Securities Industry Commentator by Bill Singer Esq

October 28, 2020

SEC Charges Seven Individuals with Unregistered Brokerage Activity Related to the Sale of Numerous Microcap Securities (SEC Release)
Today's blog considers several ingredients that would get shaken into a volatile cocktail: a boyfriend, a girlfriend, her grandson, a night of drinking, an argument, his banging on a door, and some marijuana in his bag. Shake. Stir. And we then pour out a nasty concoction whereby the boyfriend gets charged with three crimes and winds up getting fired by Allstate Insurance. Which prompted the boyfriend to sue, and took us through one California Superior Court and two Court of Appeal hearings.
In a FINRA Arbitration Statement of Claim filed in July 2020, FINRA member firm Claimant Capital Financial Services asserted indemnification and breach of contract against associated person Respondent Knuttila. As set forth in part in the FINRA Award:

[T]he causes of action relate to Claimant's allegation that Respondent is liable for the entire sum spent by Claimant in the defense and settlement of an arbitration case filed by one of Respondent's customers, pursuant to the Representative's Agreement ("Contract") signed by Respondent. Claimant further alleges that Respondent breached the Contract by refusing to indemnify Claimant.

Claimant Capital Financial sought $50,000 in compensatory damages, interest, fees, and costs. Respondent Knuttila represented himself pro se. The sole FINRA Arbitrator found Respondent Knuttila liable and ordered him to pay to Claimant $50,000 in compensatory damages and $1,450 in FINRA filing fees.

Bill Singer's Comment: Something industry participants often talk about but rarely see -- that being said, here it is!  You have a member firm suing a former associated person for indemnification of the costs of defense and settlement against a public customer.
So . . . howsabout some fun facts about Respondent Knuttila. According to online FINRA BrokerCheck disclosures as of October 28, 2020, he was first registered in 1998. BrokerCheck discloses 2 "Final/Regulatory Events," 7 "Pending/Customer Disputes," 36 "Final/Customer Disputes," and 1 "Termination" record. 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, Knuttila submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed a Bar upon Knuttila for failing to appear for a FINRA Rule 8210 on-the-record testimony. In the Matter of Steven R. Knuttila, Respondent (FINRA AWC 2017052705601)
In a Complaint filed in the United States District Court for the Central District of California, the SEC charged Alex Forester, Michael Hicks, Yarden Krampf, Christopher Lee, Sean O'Neal, Michael Raynor, and Lee Sobel with violating the broker-dealer registration provision of Section 15(a)(1) of the Securities Exchange Act. Without admitting or denying the allegations in the Complaint, Forester, Hicks, and Krampf consented to the entry of judgments that impose permanent injunctions, conduct-based injunctions from soliciting purchases or sales of securities, and that reserve the issue of a civil penalty for determination by the court. As alleged in the SEC Release:

[B]etween October 2015 and November 2019, the defendants worked as investor solicitors in several boiler-room operations engaged in a matched-trading scheme. The complaint alleges that the defendants were provided scripts and lead lists, which they used to cold call prospective investors and pitch investments in microcap securities that the boiler room was promoting. The defendants allegedly convinced investors to purchase shares of the microcap companies at prices and volumes that matched amounts sold by shareholders who were paying the boiler rooms to promote the stock. The complaint alleges that the defendants received over $2.8 million in commissions through their sales. According to the complaint, none of the defendants were registered as a broker-dealer or associated with a registered broker-dealer at the time.

Irvine Man Charged in Investment Scheme that Took In Millions with False Promises of Solar Panels Enhanced with Nanotechnology (DOJ Release)
In an Information filed in the United States District Court for the Central District of California, Michael James Sweaney, the founder/owner/Chief Financial Officer of Nanotech Engineering, Inc., was charged with one count of mail fraud; and, thereafter, pursuant to a Plea Agreement, he pled guilty to the mail fraud charge. As alleged in part in the DOJ Release:

Nanotech, which had facilities in Irvine and Loveland, Colorado, used a team of salespeople to cold-call potential investors and pitch them with bogus claims the company had developed a compact "Nanopanel" with patent-pending nanotechnology that was one-third the cost of similar devices and would soon dominate the solar panel market. But, as Sweaney admitted in the plea agreement, the Nanopanel simply did not exist.

As part of the scheme that started just over three years ago and continued until the end of 2019, Nanotech and its salesforce not only lied to investors, it also failed to disclose pertinent facts, which included identifying the CFO as "Michael Hatton" to conceal that Sweaney had previously been convicted of securities fraud, court documents state.

In his plea agreement, Sweaney admitted that, using the "Michael Hatton alias," he personally solicited a potential investor with lies, including that Nanotech did not pay commissions to sales personnel and that the company's manufacturing equipment was worth $100 million. That potential investor was actually an undercover FBI agent.

