Securities Industry Commentator by Bill Singer Esq

October 16, 2020

Justice Department And Indian Authorities Announce Enforcement Actions Against Technical-Support Fraud Scheme Targeting Seniors / First Parallel Action by U.S. and Indian Governments Against Elder Fraud (DOJ Release)

Fugitive Charged with Leading Multimillion Dollar Fraud Scheme, Falsifying Evidence, and Tax Crimes (DOJ Release)

In the Matter of the Claim for an Award in connection with Redacted (SEC Order Determining Whistleblower Award Claim)

How one family's nightmare illustrates the growing threat of real estate wire fraud (CNBC by Andrea Day, Louise Connelly, Jennifer Schlesinger, and Scott Zamost)
In these times of pandemic, with folks fleeing residences in one locale and buying homes in another, this CNBC article could not be more timely or scary. An absolutely spot-on and compelling report about the dangers of closing-frauds. Consider this frightening excerpt:

The FBI says money lost in crimes like this often ends up in China where it's usually lost forever.

"They stole a lot of financial security from us. They stole a future that could have been, a future that involved a house that we were going to live in, a future that might involve some more financial security for our children, and the ability to reduce college costs and not saddle our kids with debt, right? They stole all of that," Aaron said.
From my perspective, FINRA is an inept and frequently ineffective regulator, which I have long characterized as the lap dog of its larger member firms. Frankly, FINRA comes off as little more than a hijacked trade-group intent on eliminating its smaller members and promoting financial superstores and regional brokerages. Harsh words? Absolutely. Off the mark and unfair? I think not. 
About goddamn time -- took y'all long enough! As alleged in part in the DOJ Release:

According to the complaint filed today in the U.S. District Court for the Southern District of Florida, the defendants' scheme contacted U.S. consumers via internet pop-up messages that falsely appeared to be security alerts from Microsoft or another well-known company.  The pop-up messages fraudulently claimed that the consumer's computer was infected by a virus, purported to run a scan of the consumer's computer, falsely confirmed the presence of a virus and malware, and then provided a toll-free number to call for assistance.  When victims called the toll-free number, they were connected to India-based call centers participating in the fraud scheme.  Call center workers asked victims to give them remote access to their computers and told victims that they detected viruses or other malware on their computers.  Eventually, the call center workers would falsely diagnose non-existent problems and ask victims to pay hundreds of dollars for unnecessary services and software. 

In an unprecedented collaborative effort, the Central Bureau of Investigation (CBI) in India took actions in parallel with today's filing against corporate and individual participants in the scheme located in Delhi, Noida, Gurgaon, and Jaipur.  CBI, India's federal investigative agency, took note of the international fraud being perpetrated by these companies operating from various locations in India.  CBI registered a criminal case against five companies involved in the scheme and conducted an investigation to identify and locate the perpetrators of the crime.  Coordinated search operations were conducted at the offices of these companies and at the residences of the directors of the entities.  According to CBI, incriminating digital evidence related to the scheme was collected and seized during the searches.

. . .

The complaint alleges that Michael Brian Cotter, 59, of Glendale, California, knowingly provided U.S. support for India-based accomplices in furtherance of the scheme.  Cotter facilitated the scheme through several companies, including Singapore registered Global Digital Concierge Pte. Ltd., formerly known as Tech Live Connect Pte. Ltd., Nevada registered companies Sensei Ventures Incorporated and NE Labs Inc., New York registered Kevisoft LLC, and United Kingdom registered Kevisoft UK LTD.  The temporary restraining order issued by the court today dismantles these defendants' U.S. infrastructure, such as websites and payment processing relationships, and prohibits the defendants from continuing to facilitate the alleged scheme.

. . .

The filed complaint asserts that, since at least 2011, Cotter has worked with co-conspirators in India to operate the alleged scheme, including registering website domains, setting up shell companies, and entering into relationships with banks and payment processors to facilitate the collection of funds from victims of the scheme.  Individual victims are alleged to have reported paying hundreds to thousands of dollars to the scheme for unwanted and unnecessary technical-support services.

