Securities Industry Commentator by Bill Singer Esq

September 20, 2021

As set forth in part in the Treasury Press Release:

As part of the whole-of-government effort to counter ransomware, the U.S. Department of the Treasury today announced a set of actions focused on disrupting criminal networks and virtual currency exchanges responsible for laundering ransoms, encouraging improved cyber security across the private sector, and increasing incident and ransomware payment reporting to U.S. government agencies, including both Treasury and law enforcement. Treasury's actions today advance the United States government's broader counter-ransomware strategy, which emphasizes the need for a collaborative approach to counter ransomware attacks, including partnership between the public and private sector and close relationships with international partners.
. . .
Today's actions include the Department of the Treasury's Office of Foreign Assets Control's (OFAC) designation of SUEX OTC, S.R.O. (SUEX), a virtual currency exchange, for its part in facilitating financial transactions for ransomware actors. SUEX has facilitated transactions involving illicit proceeds from at least eight ransomware variants. Analysis of known SUEX transactions shows that over 40% of SUEX's known transaction history is associated with illicit actors. SUEX is being designated pursuant to Executive Order 13694, as amended, for providing material support to the threat posed by criminal ransomware actors.

Virtual currency exchanges such as SUEX are critical to the profitability of ransomware attacks, which help fund additional cybercriminal activity. Treasury will continue to disrupt and hold accountable these entities to reduce the incentive for cybercriminals to continue to conduct these attacks. This action is the first sanctions designation against a virtual currency exchange and was executed with assistance from the Federal Bureau of Investigation.

SEC Charges Two More Firms With Share Class Disclosure Violations / The settlements are the latest in a string of SEC enforcement actions for similar conduct, which one lawyer says is now 'low-hanging fruit' for the regulator ( by Patrick Donachie)
So-called "soft dollars" and other payments for distribution/marketing/advertising costs -- all of which tend to take on the appearance of hidden fees -- have come under the SEC's scrutiny.'s Patrick Donachie reports about some recent SEC settlements attendant to addressing such practices, and he notes in part that:

Berthel Fisher & Company Financial Services, an Iowa-based dually registered broker/dealer and investment advisor with nearly $800 million in regulatory assets under management, settled charges with the Securities and Exchange Commission over claims it failed to disclose conflicts concerning recommendations of certain mutual fund share classes that included 12b-1 fees.

The offer of settlement, which was filed on Sept. 16, is the latest in a string of SEC enforcement actions for similar conduct. Only several days earlier, Chicago-based Rothschild Investment Corporation, an RIA and broker/dealer with about $1.6 billion in AUM, settled with the commission for 12b-1 disclosure violations. Rothschild also failed to self-report those violations in the commission's 2018 Share Class Selection Disclosure Initiative, though it was eligible to do so.

SEC Charges Crowdfunding Portal, Issuer, and Related Individuals for Fraudulent Offerings / Case is SEC's First Involving Regulation Crowdfunding (SEC Release)
In a Complaint filed in the United States District Court for the Eastern District of Michigan, the SEC charged  Robert Shumake, Nicole Birch Willard Jackson, and 420 Real Estate LLC with violating the antifraud and registration provisions of the Securities Act and Securities Exchange Act; and, further,  charged  registered funding portal TruCrowd and its Chief Executive Officer Vincent Petrescu with violating the crowdfunding rules of the Securities Act. As alleged in part in the SEC Releases:

[S]humake, alongside associates Nicole Birch and Willard Jackson, conducted fraudulent and unregistered crowdfunding offerings through two cannabis and hemp companies, Transatlantic Real Estate LLC and 420 Real Estate LLC.  Shumake, with assistance from Birch and Jackson, allegedly hid his involvement in the offerings from the public out of concern that his prior criminal conviction could deter prospective investors. The complaint alleges that Shumake and Birch raised $1,020,100 from retail investors through Transatlantic Real Estate, and Shumake and Jackson raised $888,180 through 420 Real Estate. Shumake, Birch, and Jackson allegedly diverted investor funds for personal use rather than using the funds for the purposes disclosed to investors. As alleged, TruCrowd Inc., a registered funding portal, and its CEO, Vincent Petrescu, hosted the Transatlantic Real Estate and 420 Real Estate offerings on TruCrowd's platform. Petrescu allegedly failed to address red flags including Shumake's criminal history and involvement in the crowdfunding offerings, and otherwise failed to reduce the risk of fraud to investors., one of Back to Green Mining LLC's two managing members, Manuel Portalatin offered to settle to permanent injunctions from future violations of the charged provisions and from participating in securities offerings not registered with the SEC, and to pay disgorgement of $605,462, plus prejudgment interest thereon in the amount of $64,312.25, and a civil penalty of $160,000. In addition to Portalatin, the Complaint charged Back to Green and managing member Jose Jimenez Cruz with violating the antifraud provisions of the federal securities laws, as well as with directly offering and selling securities in an unregistered offering. As alleged in part in the SEC Release:

[F]rom August 2016 until at least 2020, Back to Green, Jiménez, and Portalatin offered and sold to retail investors in Puerto Rico and at least five U.S. states the opportunity to share in the profits of a purported Colombian gold mining operation.  According to the SEC's complaint, the offering, which was not registered with the Commission, was part of a fraudulent scheme that raised approximately $2.7 million. Jiménez and Back to Green allegedly placed advertisements promising investors exorbitant returns and presented investors with materials that falsely stated that all permits necessary to mine in Colombia had been obtained. Subsequent to the provision of these materials, Portalatin allegedly signed contracts with investors when he knew that they had been misled.

Chevy Chase Man Facing Federal Indictment for Allegedly Posing as an Investment Advisor to Steal $750,0000 From a Non-Profit Organization Providing Services to Combat and Wounded Military Veterans (DOJ Release)
In an Indictment filed in the United States District Court for the District of Maryland, Brian McQuade was charged with wire fraud.  As alleged in part in the DOJ Release:

[F]rom June 2018 until August 2021, McQuade perpetrated a fraud scheme to obtain money from a non-profit organization that provided services to combat and military veterans (the "Foundation").  During that time, McQuade allegedly held himself out as an investment advisor to clients, including the Foundation, falsely telling clients that he would manage investment accounts on their behalf.   Instead, McQuade allegedly misappropriated the funds provided by clients, including the Foundation, for his personal use.

The indictment alleges that McQuade represented to the Foundation and its principals that he was worked as an investment advisor through an entity called Columbia Financial Advisors, LLP ("Columbia Financial"), which McQuade represented was the investment advisory arm affiliated with an established DC accounting firm.  In reality, the Indictment alleges, McQuade had not been formally affiliated with the accounting firm since at least 2015.  McQuade also represented to the Foundation that he was a licensed, registered investment advisor, including on an "Investment Advisory Agreement" he provided to the Foundation before the Foundation made its investment.  McQuade allegedly told the Foundation that he would place the Foundation's funds in a brokerage account that he would manage on behalf of the Foundation and McQuade provided the Foundation with a completed brokerage account application. 

Based on McQuade's representations, the Foundation wired McQuade $750,000 to invest on the Foundation's behalf.   According to the indictment, McQuade never opened a brokerage account on behalf of the Foundation and, instead, McQuade misappropriated the Foundation's funds for his personal benefit, including transferring the funds to personal accounts and spending the money on restaurants, country club dues, luxury car payments, mortgages, and other personal items.  To conceal his misappropriation of the Foundation's funds, McQuade allegedly continued to make misrepresentations to the Foundation about their investment-even providing a fabricated account statement, to create the false appearance that the Foundation's funds were held in an investment account for the benefit of the Foundation.  To date, despite repeated requests, the Foundation has been unable to recover any of its funds.
As alleged in part in the DOJ Release:

According to court documents, Daryl Bank, 51, of Port St. Lucie, Florida, ran an investment fraud scheme from approximately January 2012 through July 2017, based in the Tidewater area and Port St. Lucie, and operating across the country. Bank and his co-conspirators-including his attorney, Billy Seabolt, 56, of Williamsburg; corporate executive Raeann Gibson, 49, of Florida; and salesman Roger Hudspeth, 52, of Chesapeake-deceived hundreds of unsuspecting investors, most of whom were at or near retirement age, by fraudulently convincing them to invest in companies owned and controlled by Bank. At Bank's direction, co-conspirators stole significant portions of investment contributions to fund their criminal enterprise and Bank's lavish lifestyle.

. . .

