Securities Industry Commentator by Bill Singer Esq

March 8, 2021



SEC Charges Utah Resident with Defrauding Investors (SEC Release)

SEC Charges Seven Individuals for $45 Million Fraudulent Scheme (SEC Release)

SEC Charges AT&T and Three Executives with Selectively Providing Information to Wall Street Analysts (SEC Release)


http://www.brokeandbroker.com/5738/finra-sec-tysk/
This rambling, shambling tale begins with a 2008 customer complaint, which morphed into a 2010 FINRA Arbitration against Ameriprise and a stockbroker. Responding to allegations of discovery shenanigans during that arbitration, in 2014, FINRA suspended the stockbroker for three months and fined him $50,000, but, on appeal in 2016, FINRA increased the stockbroker's suspension to one year. On further appeal in 2017, the SEC remanded the regulatory case back to FINRA. In 2019, FINRA smugly declined to budge. Suffice it to say, in 2021, the SEC was not amused with FINRA's lack of reconsideration.

John David McAfee And Executive Adviser Of His Cryptocurrency Team Indicted In Manhattan Federal Court For Fraud And Money Laundering Conspiracy Crimes (DOJ Release)
https://www.justice.gov/usao-sdny/pr/john-david-mcafee-and-executive-adviser-his-cryptocurrency-team-indicted-manhattan
-and-

In an Indictment filed in the United States District Court for the Southern District of New York https://www.justice.gov/usao-sdny/press-release/file/1374171/download, John David McAfee and Jimmy Gale Watson, Jr. are charged with one count of conspiracy to commit commodities and securities fraud; one count of conspiracy to commit securities and touting fraud; two counts of conspiracy to commit wire fraud; and two counts of substantive wire fraud; and one count of conspiracy to commit money laundering. As alleged in part in the DOJ Release:

During the period from in or about December 2017 through in or about October 2018, JOHN DAVID MCAFEE and JIMMY GALE WATSON JR., and other members of the McAfee Team, perpetrated two fraudulent schemes relating to the promotion to investors of cryptocurrencies qualifying under federal law as commodities or securities. 

The first scheme involved a fraudulent practice called "scalping," which is sometimes referred to as a "pump and dump" scheme.  This scalping scheme generally consisted of the following.  First, MCAFEE, WATSON, and other McAfee Team members bought large quantities of publicly traded cryptocurrency altcoins, which qualified as commodities or securities, at inexpensive market prices with advance knowledge that MCAFEE planned to publicly endorse them via his widely followed Twitter account (the "Official McAfee Twitter Account").  Second, after these purchases, MCAFEE published false and misleading endorsement tweets via his Official McAfee Twitter Account recommending those altcoins to members of the investing public for investment in order to artificially inflate (or "pump" up) their market prices without disclosing that MCAFEE owned large quantities of the promoted altcoins, even though MCAFEE had given false assurances that he would disclose such information in various tweets and public statements during the scalping scheme.  Third, MCAFEE, WATSON, and other McAfee Team members then sold (or "dumped") their respective investment positions in the promoted altcoins into the temporary but significant short-term market price increases that MCAFEE's deceptive tweets typically generated, often for significant profits.  From in or about December 2017 through in or about January 2018, MCAFEE, WATSON, and other McAfee Team members collectively earned more than $2 million in illicit profits from their altcoin scalping activities while the long-term value of the recommended altcoins purchased by investors declined substantially as of a year after the promotional tweets.  From in or about December 2017 through in or about October 2018, MCAFEE, WATSON, and other McAfee Team members engaged in various efforts to liquidate the digital asset proceeds of their scalping activities into United States currency. 

