extensive and exemplary legacy of accomplishment over the course of his tremendous career in the securities industry, including nearly three decades at FINRA. He was well known for his expertise in securities markets regulation, built over the course of his lifetime commitment to protecting investors and the integrity of markets," Cook added. "Tom was also highly regarded for his integrity and thoughtful character, his gentle and soft-spoken demeanor, and his keen wit and genuine regard for everyone with whom he worked."

Under Gira's leadership, FINRA's Market Regulation Department grew to conduct cross-market surveillance of all U.S. equities markets and nearly half of U.S. options markets. The department also performs trading compliance examinations of FINRA-registered firms and provides regulatory services to U.S. exchanges.

More recently, Gira assumed leadership of FINRA's Transparency Services Department and helped guide that team through significant milestones in delivering increased market transparency to investors, including the reporting of U.S. Treasury securities to FINRA's Trade Reporting and Compliance Engine (TRACE). Gira was also at the forefront of leading FINRA's work in support of the Consolidated Audit Trail. These and other essential regulatory services that Gira supported are vital to FINRA's mission to protect investors and strengthen the integrity of the markets.

Before joining FINRA in 1992, Gira was an Associate General Counsel of The NASDAQ Stock Market, Inc. Prior to that, he was Branch Chief for Options and Derivative Products Regulation within the Division of Market Regulation at the SEC.

Gira was a graduate of Wake Forest University, where he received a bachelor's degree in economics. He received his law degree from the University of Maryland.

Bill Singer's Comment: I first dealt with Tom when he was at NASDAQ and then continued interacting with him at NASD and then to FINRA. For those of us on the industry-side of things, Tom was a welcome regulator, one who knew his assigned area, knew it better than almost anyone, and was always willing to patiently explain to you why he was right, you were wrong, and where you misunderstood the rule at issue. Now, mind you, he was not, in fact, always right, I was not always wrong, and I often thought that he misunderstood the rule -- but, you know, that's the nature of an adversary system. The wonderful thing about getting on the phone with Tom is that he was soft spoken and even tempered. As a former regulator myself, it was obvious to me that Tom not only was meant to do his job but he also loved it. All of which is obvious when you listen to the recent April 28 2020 FINRA Unscripted, in which Tom spoke about the market volatility attendant to the COVID pandemic.

Tom's death is a tremendous loss to FINRA. My sincere condolences to his family and colleagues. If ever there was a class act in regulation, it was Tom Gira. Truly, a job well done.