Securities Industry Commentator by Bill Singer Esq

December 12, 2017

Company Halts ICO After SEC Raises Registration Concerns (SEC Press Release 2017-227) The SEC Press Release says that Munchee halted its initial coin offering ("ICO") after being contacted by the SEC, and without admitting or denying the findings, agreed to an order finding that its conduct constituted unregistered securities offers and sales. In the Matter of Munchee Inc., Respondent ( Order Instituting Cease-And-Desist Proceedings and Making Findings; '33 Act Release No. 10445; Admin. Proc. File No. 3-18304 / December 11, 2017), the SEC Order states in its "Summary:

Munchee is a California business that created an iPhone application ("app") for people to review restaurant meals. In October and November 2017, Munchee offered and then sold digital tokens ("MUN" or "MUN token") to be issued on a blockchain or a distributed ledger. Munchee conducted the offering of MUN tokens to raise about $15 million in capital so that it could improve its existing app and recruit users to eventually buy advertisements, write reviews, sell food and conduct other transactions using MUN. In connection with the offering, Munchee described the way in which MUN tokens would increase in value as a result of Munchee's efforts and stated that MUN tokens would be traded on secondary markets. 

Based on the facts and circumstances set forth below, MUN tokens were securities pursuant to Section 2(a)(1) of the Securities Act. MUN tokens are "investment contracts" under SEC v. W. J. Howey Co., 328 U.S. 293 (1946), and its progeny, including the cases discussed by the Commission in its Report of Investigation Pursuant To Section 21(a) Of The Securities Exchange Act of 1934: The DAO (Exchange Act Rel. No. 81207) (July 25, 2017) (the "DAO Report"). Among other characteristics of an "investment contract," a purchaser of MUN tokens would have had a reasonable expectation of obtaining a future profit based upon Munchee's efforts, including Munchee revising its app and creating the MUN "ecosystem" using the proceeds from the sale of MUN tokens. Munchee violated Sections 5(a) and 5(c) of the Securities Act by offering and selling these securities without having a registration statement filed or in effect with the Commission or qualifying for exemption from registration with the Commission. On the second day of sales of MUN tokens, the company was contacted by Commission staff. The company determined within hours to shut down its offering, did not deliver any tokens to purchasers, and returned to purchasers the proceeds that it had received.  

Romanian Man Sentenced for Role in International Fraud Scheme Involving Online Marketplace Websites (DOJ Press Release)

After previously pleading guilty to conspiracy to commit bank and wire fraud, Vlad Diaconu,was sentenced to 29 months in prison and ordered to pay $834,841.75 in restitution for his participation in an international scheme involving fraudulent advertisements on online marketplaces that induced victims to send over $870,000 to conspirators for the purchase of various items that were not actually available for purchase.  As set forth, in part, in the DOJ Press Release:

Diaconu admitted that co-conspirators fraudulently listed vehicles for sale at online marketplaces such as eBay.  When victims expressed interest in purchasing the vehicles, co-conspirators responded with emails directing the victims to wire payments to specified bank accounts, which the victims believed were going to serve as escrow accounts until the victims received the vehicle they wished to purchase.  In reality, these bank accounts were opened by Diaconu and his co-conspirators, who used false identities and fraudulent documents, including counterfeit passports, when opening the accounts.  Twelve victims sent approximately $185,000 to accounts opened by Diaconu.  Another 35 victims sent approximately $688,000 to accounts opened by Diaconu's co-conspirators.  Diaconu and his co-conspirators subsequently sent the bulk of the money to co-conspirators located overseas.  The victims never received the vehicles they intended to purchase.

IBERIABANK Agrees to Pay Over $11.6 Million to Resolve Alleged False Claims Act Liability for Submitting False Claims for Loan Guarantees (DOJ Press Release)

Former Iberiabank employees Kelley R. Shackleford and Karen Mills, who were employed with IBERIABANK filed claims under the False Claims Act ("FCA") against their firm and will now receive a 20% of any resulting recovery arising out of IBERIABANK Corporation, IBERIABANK and IBERIABANK Mortgage Company (collectively, IBERIABANK) agreement to pay the United States $11,692,149 to resolve the FCA allegations. As alleged in part in the DOJ Press Release:

Between Jan. 1, 2005, and Dec. 31, 2014, IBERIABANK certified for FHA insurance mortgage loans that did not meet HUD underwriting and origination requirements and were, therefore, ineligible for FHA mortgage insurance under the DE program.  HUD paid FHA insurance claims on certain of these ineligible mortgages, and these included ones where IBERIABANK's loan files contained inadequate documentation of the borrower's income, unresolved appraisal discrepancies concerning declining home values in the relevant neighborhood, and inadequate verification related to the borrower's down payment. 