The complaint seeks an injunction under the Anti-Fraud Injunction Statute immediately shutting down the defendants' role in the fraudulent schemes in order to protect U.S. victims from further harm.  The injunctions sought by the United States would authorize the immediate shutdown of websites used to contact and collect payments from victims, and would enjoin Cotter and the corporate defendants from engaging in telemarketing activity related to computer technical support or accepting payments related to any purported technical support service.

The widespread fraud allegedly committed in this case was brought to the Transnational Elder Fraud Strike Force's attention by Microsoft, which often is impersonated by those engaged in technical-support fraud schemes.
In two Indictments filed in the United States District Courts for the Districts of Nevada and of Colorado, Mykalai Kontilai, a/k/a "Michael Contile" was charged in:

Nevada one count of securities fraud, six counts of wire fraud, six counts of laundering of money instruments, one count of money transaction in property derived from specified unlawful activity, and four counts of willful failure to file tax returns; and

Colorado with one count of conspiracy to obstruct proceedings, two counts of obstruction of proceedings, one count of tampering with documents, and two counts of false statements.  

Kontilai is believed to have traveled to Russia to avoid prosecution and arrest, and, accordingly, the FBI released a "Wanted" poster As alleged in part in the DOJ Release:

The District of Nevada indictment alleges that from 2012 through 2018, Kontilai lured investors into giving him money to start an e-commerce auction business.  The indictment further alleges Kontilai falsely told investors that he invested millions of dollars of his own money in the business and was not taking "a dime of salary."  According to the filing, Kontilai led bank officials to believe that money he withdrew was for business purposes when in fact it was for himself.  On one occasion alone he allegedly withdrew $770,000 in cash from a company bank account, not to purchase inventory for the company, but for his personal use.  He also allegedly used investor funds to purchase a Cadillac with the vanity tag, "MYKALAI," and to pay for private school tuition and rent on luxury homes throughout the country.  Kontilai is also charged with failing to file tax returns for tax years 2015 through 2018 when he was engaged in this scheme. 

The District of Colorado indictment alleges that Kontilai covered up his theft by providing false testimony, and altering and manufacturing documents in an SEC investigation.  Among other things, Kontilai is alleged to have tampered with a bank statement to substantiate his testimony that he loaned the company five million dollars and was justified in taking investor money to pay himself back.  The altered bank statement showed the company's account with a balance of $4,999,065, when the actual balance at the time was $935.
Robert F. Smith entered into a Non-Prosecution Agreement with DOJ for his involvement from 2000 through 2015 in an illegal scheme to conceal income and evade millions in taxes by using an offshore trust structure and offshore bank account. Smith admits his involvement in the illegal scheme and agrees to cooperate with ongoing investigations and to pay back taxes and penalties in full. 
As alleged in part in the DOJ Release:

According to the agreement, Smith, a resident of Austin, Texas, formed the Excelsior Trust in Belize, and a shell company, Flash Holdings, in Nevis in 2000. Smith used third-parties to conceal his beneficial ownership and control of the Excelsior Trust and Flash Holdings. In reality, Smith controlled both offshore structures and made all substantive decisions regarding Flash Holdings' operations, transactions, income, investments and assets. Smith used the Excelsior Trust to conceal his ultimate ownership and control over Flash Holdings. He further used Flash Holdings to hide his interest in private equity investments. Smith admits that he formed these foreign entities in order to use them to avoid the payment of U.S. taxes.

Furthermore, Smith admits that he knowingly and intentionally used the Excelsior Trust and Flash Holdings and their associated foreign bank accounts in the British Virgin Islands and Switzerland to conceal from the IRS, and the U.S. Treasury Department, income earned and distributed to Flash Holdings from private equity funds. As a result of the overall scheme, Smith willfully did not report to the IRS over $200 million of partnership income. Smith also failed to report his ownership of his foreign bank accounts in BVI and Switzerland as required by law.

