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Securities Industry Commentator by Bill Singer Esq

September 2, 2021

The SEC Is Asked to Go Back To The Future to Rewrite History (BrokeAndBroker.com Blog)

FINRA Announces Governor Elections and Appointments (FINRA Release)

Co-Founder Of Investment Fund Sentenced To 4 Years In Prison For Defrauding Investors Of Over $25 Million / Jason Rhodes Served as Chief Investment Officer and Chief Risk Officer While Defrauding Investors (DOJ Release)

Director and Promoter of BitConnect Pleads Guilty in Global $2 Billion Cryptocurrency Scheme (DOJ Release)

SEC Charges Global Crypto Lending Platform and Top Executives in $2 Billion Fraud (SEC Release)




SEC Charges Recidivist California Investment Adviser with Fraud and Breach of Fiduciary Duty (SEC Release)

SEC Obtains Emergency Relief, Charges Couple Who Operated $18 Million Ponzi scheme (SEC Release)

SEC Obtains Final Judgment Against Investment Adviser Charged with Fraud (SEC Release)


UPDATE: If You Didn't Know But Now Do. If You Hadn't Told FINRA But Did. If You Ask For A Stay But the SEC Doesn't. (BrokeAndBroker.com Blog)

http://www.brokeandbroker.com/6038/sec-dismissal-oip/
After an individual or entity is named as a defendant or respondent in a legal proceeding, they may subsequently be exonerated, or, the prior charges may be withdrawn for a number of reasons. Such vindication or dismissals may occur years after the filing indictments/complaints and the follow-on press coverage. Unfortunately, it's often difficult (if not impossible) to erase the references to a lawsuit that were posted on the Internet. Moreover, what was "true" when first posted months or years ago is not rendered as false or defamatory merely because subsequent developments prompted a finding of not guilty or the withdrawal of charges. In a recent SEC matter, we see how some of these various considerations  come into play. 

FINRA Announces Governor Elections and Appointments (FINRA Release)
https://www.finra.org/media-center/newsreleases/2021/finra-announces-governor-elections-and-appointments
On September 2, 2021, at FINRA's Annual Meeting, as noted in part in the FINRA Release, the following Governors were elected:

Timothy C. Scheve, President and Chief Executive Officer (CEO) of Janney Montgomery Scott LLC, was re-elected as a Large Firm Governor, one of three representatives of large firms on the Board. Scheve-who ran unopposed-has served as President and CEO of Janney Montgomery Scott since August 2007 and has more than 30 years of experience in the securities industry, including in a variety of leadership roles at Legg Mason. Scheve was previously elected to the FINRA Board in August 2018, after having been appointed to complete a partial term on the Board.
 
James T. Crowley, CEO of Pershing Advisor Services LLC-who also ran unopposed-was elected as the sole Mid-Size Firm Governor on the FINRA Board. At his firm, Crowley leads a team of professionals dedicated to helping firms operate their businesses more efficiently so they may serve their clients more effectively. Prior to becoming CEO in July 2019, he was the firm's COO.
 
Paige Pierce, President and Chief Executive Officer of the Bley Investment Group, Inc., was re-elected by small firms to one of the three Small Firm Governor seats on the FINRA Board. Pierce-who was previously elected to FINRA's Board in August 2018-has more than 25 years of securities industry experience. She ran against Daniel P. Logue, Counsel and Chief Compliance Officer of Muriel Siebert & Co., Inc.

At its July meeting, the FINRA Board appointed two new Governors: Vanguard Chairman and CEO Mortimer J. "Tim" Buckley and Commonwealth Financial Network SVP and General Counsel Peggy Ho. Buckley-who joined Vanguard in 1991 and held several senior leadership positions at the firm prior to becoming CEO in January 2018-will fill the FINRA Board Investment Company Affiliate seat. Ho fills the Board's Independent Dealer/Insurance Affiliate seat. She has nearly 15 years of experience overseeing legal, compliance and risk strategy and operations for firms in the independent channel and was previously a corporate associate in private law practice at Ropes & Gray LLP. The new Governors begin their three-year terms immediately, and participate in their first FINRA Board of Governors meeting on September 23-24.

https://www.justice.gov/usao-sdny/pr/co-founder-investment-fund-sentenced-4-years-prison-defrauding-investors-over-25
Jason Rhodes, 48, the  Co-Founder/Chief Investment Officer/Chief Compliance Officer for Sentinel Growth Fund Management, LLC, was sentenced to 48 months in prison plus three years of supervised release, and he was ordered to pay restitution and forfeiture of $25,451,801. As alleged in part in the DOJ Release:

