The Wall Street Legal & Regulatory Feed
Securities Industry Commentator by Bill Singer Esq WEEK IN REVIEW
July 21, 2018
SEC Charges Cape Cod-Based Investment Adviser with Fraud (SEC Litigation Release No. 24208)
The SEC filed a Complaint in the United States District Court for the District of Massachusetts charging investment adviser Kimberly Pine Kitts with having engaged in a six-year scheme to steal money from client accounts by forging client signatures on withdrawal requests from variable annuities, forging client signatures to wire funds from client brokerage accounts, and misleading clients into withdrawing funds to make fake tax payments. The Complaint alleged that Kitts stole over $3 million via 82 unauthorized withdrawals from seven clients, and then tried to conceal her fraud through falsified account statements and other documentation. Kitts purportedly used the money she stole for personal expenses, including paying for vacations and several luxury vehicles. READ the FULL TEXT Complaint
Federal Court in District of Columbia Orders "Prediction Market" Companies to Pay $3 Million Civil Monetary Penalty for Illegally Trading Binary Options and Violating a 2005 CFTC Cease and Desist Order (CFTC Press Rel. 7738-18) The United States District Court for the District of Columbia issued an Opinion and Order (Order) against Defendants Intrade The Prediction Market Limited (Intrade) and Trade Exchange Network Limited (TEN) requiring them to pay, jointly and severally, a $3 million civil monetary penalty for violations of the Commodity Exchange Act (CEA) and CFTC Regulations. The Court had previously granted CFTC summary judgment on two counts of a 2012 Complaint filed against Intrade and TEN. The Court found that TEN and Intrade had permitted U.S. customers to trade 5,503 binary option contracts involving CFTC-regulated commodities from September 2007 through June 25, 2012 in violation of the CFTC's ban on off-exchange options trading. The Court also found that TEN violated a 2005 Cease and Desist Order that the CFTC issued against TEN for similar conduct. READ the FULL TEXT Orders and Opinion.
Morgan Stanley Customer Sues Over Dormant Account Charges (BrokeAndBroker.com Blog) An angry Morgan Stanley customer had what he deemed a dormant account. They didn't give me any advice for 16 years, he complained. But they sure as hell racked up charges for doing nothing, he fumed. All of which prompted him to file a FINRA arbitration seeking damages. The litigation cards get the old Wall Street shuffle. Place your bets on the customer, the broker-dealer, and the stockbroker.
Federal Court Orders Estonian Forex Dealer to Pay over $10 Million in Sanctions for Defrauding U.S. Customers and Orders Introducing Broker that Solicited for Dealer to Pay $85,000 Penalty / Tallinex Ltd. Ordered to Pay nearly $10.3 Million in Restitution to Defrauded Customers and Defendants Ordered to Pay Civil Monetary Penalties Totaling More than $760,000 (CFTC Release 7757-18) In response to a CFTC Complaint, the United States District Court for the District of Utah entered an Order for Final Judgment by Default against Tallinex, a/k/a Tallinex, Ltd. (Tallinex), an Estonian company that was licensed to do business in St. Vincent and the Grenadines. The Default Order found that Tallinex operated as an unregistered foreign exchange dealer soliciting or accepting orders for leveraged or margined forex transactions from retail U.S. customers, and offered to be or was the counterparty to such contracts with its customers. Tallinex falsely represented that it was lawfully doing business in the United States, that customer funds were segregated and protected, and that forex investments made with it were likely to be profitable so that it could increase its number of customer accounts. The Default Order requires Tallinex to pay $10,289,391 in restitution to U.S. customers and a civil penalty of $681,888; and permanently prohibits Tallinex from violating the Commodity Exchange Act, as charged. Additionally, the Court entered a Consent Order against General Trader Fulfillment (GTF), which was in the business of providing forex trading instruction and at least one of the firm's paid "coaches" introduced U.S. customers who were not eligible contract participants, to Tallinex for the purposes of opening and maintaining individual forex trading accounts and participating in off-exchange retail forex transactions at Tallinex -- which constituted GTF acting as an unregistered introducing broker. The Consent Order requires GTF to pay an $85,000 civil monetary penalty and permanently prohibits GTF from violating the CEA, as charged. READ the FULL TEXT Orders.