In the second scheme, MCAFEE, WATSON, and other McAfee Team members also used MCAFEE's Official McAfee Twitter Account to publicly tout fundraising events called "initial coin offerings" ("ICOs") in which startup businesses ("ICO issuers") issued and sold digital tokens qualifying as securities to the investing public, without disclosing and, in fact, concealing that the ICO issuers were compensating MCAFEE and his team for his promotional tweets with a substantial portion of the funds raised from ICO investors.  As the United States Securities and Exchange Commission had publicly warned, and as MCAFEE and WATSON well knew, the federal securities laws required them to disclose any compensation paid by ICO issuers for touting securities offerings styled as ICOs.  From approximately on or about December 20, 2017 through on or about February 10, 2018, MCAFEE, WATSON, and other McAfee Team members collectively earned more than $11 million in undisclosed compensation that they took steps to affirmatively hide from ICO investors.  In each instance, MCAFEE and WATSON failed to disclose to ICO investors that the ICO Issuers were paying the McAfee Team a substantial portion of the funds raised from ICO investors for their touting efforts, despite knowing that they were required to disclose such compensation under federal securities laws.  Furthermore, in several instances during this ICO touting scheme, MCAFEE and WATSON took active steps to conceal their secret compensation arrangements with ICO issuers from ICO investors, and MCAFEE made false and misleading statements and omissions to hide such deals from ICO investors.  From approximately in or about December 2017 through in or about October 2018, MCAFEE, WATSON, and other McAfee Team members engaged in various efforts to liquidate the digital asset proceeds of their ICO touting activities into United States dollars.

During the period from in or about December 2017 through in or about October 2018, MCAFEE and WATSON caused another McAfee Team member to engage in banking transactions to launder proceeds of the fraudulent ICO touting scheme. 

In separate parallel enforcement actions, the United States Securities and Exchange Commission (the "SEC") and Commodity Futures Trading Commission ("CFTC") have filed civil charges against MCAFEE and WATSON.    
 
In a Complaint filed in the United States District Court for the Southern District of New York
https://www.cftc.gov/media/5741/enfjohndavidmcafeecomplaint030521%20/download, the CFTC alleged that McAfee and Watson had

strategically selected digital assets suitable for their scheme. As is typical of pump-and-dump schemes, they secretly accumulated a position in a digital asset through bitcoin trading in anticipation of price spikes following McAfee's misleading public endorsements on social media. They "pumped" in the form of touting the asset in order to increase demand, while deceptively concealing the previously accumulated position and the intent to promptly sell the position. The defendants then "dumped" the digital asset by selling it into the inflated demand as price levels rose in response to their deceptive touting. 

https://www.sec.gov/litigation/litreleases/2021/lr25044.htm
In a Complaint filed in the United States District Court for the District of Utah
https://www.sec.gov/litigation/complaints/2021/comp25044.pdf, the SEC charged Craig C. Garrick, Jr. with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and the registration provisions of Section 5 of the Securities Act. Without admitting or denying he allegations in the Complaint, Garrick agreed to settle the SEC's charges and he will be permanently enjoined from violating the antifraud provisions of the federal securities laws and from conducting unregistered securities offerings. On October 5, 2020, Garrick was convicted of securities fraud in connection with the same conduct. As alleged in part in the SEC Release:

[G]arrick induced investors to invest at least $450,000 in a company Garrick partially controlled, while concealing from the investors that he planned to and did use investment money for his own benefit and living expenses. The complaint also alleges that Garrick failed to disclose to investors that he was serving a probationary sentence for state felony charges of mortgage fraud.

SEC Charges Seven Individuals for $45 Million Fraudulent Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/2021/lr25043.htm
In a Complaint filed in the United States District Court for the Southern District of New York
https://www.sec.gov/litigation/complaints/2021/comp25043.pdf, the SEC charged Airborne Wireless Network, Kalistratos "Kelly" Kabilafkas, Timoleon "Tim" Kabilafkas, Chrysilios Chrysiliou, Panagiotis Bolovis, Jack Edward Daniels, Eric Scheffey,and Moshe Rabin with violations of the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 17(a)(1) and (3) of the Securities Act; and, the Complaint further charges Airborne, Kelly Kabilafkas, Tim Kabilafkas, Chrysiliou, Bolovis, and Scheffey with violations of the antifraud provisions of Section 17(a)(2) of the Securities Act, and, finally, charges Kelly Kabilafkas with control person liability under Section 20(A) of the Exchange Act. Without admitting or denying the allegations in the Complaint omplaint, Rabin agreed to the entry of a final judgment ordering injunctive relief, a $125,000 civil penalty, and a penny stock bar. As alleged in part in the SEC Release:

[K]alistratos "Kelly" Kabilafkas secretly purchased essentially all the outstanding stock of the shell company now known as Airborne, then distributed millions of shares among himself and his associates, including defendants Timoleon "Tim" Kabilafkas, Panagiotis Bolovis, Eric Scheffey, Chrysilios Chrysiliou, and Moshe Rabin. As alleged, Kelly Kabilafkas and his associates deceived Airborne's transfer agent and broker dealers in order to have the shares transferred into their names, deposited in brokerage accounts, and cleared for sale to the public. The complaint alleges that Kelly Kabilafkas, through defendant Jack Edward Daniels, Airborne, and other third parties, spent millions of dollars on advertisements that concealed that Airborne was a vehicle for Kabilafkas's fraudulent scheme. The complaint further alleges that, while the promotional campaign was underway, Kelly Kabilafkas and his associates sold approximately 11.8 million Airborne shares for proceeds of more than $22 million, much of which was kicked back to benefit the Kabilafkas family. As alleged, Airborne raised another approximately $22.8 million dollars from unsuspecting investors through public and private offerings while materially false and misleading statements about the company were publicly available. In total, the complaint alleges, the scheme raised nearly $45 million.

In a Complaint filed in the United States District Court for the Southern District of New York,
https://www.sec.gov/litigation/complaints/2021/comp-pr2021-43.pdf, the SEC alleged that AT&T, Inc. violated Regulation FD and reporting provisions of the Securities Exchange Act of 1934; and that AT&T Investor Relations executives Christopher Womack, Kent Evans, and Michael Black aided and abetted those violations. As alleged in part in the SEC Release:

[AT&T] learned in March 2016 that a steeper-than-expected decline in its first quarter smartphone sales would cause AT&T's revenue to fall short of analysts' estimates for the quarter. The complaint alleges that to avoid falling short of the consensus revenue estimate for the third consecutive quarter, AT&T Investor Relations executives Christopher Womack, Michael Black, and Kent Evans made private, one-on-one phone calls to analysts at approximately 20 separate firms.  On these calls, the AT&T executives allegedly disclosed AT&T's internal smartphone sales data and the impact of that data on internal revenue metrics, despite the fact that internal documents specifically informed Investor Relations personnel that AT&T's revenue and sales of smartphones were types of information generally considered "material" to AT&T investors, and therefore prohibited from selective disclosure under Regulation FD. The complaint further alleges that as a result of what they were told on these calls, the analysts substantially reduced their revenue forecasts, leading to the overall consensus revenue estimate falling to just below the level that AT&T ultimately reported to the public on April 26, 2016.

https://www.justice.gov/opa/pr/man-sentenced-role-investment-fraud-scheme
After a four-day trial in the United States District Court for the Eastern District of Virginia, James Michael Johnson, 69, was convicted by jury on conspiracy to commit wire fraud, wire fraud, and money laundering; and he was sentenced to to over eight years in prison. As alleged in part in the DOJ Releas:

[J]ohnson participated in a worldwide scheme through Chimera Group Ltd., a purported investment company based out of the United Kingdom. The fraud operated as an advance-fee scheme in which the defendants acted as promoters who promised to pay the victims a sum of money at a later date in exchange for an up-front payment. Among other misrepresentations, Johnson and his co-conspirators told potential victims that their principal payments would be protected based on letters of credit and other documents that purported to be from a large financial institution. However, these documents were fabricated. The evidence also showed that Johnson and his co-conspirators used escrow attorneys, who were themselves part of the scheme, in order to give the victims the impression that their money would remain secure until the defendants' promises had been kept. Johnson and his co-conspirators stole at least $5 million from their victims.