Beginning in at least 2013 and through in or about December 2016, RHODES, together with his co-conspirators, solicited investments in Sentinel by falsely representing to investors that their funds would be used for legitimate, specified, investment purposes, namely purchasing securities.  In fact, RHODES failed to invest the investor monies as promised, but rather diverted investor funds to his own personal use and the personal use of his co-conspirators and, in a Ponzi-like manner, used them to make repayments to other investors who were demanding their money.  Among other things, RHODES diverted investor funds to a trucking business operated by RHODES and his wife; used them to pay more than $1 million to settle an unrelated civil lawsuit filed against RHODES and one of his co-conspirators; and expended them on other, personal expenses including a resort stay in Dubai and a luxury time-share vacation club.  Through this scheme, RHODES and his co-conspirators defrauded over 25 investors out of more than $25 million.

Among other fraudulent acts, RHODES and a co-conspirator falsified an account statement for an investor ("Investor-1") to conceal the fact that RHODES and his co-conspirators had misappropriated most of the $4.2 million Investor-1 had invested in Sentinel.  After Investor-1 discovered the fraudulent nature of the account statement, RHODES, working with others, obtained funds from yet another investor ("Investor-2") in order to make payments to Investor-1.  RHODES and his co-conspirators then, on multiple occasions, created fraudulent reports for Investor-2, falsely reflecting that Investor-2's funds were invested with portfolio managers in Sentinel's brokerage accounts and were earning returns.  In truth and in fact, and as RHODES well knew, Investor-2's funds had been almost entirely misappropriated upon their receipt to repay Investor-1 and were not being managed by portfolio managers on Sentinel's platform.  

https://www.justice.gov/usao-sdca/pr/director-and-promoter-bitconnect-pleads-guilty-global-2-billion-cryptocurrency-scheme
-and-
https://www.sec.gov/news/press-release/2021-172

Glen Arcaro pled guilty in the United States District Court for the Southern District of California to Conspiracy to Commit Wire Fraud and Criminal Forfeiture. In part, the DOJ Release alleges that:

[A]rcaro conspired with others to exploit investor interest in cryptocurrency by fraudulently marketing BitConnect's proprietary coin offering and digital currency exchange as a lucrative investment. 

Arcaro further admitted that he and others conspired to mislead investors about BitConnect's purported proprietary technology, known as the "BitConnect Trading Bot" and "Volatility Software," as being able to generate substantial profits and guaranteed returns by using investors' money to trade on the volatility of cryptocurrency exchange markets. In truth, BitConnect operated a textbook Ponzi scheme by paying earlier BitConnect investors with money from later investors. 

. . .

It was through the use of social media, Arcaro acknowledged in his plea agreement, that he and others made materially false and misleading statements, while concealing material facts, all to persuade investors that BitConnect was a lucrative investment. During the scheme, Arcaro posted videos that mocked those who questioned whether BitConnect had a Trading Bot and Volatility Software, doubted the true identity of BitConnect's owner, and complained about losing their money in BitConnect.

According to the documents filed today, Arcaro sat atop a large network of promoters in North America, forming a pyramid scheme known as the BitConnect Referral Program. Arcaro earned as much as 15 percent of every investment into another part of the scheme-the BitConnect "Lending Program"-either from investors he recruited directly or those recruited by others beneath Arcaro in the pyramid.  Arcaro further received portions of all investments from a concealed "slush" fund.

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-pr2021-172.pdf, the SEC charged BitConnect, its founder Satish Kumbhani, Glenn Arcaro, and Future Money Ltd. with violating the antifraud and registration provisions of the federal securities laws. As alleged in part in the SEC Release:

[F]rom early 2017 through January 2018, Defendants conducted a fraudulent and unregistered offering and sale of securities in the form of investments in a "Lending Program" offered by BitConnect. The complaint alleges that, to induce investors to deposit funds into the purported Lending Program, Defendants falsely represented, among other things, that BitConnect would deploy its purportedly proprietary "volatility software trading bot" that, using investors' deposits, would generate exorbitantly high returns. However, the SEC alleges that instead of deploying investor funds for trading with the purported trading bot, defendants BitConnect and Kumbhani siphoned investors' funds off for their own benefit by transferring those funds to digital wallet addresses controlled by them, their top promoter in the U.S., defendant Glenn Arcaro, and others. The SEC's complaint further alleges that BitConnect and Kumbhani established a network of promoters around the world, and rewarded them for their promotional efforts and outreach by paying commissions, a substantial portion of which they concealed from investors. According to the complaint, among these promoters was Arcaro, the lead national promoter of BitConnect for the United States who used the website he created, Future Money, to lure investors into the Lending Program.