SEC Charges Officers of Florida Battery Company with Securities Fraud (SEC Litigation Release 24207) In a Complaint filed in the United States District Court for the Middle District of Florida, the SEC alleged that the defunct Oakridge Global Energy Solutions, Inc.'s former CEO Stephen J. Barber made false and misleading statements in six press releases concerning Oakridge's signed agreements to supply battery systems to Maritime Tactical Systems, Inc. and Freedome Motores, LLC; and that former President Lee Larry Arrowood substantially assisted Barber with drafting those knowingly false press releases. The SEC alleges that Oakridge had only provided test batteries to those companies for their consideration for possible future orders. Further, the SEC alleged that Barber and Arrowood misrepresented that Oakridge had received $250,000 in "immediate booked orders" and more than $20 million in "follow on commitments" for its "state-of-the-art" lithium golf cart batteries, and had "existing pipeline orders" of $24 million for its batteries. Arrowood has consented to the entry of a final judgment permanently enjoining him from future violations of Exchange Act Section 10(b) and Rule 10b-5, barring him from serving as an officer or director of a public company, and ordering him to pay a civil penalty of $50,000. READ FULL TEXT SEC Complaint
SEC Charges Wyoming Man for Offering Fraud Targeting Elderly Ministry Members (SEC Litigation Release No. 24211) In a Complaint filed in the United States District Court for the District of Wyoming, the SEC alleged that Edward A. Young and his wholly-owned entity Guardians Trustee, LLC with fraudulently raising money from members of an online ministry lby promising returns of 400% through operation of a purported private banking facility and assuring that funds would be indemnified against loss. The Complaint asserts that the defendants misappropriated investor funds to pay for Young's personal expenses, another individual's child support, and start-up costs for an unrelated entity. Further, defendants allegedly failed to disclose prior orders against Young for securities fraud and criminal theft. Investors allegedly lost all of their invested funds. Without admitting or denying the allegations, Young and Guardians Trustee agreed to pay, jointly and severally, disgorgement of $170,000 and prejudgment interest of $9,253, and to be enjoined from future securities laws violations. Young has also agreed to be enjoined from participating in the issuance, purchase, offer, or sale of any securities, other than trading in his personal account. READ the FULL TEXT Complaint
Two Connecticut Men Charged for Deceptive Trading Practices Executed on U.S. Commodities Markets (DOJ Press Release) Precious metals traders Edward Bases and John Paciliowere each Indicted in the United States District Court for the Northern District of Illinois on one count of conspiracy to commit wire fraud affecting a financial institution and commodities fraud and one count of commodities fraud each; further, Pacilio was charged with five counts of spoofing. Allegedly, the defendants and their co-conspirators placed orders that they did not intend to execute in order to create the appearance of false supply and demand and to induce other market participants to trade at prices, quantities and times that they otherwise would not have traded. READ the FULL TEXT INDICTMENT
Austin-Based Nigerian Money Launderer Sentenced to Federal Prison for Romance Scams / Woman Took Her Own Life upon Learning She Was Victim of Romance Scam (DOJ Press Release) Kingsley Otuya pled guilty in the United States District Court for the Western District of Texas to one count of conspiracy to commit money laundering in connection with an online romance and investment scams. One victim took her own life after losing hundreds of thousands of dollars and being emotionally devastated by the romance scam. Otuya was sentenced to 135 months in federal prison plus three years of supervised release, and ordered to pay $966,617.31 restitution. Court records indicate that Otuya faces likely deportation back to Nigeria as a result of this conviction.
Morgan Stanley Broker Fined And Suspended For NSF Wires Into His Personal Account (BrokeAndBroker.com Blog) Embedded in popular culture is the dubious moral proposition that "ya do what ya gotta do." This mind-set often manifests itself when we decide that something is "wrong" but immediately follow that thought with "but." And don't even pretend that you haven't come to that threshold at various points in your life and stepped over. Some of us quickly step back. Others stand still. Others move further into the darkness to a place from which there is no return. In a recent FINRA regulatory settlement, we got a guy who sent wires from one of his bank accounts to another at a time when he didn't have covering funds. This bit of financial sleight-of-hand got him fired by his employer. Then it got him fined and suspended by Wall Street's self regulator. BrokeAndBroker.com Blog publisher Bill Singer doesn't excuse or defend the stockbroker. That much is clear. Bill does ask some uncomfortable questions and provides a number of unsettling answers.
SEC Charges Investment Adviser and CEO With Misleading Retail Investors (SEC Press Release 2018-137) In a Complaint filed in the United States District Court for the District of Connecticut, the SEC alleged that investment advisory firm Temenos Advisory Inc. and its CEO George L. Taylor with putting $19 million of investor money, including elderly investors' retirement savings and pension plans, into four risky, illiquid private offerings and secretly pocketing commissions. READ the FULL TEXT SEC Complaint
SEC Adopts Rules to Enhance Transparency and Oversight of Alternative Trading Systems (SEC Press Release 2018-136) The SEC adopted amendments to Regulation ATS to enhance operational transparency and regulatory oversight of alternative trading systems (ATSs) that trade stocks listed on a national securities exchange. Certain ATSs will be required to file detailed public disclosures on new Form ATS-N.