CFTC Charges Wisconsin Man with Fraud and Misappropriation (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8367-21
In a Complaint filed in the United States District Court for the Eastern District of Wisconsin
https://www.cftc.gov/media/5746/enfrobertnarvettcomplaint030521/downloadagainst, the CFTC charged Robert Narvett with fraud and misappropriation of over $196,000 from at least two individuals; and further charged him with failing to register with the CFTC as a Commodity Trading Advisor as required under the Commodity Exchange Act. Also, Narvett was indicted in a parallel criminal action on wire fraud, bank fraud, money laundering, and aggravated identity theft. As alleged in part in the CFTC Release:

[F]rom at least December 2013 through the present, Narvett fraudulently solicited Wisconsin clients by making false statements in violation of the CEA. Specifically, the complaint alleges that in his solicitations to existing and prospective clients, Narvett made numerous materially false and misleading statements concerning his trading successes and strategies and promised future trading profits. He also omitted material information, including that a federal court in Wisconsin previously entered a judgment against him in an action brought by the Securities and Exchange Commission alleging that he operated an unrelated fraudulent investment scheme. 

Narvett, as alleged, fraudulently persuaded clients to provide him with access to their personal commodity futures accounts at a Futures Commission Merchant. He allegedly traded futures contracts in those accounts, abandoned his clients after he lost their money trading, and misappropriated client funds for his own benefit and to benefit the ongoing fraud.

Investment Company Products / FINRA Provides Guidance on Common Sales Charge Discounts and Waivers for Investment Company Products (FINRA Regulatory Notice 21-07)
https://www.finra.org/sites/default/files/2021-03/Regulatory-Notice-21-07.pdf
As set forth in the "Summary" portion of the FINRA Notice:

Many investment companies provide sales charge discounts and waivers on their products for customers in certain circumstances described in their product offering documents (e.g., prospectuses or statements of additional information). These include volume-based discounts, such as breakpoints and waivers, on mutual fund exchanges. Failure to apply these discounts or waivers correctly may adversely affect customers' rates of return on their investment and contravenes firms' obligations under FINRA rules. 

FINRA has focused on firms' systems and controls to provide customers with appropriate discounts for many years. Recently, FINRA announced a targeted examination related to Rights of Reinstatement.1 In 2015 and 2016, FINRA identified sales charge discounts and waivers as priorities in the Regulatory and Examination Priorities Letter.2 In addition, FINRA has taken a number of enforcement actions against firms that did not provide available sales charge discounts and waivers to customers that met certain thresholds,3 and FINRA continues to find situations where firms fail to (1) identify and apply relevant sales charge discounts or waivers; and (2) establish, maintain or enforce supervisory systems and written supervisory procedures (WSPs) reasonably designed to identify accounts that would be eligible for such discounts or waivers. 

FINRA is issuing this Notice to: 
  • remind firms of their obligation to understand and, as appropriate, apply sales charge discounts and waivers for eligible customers; 
  • provide an overview of common sales charge discounts and waivers; 
  • share frequently observed findings in examinations and enforcement matters; and
  • note considerations firms should review to improve their compliance programs. . . .
FINRA Fines and Suspends Rep Over OBA
In the Matter of Larry Bowman, Respondent (FINRA AWC 2020065037601)
https://www.finra.org/sites/default/files/fda_documents/2020065037601
%20Larry%20Bowman%20CRD%202349910%20AWC%20jlg.pdf
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, Larry Bowman submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Larry Bowman was first registered in 1993, and by June 2018, he was registered with Heritage Financial Systems, Inc. (n/k/a Heritage Financial Systems, LLC). The AWC asserts that Bowman "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Bowman violated FINRA Rules 3270 and 2010, and the self regulator imposed upon him a $5,000 fine and a 45-calendar-day suspension from associating with any FINRA member in all capacities. In part, the AWC alleges that:

From October 2018 through December 2019, Bowman acted as a consultant and conducted financial modeling and analysis outside the scope of his relationship with Heritage Financial Services for three different companies. He was paid $18,750 for his work. Bowman did not provide prior written notice of his outside business activities to the firm.