In 2010, Bank, then a registered securities broker, was barred from the securities industry by the Financial Industry Regulatory Authority. Undeterred, Bank created an investment company called Dominion Private Client Group (Dominion) and continued to sell unregistered securities on his own and through insurance salesmen across the country. Seabolt, whose legal practice was otherwise focused on elder and trust law, served as Dominion's legal counsel and was involved in negotiating and developing many of the fraudulent investments and corporations.

The conspirators made material misrepresentations and omissions to sell illiquid, highly speculative investment vehicles. Based on these fraudulent representations, unsuspecting investors cashed out of 401(k) and other retirement accounts to invest in Bank's investments, without knowing that Bank immediately transferred 20%-70% of the investors' funds to other companies that he controlled in the form of purported "fees," much of which he ultimately spent on luxury and designer goods. As a result of this investment fraud scheme, the victims suffered losses in excess of $25 million.

Bank, who was convicted on all 27 counts submitted to the jury, was sentenced today to 35 years in prison for conspiracy, mail and wire fraud, selling unregistered securities, securities fraud, and money laundering. Seabolt was sentenced on September 15 to 10 years in prison on multiple conspiracy, mail fraud, and sale of unregistered securities charges. 

Gibson pleaded guilty to conspiracy and was sentenced to 10 years in prison in February 2020. Hudspeth pleaded guilty to investment advisor fraud and money laundering, and was sentenced to over 12 years in prison in May 2018.
In a Complaint filed in the United States District Court for the Western District of Texas, the SEC charged Leena Jaitley d/b/a Managed Option Trading and Options By Pros 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) and 206(2) of the Investment Advisers Act of 1940; and further named as Relief Defendants: Taraben Patel and OTA LLC. As alleged in part in the SEC Release

[J]aitley operated two fraudulent websites called Managed Option Trading and OptionsbyPros. As alleged, clients would provide with the websites access to their on-line brokerage accounts and allow traders purportedly employed by the websites to trade options on their behalf, in return for a "start-up" fee and a percentage of the profit generated by those trades. The SEC alleges that to convince investors to subscribe for the services, Jaitley falsely claimed, among other things, that the websites used a unique, proprietary system designed to generate profits, had a long track record of successful investing, and employed scores of traders in New York with experience at large and reputable broker-dealers. Jaitley also allegedly solicited and published fake testimonials and positive reviews by supposed clients of the websites. According to the complaint, however, the only "traders" at the websites were Jaitley and, possibly, her now-deceased, 84-year-old father - neither of whom had any relevant education or experience or any unique, proprietary system for reliably producing trading profits from trading options. The SEC alleges that ultimately, the websites frequently lost all or most of the money in their clients' accounts, and when clients complained about the trading losses, Jaitley, using an alias and posing as a representative of the websites, often responded by email or text message to falsely disavow any responsibility and blame the client or someone else for her losing trades.

Order Determining Whistleblower Award Claim ('34 Act Release No. 34-93055; Whistleblower Award Proc. File No. 2021-95)
The SEC's Claims Review Staff ("CRS") issued Preliminary Determinations recommending a Whistleblower Award of over $2.5 million to Claimant 1 and denying an award to Claimant 2. The Commission ordered that CRS' recommendations be approved. The Order asserts that:

[(1)] Claimant's information was significant, as it resulted in Enforcement staff initiating an investigation into misconduct by REDACTED ("the Company"), and it ultimately led to the Covered Action; (2) Claimant submitted information and documents to Enforcement staff, participated in interviews with Enforcement staff, and helped Enforcement staff identify key individuals and entities involved in the investigation; (3) Claimant's information and assistance helped Enforcement staff focus its investigation into the Company's conduct and helped the Commission conserve significant time and resources; and (4) Claimant raised *** concerns multiple times at the Company in efforts to remedy the relevant misconduct.
As set forth in part in the FINRA podcast notes:

As part of FINRA's Member Supervision Transformation, each firm was assigned a Single Point of Accountability - a senior leader in Member Supervision that helps firms navigate their experience with FINRA. 

Now that we are nearly two years into the new structure, we are joined on this episode by two SPOAs - Andrew McElduff and Brian Kowalski - to give us insight into their roles, how they interface with member firms, and how their positions have evolved since the new structure took effect in 2020.