Indictment: Man Behind Cyberattacks Was Working for Wichita Lawyer (DOJ Press Release) Wichita Attorney Bradley A. Pistotnik and the co-founder of VIRAL Artificial Intelligence David Dorsett were charged in an Indictment in the United States District Court for the District of Kansas with five counts of computer fraud and two counts of conspiracy; additionally, Pistotnik is charged with three counts of making false statements to the FBI. The charges arose in connection with allegations that Pistotnik and Dorsett were responsible for cyberattacks on Leagle.com, Ripoffreport.com and JaburgWilk.com. The Indictment alleges that Dorsett sent threatening emails to the sites threatening to targe advertisers unless negative postings about Pistotnik were removed. When questioned by the FBI, Pistotnik purportedly claimed that:
- Dorsett told him about a negative posting on Riffoffreport.com and offered to remove it. The Indictment alleges that Pistotnik told Dorsett about the negative posting and said to Dorsett, "tell me how to get rid of it;"
- a week after Dorsett told him the negative posting had been removed that an attorney for Ripoffreport.com contacted him. The Indictment alleges that the company's attorney contacted Pistotnik during the attack and before Pistotnik paid Dorsett for his services; and
- he received two emails from Dorsett relating to the attack on Ripoffreport. The Indictment alleges that he received four such emails, including an invoice for the attack and one referencing the invoice as well as the method used to make the attack.
In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, BGC Financial, L.P. submitted an Offer of Settlement, which the federal regulator accepted. In the Matter of BGC Financial, L.P., Respondent (Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order, '34 Act Rel. No. 83650; Admin. Proc. File No. 3+-18598 / July 18, 2018). BGC agreed to a cease-and-desist order, a censure, and a $1.25 million penalty. READ the FULL TEXT Order. As set forth in part in the SEC Press Release:
The SEC's order finds that after receiving document requests in 2014 from the SEC's Division of Enforcement, BGC deleted audio files for the recorded telephone lines of eight brokers that were responsive to the document requests. According to the order, the department responsible for maintaining voice recordings was unaware of the SEC's request and deleted the files in keeping with the firm's policy of not maintaining them after one year.The SEC order also finds that BGC failed to maintain books and records that accurately recorded compensation, travel, entertainment, and gifts. BGC provided a high performing broker with season tickets for a New York-area sports team that cost more than $600,000 per year, and failed to record the payments for the tickets as compensation in its general ledger. BGC also reimbursed this same broker for more than $100,000 of expenses associated with an international trip for his birthday and other foreign travel that lacked a sufficiently documented business purpose. BGC inaccurately recorded these items in its books and records as selling and promotion. BGC also reimbursed a different broker for thousands of dollars of personal expenses spent on his birthday party, his bachelor party, and two separate trips to Las Vegas for his friends' bachelor parties.
In the Matter of the Application of Mark E. Laccetti, CPA For Review of Disciplinary Action Taken by the PCAOB (Order Vacating Disciplinary Action and Cancelling Sanction, '34 Act Rel. No.83659, Admin Proc. File No. 3-16430) Following the decision to the United States Court of Appeals for the District of Columbia Circuit vacating the SEC's decision and remanding with orders to vacate the PCAOB's underlying orders and sanctions, the SEC ordered same. For details of the underlying PCAOB case, SEC review, and DCCir appeal read: "UPDATE: SEC Vacates PCAOB Action In Laccetti And Cancels Sanctions" (BrokeAndBroker.com Blog)
SEC Charges Asset Manager for Stealing Client Assets and Due Diligence Failures (SEC Litigation Release No. 24205) The SEC filed a Complaint in the United States District Court for the Southern District of New York charging John Geraci with violating the antifraud provisions of the federal securities laws. The SEC seeks permanent injunctions, an officer and director bar, and disgorgement of ill-gotten gains plus penalties. READ the FULL TEXT SEC Complaint
A parallel criminal action was filed against Geraci in the same court. Fund Portfolio Manager Nicholas Mitsakos pled guilty in a parallel criminal action. As set forth in part in the SEC Litigation Release:
The SEC alleges that John Geraci formed the Meridian Matrix Long Short Equity Fund in 2015, and hired Nicholas Mitsakos and his company, Matrix Capital Markets, as the fund's portfolio manager. Mitsakos had no assets under management, but falsely claimed that he managed millions of dollars of assets and that he had generated returns of up to 66 percent in preceding years. Rather than verifying these claims, the complaint alleges that Geraci used Mitsakos' false and unsubstantiated claims to market his fund, and eventually obtained $2 million from investors. Geraci later learned of Mitsakos' deception, and that he had misappropriated approximately $800,000 of the investors' money, but continued to market the fund and to let Mitsakos trade the clients' assets. Mitsakos returned approximately $1 million of the funds to Geraci, which Geraci then misappropriated for his own use, telling his clients that Mitsakos had lost all of it.