During the scheme, Sweaney instructed his nephew - who was in charge of Nanotech's Colorado facility - to create a prop to make it appear that there were functioning Nanopanels, to make a video with a hired actor showing the product outperforming a traditional solar panel, and to make it appear the Loveland facility was manufacturing Nanopanels, the court documents state. In a 2018 email to his nephew, Sweaney wrote, "We need to spend ALOT OF CASH, we need IMMEDIATELY equipment in the warehouse, without it JAIL, and that's no joke, no equipment and using investment funds EQUALS JAIL, however spending money on equipment WILL SET US FREE."

Once he enters the guilty plea in this case, Sweaney will face a statutory maximum sentence of 20 years in federal prison.

Sweaney admitted in his plea agreement that investor funds - which purportedly would be spent on company overhead and the manufacturing of Nanopanels - were used to fund his lavish lifestyle, which included a 46-foot yacht, two Maserati GranTurismo automobiles, a gold Cartier watch and cosmetic surgery. As part of the plea agreement, Sweaney agreed to forfeit the yacht, the cars, the watch and approximately $1.5 million in cash, bank accounts and checks previous seized by investigators.

Sweaney's nephew - David Wayne Sweaney, 41, of Fort Collins, Colorado, who was listed on documents as Nanotech's chief executive officer - pleaded guilty last month to one count of mail fraud. He is scheduled to be sentenced by United States District Judge Josephine L. Staton on April 2, 2021, at which time he will face a statutory maximum sentence of 20 years in prison.

According to court documents, David Sweaney assisted in the scheme orchestrated by his uncle in a number of ways, including depositing victims' checks into Nanotech bank accounts in Colorado, purchasing and installing $300,000 in used solar panel manufacturing equipment, arranging for at least two potential victim-investors to tour Nanotech's Colorado facility, and creating a video showing a prop Nanopanel outperforming a standard solar panel - an illusion he created by powering the purported Nanopanel with a hidden battery pack.

Self-Styled Diamond And Gold Exporter Sentenced To Nine Years In Prison For Wire Fraud And Commodities Fraud / Dual U.S./Swiss Citizen Convicted of Fraudulently Soliciting Millions In Investment Scheme To Purportedly Export Diamonds and Gold From Africa (DOJ Release)
After a six-week jury trial in the United States District Court for the Northern District of California, Fritz Kramer, 72, was convicted on 11 counts of wire fraud and one count of commodities fraud, and he was sentenced to 108 months in prison plus three years of supervised release (wire fraud) and five years of supervised release (commodities fraud) to run concurrently, and ordered to pay $7,956,267 in restitution. As alleged in part in the DOJ Release:

[K]ramer fraudulently solicited funds from dozens of investors, several of whom resided in the Bay Area.  Kramer told the investors that their money would be invested in an export project in which Kramer would export gold and diamonds from the Democratic Republic of Congo to Europe, Asia, and the United States.  The evidence at trial showed that Kramer falsely promised investors returns of up to ten times the amount invested in as short a time as one month, though no investor ever received a return on their investment.  Trial evidence demonstrated that numerous investors sent Kramer millions of dollars based upon Kramer's false representations regarding the export project.

Rep Fined and Suspended by FINRA for Private Securities Transactions
In the Matter of David Allen Walters, Respondent (FINRA AWC 2018060587101)
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, David Allen Walters submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that David Allen Walters was first registered in 1998; and by June 2017, he was registered with Advisory Group Equity Services Ltd ("AGES"), where he remained until November 2018. The AWC alleges that Walters "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 Walters had violated FINRA Rules 3280 and 2010; and the self regulator imposed upon him a $5,000 fine and an four-month suspension from association with any FINRA member in all capacities. As alleged in part in the AWC: 

From October 2017 to June 2018, and while Walters was registered through AGES, 
Walters participated in four private securities transactions, in which individuals invested a total of $450,000 in exchange for Series A Preferred Units of a company for which Walters served as Executive Chairman (the Company). The investors were directed to mail their completed subscription documents and subscription payment to Walters, or to evidence to Walters that their payment was wired directly to the Company. Further, investors were told to direct any questions about their subscriptions to Walters by mail, phone, or email. Walters emailed the term sheet and the master financial projections for the Company to one investor less than a month before his investment. Walters signed the subscription agreement for each of the four investors in his capacity as Executive Chairman of the Company. Walters did not receive selling compensation, and none of the four investors was a customer of AGES. Walters' participation in the four private securities transactions was outside the regular course and scope of his employment with AGES. 

Walters did not provide prior written notice to AGES of the four private securities transactions or his role in the transactions. While Walters disclosed the Company to AGES as an "outside business activity," he told the firm that the source of its capital would be "personal assets" rather than investments by third parties.