Over the years, Smith used millions of this unreported income to acquire and make improvements to real estate used for his personal benefit. Smith admits that, in 2005, he used approximately $2.5 million in untaxed funds to purchase and renovate a vacation home in Sonoma, California. In 2010, Smith again used untaxed funds to purchase two ski properties and a piece of commercial property in France. In 2011 and 2012, Smith used approximately $13 million of untaxed funds to build and make improvement to a residence in Colorado and to fund charitable activities at the property.

Under the terms of the agreement, Smith has agreed to continue cooperating with the Department of Justice in other related investigations. Further, Smith has agreed to pay approximately $56 million in taxes and penalties stemming from the unreported income and another $82 million in penalties stemming from his concealment of his offshore bank accounts. Taken altogether, Smith will pay more than $139 million in taxes and penalties.

Additionally, Smith agrees to abandon his protective claims for a refund totaling approximately $182 million that were filed with the IRS. The protective refund claims consisted, in part, of claims filed with the IRS for charitable contribution deductions on Sept. 21, 2018, and Oct. 11, 2019. As a result of the agreement, Smith shall take no further direct or indirect tax benefit from such claims.
Without admitting the findings in as SEC Order, Andeavor LLC agreed to cease-and-desist from further alleged violations of the internal controls provisions of Section 13(b)(2)(B) of the Securities Exchange Act; and agreed to pay a $20 million penalty. As alleged in part in the SEC Release:

Andeavor and Marathon held months of confidential discussions in 2017 about Marathon potentially acquiring Andeavor, which at the time was an energy company headquartered in San Antonio. The order finds that, in October 2017, Andeavor's then-Chairman and CEO and Marathon's Chairman and CEO agreed to suspend the discussions, and then agreed in late January 2018 to resume talks. The order finds that two days before the date set for resuming the discussions, Andeavor's CEO directed the company's CFO to initiate a $250 million stock buyback. According to the order, the Board of Directors' authorization for the buyback was subject to a company policy prohibiting repurchases while Andeavor was in possession of material non-public information, yet Andeavor failed to maintain internal accounting controls that provided reasonable assurance that the buyback complied with Andeavor's policy.

The order finds that Andeavor used an abbreviated and informal process to evaluate whether the requirements for the buyback were satisfied, including that the company was not in possession of material non-public information. The order finds more specifically that the process for evaluating the materiality of the acquisition negotiations did not include discussing, with the CEO, the likelihood of a deal between Andeavor and Marathon. As described in the order, in February and March 2018, Andeavor repurchased 2.6 million shares of its stock from investors at an average price of $97 per share. Approximately one month after completing the buyback, the order finds, Andeavor publicly announced that it would be acquired by Marathon in a deal valuing Andeavor at over $150 per share.

In the Matter of the Claim for an Award in connection with Redacted (Order Determining Whistleblower Award Claim, '34 Act Rel. No. 90189; Whiustleblower Award Proc. File No. 2021-1 / October 15, 2020)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of the whistleblower Claimant's award claim. CRS purportedly concluded that said Claimant was not a "whistleblower."
Upon consideration of the Claimant's contest of the denial and following a review of the record, the SEC found that  satisfied the requirements for being considered a whistleblower and, in fact, had voluntarily provided original information that led to the successful enforcement of the Covered Action. In characterizing the nature of Claimant's contribution, the SEC Order notes in part that:

[C]laimant authored information containing a detailed analysis that alerted Commission staff to the underlying securities violations. However, beyond the initial tips, Claimant did not provide further assistance to the staff during the course of the investigation.

In furtherance of its determinations, the SEC awarded over $800,000 to the Claimant.

Bill Singer's Comment: Bravo to the Chair and Commissioners for declining to merely rubber stamp the CRS recommendations. The current composition of the SEC comprises four Commissioners who have already demonstrated a willingness to speak their minds and rock the boat.