Between 2005 and 2014, IBERIABANK paid incentive payments to underwriters and others who performed underwriting activities.  After a HUD review of IBERIABANK in 2010 notified the Bank that it was not in compliance with the underwriter commission prohibition, IBERIABANK advised HUD that it was no longer paying underwriter commissions.  However, the Bank did not disclose to HUD that it was paying underwriters incentive payments and that it continued to do so through 2014.

Between 2005 and 2014, IBERIABANK did not timely self-report material violations of HUD requirements.  Internal IBERIABANK audits and reviews during this time period found that the Bank's quality reviews were not being performed in a timely manner and did not comply with other HUD requirements.

As a result of IBERIABANK's conduct and omissions, HUD insured loans approved by the Bank that were not eligible for FHA mortgage insurance under the DE Program and that HUD would not otherwise have insured.  HUD subsequently incurred losses when it paid insurance claims on those loans.

Stock Trader Charged in Insider Trading Ring (SEC Press Release 2017-228) According to the SEC Press Release, the federal regulator charged a former day trader Joseph Sera with making more than $1 million in illegal insider trading profits as part of a ring that allegedly stole confidential information from investment banks and clients so they could trade in advance of secondary stock offerings. A parallel federal criminal action against Spera, who agreed to plead guilty. Previously, Paul Petrello, Steven Costantin, and Ronald Chernin pleaded guilty in the criminal actions and agreed to partial settlements in the SEC cases with potential monetary sanctions to be determined at a later date.  Litigation continues against the alleged ringleader Steven Fishoff. As set forth in part in the "Summary" portion of SEC, Plaintiff, v. Joseph Spera and Joleine, Inc., Defendants (Complaint, 17-CV-12875, United States District Court for the District of New Jersey):

1. This case involves a serial insider trading scheme perpetrated by a group of stock traders that generated over $5.45 million in total profits for the group. Spera was one of the traders that profited unlawfully from the scheme, making a total of over $1 million in illegal insider trading profits. The primary component of the scheme was the systematic misappropriation of material non-public information from investment banks confidentially marketing secondary stock offerings by publicly traded issuers. The individuals who participated in this aspect of the scheme - including the leader Steven Fishoff ("Fishoff"), Paul Petrello ("Petrello"), Ronald Chernin ("Chernin"), Steven Costantin ("Costantin"), and Spera - together made a total of over $3.96 million by obtaining advance knowledge of the offerings from the investment banks and then, after tipping other members of the group, selling short the issuers' stock before the offerings were publicly announced. The confidential offering information obtained by these defendants was material because the offering shares were sold by the issuers at a discount to the market price and diluted the holdings of existing shareholders. As a result, the issuers' stock prices dropped substantially after the offerings were announced, thus enabling members of the group who shorted the stocks to cover their short sales at a hefty profit. 

Season's Greetings From FINRA. You're Fined And Suspended. Ho, Ho, Ho 

We're nearing year-end and for many industry employees that means another cycle of annual compliance disclosures is on its way. You will get the office memo about how you need to make time to sit down at the computer and click your way through a batch of "YES" and "NO" responses about all sorts of events that may or may not have happened to you during the past year. Then there are those other queries about whether you engaged in this type of activity or have any of the following such-and-such outside accounts or if you were named in some legal proceeding. Year after year it's pretty much the same nonsense, as you would put it. The thing is, you may not have considered that you never disclosed something a few years ago because you didn't realize that you had to -- and you're continuing to answer "NO" when you should answer "YES." Then there's that other bit of language on the annual form that they changed last year and the way it's now re-worded should elicit a different response from you but for the fact that you're assuming it's the same old language that you've read every year in the past. Well . . . season's greetings and all that but, hey, you better slow down this year and make sure that you know what you're being asked to disclose. Consider a recent FINRA disciplinary settlement.