Securities Industry Commentator by Bill Singer Esq

[T]he charge stemmed from Burke's operation of a mass-mailing fraud scheme that misled consumers into believing that they had won large cash prizes, often millions of dollars. Burke specifically mailed consumers solicitations that used fake names and, in many cases, looked like they came from law firms or financial institutions, advising consumers to pay a fee - usually $20 to $30 - to claim their promised winnings.  Once consumers paid, however, Burke never sent any consumer a promised prize.  

Burke, along with Rossi, also pleaded guilty to conspiracy to commit mail and wire fraud for running a fraudulent telemarketing operation.  Telemarketers working for Burke and Rossi falsely told victims that they had won one of five valuable prizes, typically: a Chevy Camaro; a Boston Whaler boat; a diamond-and-sapphire bracelet; $3,000 cash; or a cruise that could be exchanged for $2,300.  To claim the prize, consumers were told to pay hundreds, or in some cases thousands, of dollars.  Once they paid, victims received a nearly worthless piece of costume jewelry or nothing at all.  

In January 2013, the FTC filed a civil contempt case against Burke for violating the 1998 court order.  The district court found Burke in civil contempt and ordered him to pay contempt sanctions of over $20 million, reflecting consumer loss from both the telemarketing and mass-mailing schemes. 

[B]efore February 2015, Feng told his clients he received referral fees only if they asked him. Id. at 16; Feng Decl. at 9. Respondents did not tell their clients about the referral fees because they did not want to have to return a portion of them to their clients. Div. Ex. 3 at 19.1 Also, Respondents never registered as brokers with the Commission. Id. at 15. 

On these facts, the district court found that Respondents acted as unregistered broker-dealers in violation of Section 15(a) of the Securities Exchange Act of 1934. Id. The district court further found that Respondents' failure to disclose to their clients that they received commissions was a material misrepresentation in connection with the offer or sale of a security, and that Respondents acted with scienter. Id. at 17-19. 

In addition, Feng told regional centers that he was working with individuals in China to procure investors and that those individuals were demanding the referral fees. Div. Ex. 3 at 21. Feng made it look like the referral fees were not going to him. See id. In reality, at Feng's direction, his relatives purported to be the overseas individuals demanding the referral fees and signed agreements with the regional centers on behalf of Atlantic Business Consulting Limited (ABCL), a Hong Kong entity Feng formed in April 2014. Id.; Feng Decl. at 8. Feng is the sole beneficial owner of ABCL and has sole control over its bank account. Div. Ex. 3 at 20-21. ABCL's employees were all employees of the Law Offices. Id. at 21. 

Feng failed to disclose to the regional centers that ABCL was his company, that his relatives had no role in finding investors, and that they had no actual role in ABCL. Id. at 21-22. At least one regional center would likely have ceased doing business with Feng if it had known about this arrangement. Id. at 22. Respondents offered no evidence that the regional centers were aware of Feng's real relationship with ABCL. Id. The district court therefore found that this conduct was a scheme to defraud the regional centers, and that the Commission proved that Respondents had violated  .

The district court ordered Respondents to jointly and severally disgorge the $1,268,000 in commissions that they received, in addition to $130,517.09 in prejudgment interest. Id. at 23. The district court imposed $160,000 in civil penalties against Feng and $800,000 against the Law Offices. Id. at 24. The court permanently enjoined Respondents from violating Section 17(a) of the Securities Act, and Sections 10(b), 15(a), and Rule 10b-5 of the Exchange Act. Div. Ex. 4 at 1-3. . .

On November 8, 2016, MURRAY, falsely purporting to be an officer at a China-based entity called ABM Capital, created an account on the SEC's Electronic Data Gathering, Analysis, and Retrieval (or "EDGAR") system.  The next day, MURRAY submitted a filing on EDGAR that reported that ABM Capital had offered to purchase Fitbit for approximately $12.50 a share, a significant premium to the price of Fitbit stock at the time.  This filing was made public on November 10, 2016, and, when it was, Fitbit's stock temporarily increased in response to the news.  While Fitbit's stock had closed at approximately $8.55 a share on November 9, 2016, it reached a high of approximately $9.27 per share, with significantly increased trading volume, after MURRAY's fake tender offer filing was made public.  This resulted in a temporary increase of Fitbit's market capitalization of around $100 million.  The tender offer that MURRAY filed, however, was entirely fictitious, and was instead meant only to increase the value of options in Fitbit stock that MURRAY had purchased just days earlier. 

MURRAY also took significant steps to hide his connection to the tender offer filing.  For example, he created a separate email account to register with the SEC and to file the sham tender offer, and took efforts to disguise his IP address when accessing that account. 

• Securities Industry Commentator
• Bill Singer