SEC Files Subpoena Enforcement Action Against Penny Stock Promoter (SEC Release)
https://www.sec.gov/litigation/litreleases/2021/lr25192.htm
The SEC filed an action in the United States District Court for the Southern District of Florida seeking an Order directing Alexander Kon to comply with investigative subpoenas for documents and testimony. As alleged in part in the SEC Release:

[T]he SEC is investigating whether Kon violated the federal securities laws by participating in an offering of penny stock in contravention of an SEC order. The filing states that, based on its ongoing investigation, the SEC has reason to believe that Kon promoted microcap stocks and hired others to promote microcap stocks while subject to a penny stock bar the SEC had imposed against him. As stated in the filing, SEC staff served Kon with investigative subpoenas requiring the production of certain documents and compelling his testimony. According to the filing, however, despite multiple accommodations by the SEC, Kon has failed and refused to comply with either the document production or the testimonial obligations of the subpoenas.

The SEC's application seeks an order from the court directing Kon to show cause why the court should not compel him to appear for testimony and to produce documents as required by the subpoenas. The application further seeks an order from the court, following its ruling on the order to show cause, directing Kon to comply fully with the subpoenas. The SEC is continuing its fact-finding investigation and, to date, has not concluded that any individual or entity has violated the federal securities laws.

https://www.sec.gov/litigation/litreleases/2021/lr25193.htm
In a Complaint filed in the United States District Court for the Central District of California  https://www.sec.gov/litigation/litreleases/2021/lr25193.htmp, the SEC charged Davenport, Elite Aerospace Group, Robert Gunton, Andrea J. Lindstrom, Michael P. Owens, Dustin B. Tillman, Julie Yale, and Zeeshawn S. Zia with violating the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rules 10b-5(a) and (c) thereunder. Further, Elite, Tillman, and Zia were charged with violations of the antifraud provision of Rule 10b-5(b); Gunton, Owens, and Yale were charged with violating the securities registration provisions of Sections 5(a) and (c) of the Securities Act; and, finally, Owens was charged with violating the broker registration provisions of Section 15(a) of the Exchange Act. As alleged in part in the SEC Release:

[R]ecidivist Michael P. Owens set up and controlled a boiler room that raised approximately $67 million from investors in Elite between 2014 and summer 2018. The complaint alleges that Owens operated the boiler room with the knowledge of Elite's executive officers, Dustin B. Tillman and Zeeshawn S. Zia, and assistance from his associates, Dawson L. Davenport (also a recidivist) and Andrea J. Lindstrom. The SEC alleges that Elite paid undisclosed commissions of about 15% per investment to unregistered salespeople, failed to properly disclose to investors that approximately 30% of offering proceeds were used to pay offering costs, and that Owens, Davenport, Lindstrom, Tillman, and Zia took steps to conceal these omissions. The SEC's complaint also alleges that Davenport, Lindstrom, Tillman, and Zia made misrepresentations to Elite investors regarding the status of an acquisition and the status of Elite's financial audit, and that Owens acted as an unregistered broker.

The complaint also alleges that Owens' company, RMMH, LLC, conducted a separate unregistered and unauthorized offering of Elite common stock in 2017. According to the SEC, RMMH sold Elite shares it owned to about 20 investors, raising approximately $2 million, but Owens and his affiliates concealed the offering from Tillman and Zia. In order to provide purchasers in the RMMH offering with their stock certificates, defendants Owens, Davenport, Lindstrom, Robert Gunton, and Julie Yale schemed to generate Elite stock certificates and use the signature stamps of Tillman and Zia without their authorization.

https://www.sec.gov/litigation/litreleases/2021/lr25191.htm
In a Complaint filed in the United States District Court for the Western District of Missouri, the SEC charged Douglas E. Elstun with violating the antifraud provisions of Sections 206(1) and 206(2) of the Advisers Act, or in the alternative, aiding and abetting Crossroads Financial Management Inc.'s violations of those provisions; and with aiding and abetting Crossroads' violations of the record-keeping, custody, cash solicitation, and compliance provisions of Sections 204(a) and 206(4) of the Advisers Act and Rules 204-2(a)(10), 206(4)-2, 206(4)-3, and 206(4)-7 thereunder. Without admitting or denying the SEC's allegations, Elstun consented to the entry of a final judgment
https://www.sec.gov/litigation/litreleases/2021/judgment25191.pdf  that permanently enjoins him from violating the charged provisions, orders him to pay disgorgement of $386,647 together with prejudgment interest of $64,338, and orders him to pay a civil penalty of $390,094. As alleged in part in the SEC Release:

[F]rom 2015 through 2018, Elstun fraudulently overcharged his advisory clients by charging undisclosed fees, including higher advisory fees than clients had agreed to pay, and by applying the advisory fee to non-advisory assets. The complaint alleges that Elstun also traded in high risk, daily leveraged and/or inverse exchange-traded funds (ETFs) and misled advisory clients by failing to disclose the substantial risks of buying and holding these products, and by inaccurately representing that the products functioned as "insurance" or a "hedge" for their portfolios even though his trading of these products actually created significant risk for clients. The complaint further alleges that Elstun made unsuitable and risky investments that were inconsistent with his clients' investment objectives and risk tolerances. As alleged in the complaint, as a result of Elstun's ETF trading, Elstun's clients lost millions.

https://www.sec.gov/litigation/litreleases/2021/lr25189.htm
https://www.sec.gov/litigation/complaints/2021/comp25189.pdf, The SEC charged Tellone Management Group, Inc. ("TMG") and its President Dean Tellone with violating the antifraud provisions of Section 17(a) of the Securities Act,  Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 207 of the Investment Advisers Act of 1940; and the Complaint further charges TMG with violating, and Tellone with aiding and abetting TMG's violations of, Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. Also, the Complaint; charges TMG's vice president of investments Steven Wolfe with aiding and abetting TMG and Tellone's violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act; and charges Wolfe's friend, Robert Gumerman, with violating Sections 17(a)(1) and 17(a)(3) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder. 
Without admitting or denying the allegations in the complaint, Gumerman has consented to the entry of a final judgment, subject to court approval, permanently enjoining him from violating the antifraud provisions of the federal securities laws. 
As alleged in part in the SEC Release:

[F]rom 2015 through the present, Tellone and TMG concealed material information from TMG's mortgage fund investors, many of whom were advisory clients, and from two successive audit firms in order to hide a significant loss in the mortgage fund. The complaint alleges that Tellone instructed Gumerman to mislead the auditors about the status of a $1 million loan the fund made to Gumerman and his wife that had been discharged in bankruptcy proceedings. As alleged, by lying to the auditors and hiding the loss, Tellone was able to inflate the mortgage fund's reported returns. The complaint also alleges that as part of the scheme, Tellone and Gumerman entered into a sham transaction where they purportedly restructured the discharged loan but entered into a secret side deal agreeing to write off the restructured loan. According to the complaint, the side deal provided other favorable terms for the Gumermans at the expense of the mortgage fund and its investors, and rendered the mortgage fund's financial statements, offering documents, and information within its Form ADVs materially misleading. The complaint further alleges that Wolfe aided and abetted the scheme by knowingly providing misleading information to the mortgage fund's auditors.

https://www.sec.gov/news/press-release/2021-170
In a Complaint filed in the United States District court for the District of Minnesota,
https://www.sec.gov/litigation/complaints/2021/comp-pr2021-170.pdf, the SEC charged Jason Dodd Bullard, Angela Romero-Bullard, and Bullard Enterprises LLC with violating the antifraud provisions of the federal securities laws. The Court granted a temporary restraining order and an asset freeze. As alleged in part in the SEC Release:

[F]rom at least 2007 to 2021, the defendants raised approximately $17.6 million from as many as 200 investors to invest in Bullard Enterprises' purported Flagship and Platinum Funds. Bullard and Romero-Bullard allegedly told investors - most of whom were friends and family, including many elderly retirees - that their investments would be used to trade foreign currencies, and sent investors account statements showing that their accounts were increasing in value. In reality, according to the complaint, Bullard Enterprises stopped trading in foreign currencies in 2015, and the defendants simply used new investor money to pay purported "returns" to existing investors. Also according to the complaint, Bullard and Romero-Bullard misappropriated investors' money to support other businesses they owned, including a horse racing stable, limousine service, and health and fitness studio.

https://www.sec.gov/litigation/litreleases/2021/lr25190.htm
In a Complaint filed in the United States District Court for the Central District of California, the SEC alleged that Steven Fitzgerald Brown, the Chief Executive Officer/President/Sole Owner/Director of Alpha Trade with engaging in a Ponzi-like scheme using Alpha Trade Analytics, Inc.'s investment fund and that Brown, as investment adviser to the fund, misappropriated or misused investor funds for his own benefit. The Court entered final judgment on consent against Brown
https://www.sec.gov/litigation/litreleases/2021/judgment25190.pdf whereby he was permanently enjoined from violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder; and, further, he was ordered to pay disgorgement of $2,613,346 plus prejudgment interest of $65,833, which is deemed satisfied by the criminal restitution order. In a parallel criminal action, Brown pled guilty to wire fraud, and he was sentenced to 51 months in prison plus three years of supervised release, and ordered to pay restitution of $3,313,346 to his victims. 

https://www.finra.org/sites/default/files/fda_documents/2021072190201
%20John%20Matthew%20Izzo%20CRD%206339734%20AWC%20sl.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, John Matthew Izzo submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that John Matthew Izzo registered from February 2015 to October 2019 with Allstate Financial Services, LLC. In accordance with the terms of the AWC, FINRA imposed upon Anderson a $5,000 fine and a two-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

In 2013, Izzo established Elite Agency LLC (Elite) via filing with the New York State Division of Corporations, and was a co-owner and member of that company. When Izzo subsequently became associated with Allstate Financial in February 2015, he did not disclose his outside business activity with Elite to the firm. Through Elite, Izzo engaged in insurance-related outside business activities until his termination from Allstate Financial in October 2019. Izzo did not disclose these activities to the firm, or receive approval to engage in them. Izzo received over $250,000 in compensation from Elite Agency LLC. In addition, during the relevant period, Izzo falsely responded "no" in five annual compliance questionnaires from 2015 to 2019 to the question of whether he had accepted compensation from any entity that had not been previously disclosed on the firm's outside business activities questionnaire. 

By engaging in an outside business activity without providing prior written notice to his firm, Izzo violated FINRA Rules 3270 and 2010. 

https://www.finra.org/sites/default/files/fda_documents/2018058278601
%20Joseph%20A.%20Lianzo%20CRD%204516842%20AWC%20va.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, Joseph A. Lianzo submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Lianzo was first registered in 2002, and from September 2015 through April 2017, he was registered with Laidlaw & Company (UK) Ltd; and, thereafter, since September 2017, with SW Financial. In accordance with the terms of the AWC, FINRA imposed upon Anderson an eight-month suspension from associating with any FINRA member in all capacities. No fine was imposed based upon Lianzo's financial condition.  As alleged in part in the  "Overview" of the AWC:

Between March 2016 and November 2019, Lianzo excessively traded four customers' accounts in violation of FINRA Rules 2111 and 2010. Lianzo also placed 13 unauthorized transactions in accounts of two of those four customers, in violation of FINRA Rule 2010. 

http://www.brokeandbroker.com/6037/finra-widow-elderly/
When entering into a settlement of allegations of regulatory conduct with FINRA, respondents agree to the imposition of sanctions subject to the reservation "without admitting or denying" the allegations in the Complaint. That's a big concession by a regulator. Unfortunately, FINRA isn't policing the enforcement of its settlements because some respondents seem to be denying their misconduct or raising questions about it. See a recent FINRA regulatory settlement for one such scenario.

UPDATE: If You Didn't Know But Now Do. If You Hadn't Told FINRA But Did. If You Ask For A Stay But the SEC Doesn't. (BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/6028/finra-sec-giles/
In June 2021, in the first iteration of this article, we noted that among the mysteries of the Universe is whether a revocation of a license is the same as a bar of a license.  On top of that puzzler, if something happens but you didn't know about it at the time but you eventually learn about it, does that mean you had failed to timely report what you didn't know had happened but now do? Then, we are asked to ponder the ethical and legal implications of whether the SEC should stay a determination by FINRA that someone has become statutorily disqualified after that same individual voluntarily reported the facts that prompted FINRA's determination. In August 2021, the SEC asked for additional briefing.

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