Chinese National Charged With Insider Trading Scheme Conducted With Principal Of Private Equity Fund (DOJ Press Release) Michael Yin a/k/a/Shaohua Yin, who remains at large, was indicted in the United States District Court for the Southern District of New York on one count of conspiring to commit securities fraud and 13 counts of securities fraud in connection with his alleged insider trading in the securities of Lattice Semiconductor Corporation. Federal prosecutors allege from about March 2016 to February 2017, Yin obtained from a friend and business associate, Benjamin Chow, material nonpublic information relating to a potential merger between Lattice and successive private equity firms managed by Chow, and thereafter, Yin used such information to make over $5 million in trading profits. Chow was found guilty in a jury trial of several offenses for his role in the scheme and is awaiting sentencing. READ the FULL TEXT Indictment
Former State Street Corp. Executive Convicted of Defrauding Customers (SEC Litigation Release No. 24200) Ross McLellan, a former State Street Corp. executive, was convicted by a jury in the United States District Court for the District of Massachusetts of engaging in a scheme to defraud customers of State Street's Transition Management line of business. In that criminal case, McLellan was found guilty of applying secret commissions to billions of dollars of securities trades executed on behalf of these customers. A parallel SEC civil case continues.
87 Year Old Stifel Nicolaus Customer, His Stockbroker, and 33 Blank Account Checks (BrokeAndBroker.com Blog) Let's see if you can guess where this fact pattern is going and how it will end. We got an 87 year old customer. The customer gives to his stockbroker blank checks to be drawn against his brokerage account. Those checks are to be used only in the event that the elderly customer can't write out the checks for the sole purpose of paying his caregivers. Hmmm . . . what could possibly go wrong?
SEC Files Charges in Busted Microcap Schemes (SEC Litigation Release No. 24201) In a Complaint filed in the United States District Court for the Southern District of California, the SCE alleged that stock promoter Gannon Giguiere took control of a purported medical device company, whose share price he caused to rise from zero to $1.20 per shar via a matched trading scheme. Brokerage owner, Oliver-Barret Lindsay, allegedly coordinated the matched trading through an individual who turned out to be an FBI cooperating witness. The Complaint further names Kevin Gillespie, Annetta Budhu, and Andrew Hackett for entering into a number of pump-and-dump scheme, with Hackett communicating with someone he believed to be a participant in the scheme but who was an undercover FBI agent. The U.S. Attorney's Office for the Southern District of California has announced criminal charges in the case. READ the FULL TEXT SEC
SEC Halts Fraudulent Hi-Tech Scam (SEC Litigation Release No. 24199) In a Complaint filed in the United States District Court for the District of Hawaii, the SEC alleged that Marianne Veronika Sandor, her husband Edward Michael Porrazzo falsely told investors that their company, Moddha Interactive, Inc.,had a valuable portfolio of patents for a supposed 3-D technology to be used with tablet devices. Allegedly, the patents had expired and were worthless, and the technology either did not exist or was developed by other, unrelated companies. In raising funding for the company, Sandor and Porrazzo allegedly lied about a share dividend buy-back program and how the use of investor proceeds. Further, Moddha Interactive allegedly paid over $200,000 in sales commissions to co-Defendant Spar Street, who purportedly READ the FULL TEXT SEC Complaint
SEC Obtains Final Judgments Against Defendants in Ticket Investment Scheme (SEC Litigation Release No. 24203) The United States District Court for the Southern District of New York entered final judgments against Defendants Matthew Harriton and 875 Holdings, LLC, and relief defendants MXCU Holdings, LLC and Mash Transactions, LLC in connection with a multi-million dollar Ponzi scheme involving purported resales of tickets to popular concerts and Broadway shows. The defendants collectively agreed to pay over $8.3 million in disgorgement, prejudgment interest, and civil penalties. Harriton was permanently enjoined him from violating Sections 17(a)(2) and (3) of the Securities Act of 1933 ("Securities Act") and ordered to pay $1,375,785, including disgorgement, prejudgment interest, and a civil penalty. was 875 Holdings permanently enjoined from violating Section 17(a) of the Securities Act, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and ordered it to pay a total of $6,573,542, including disgorgement, prejudgment interest, and a civil penalty. Relief Defendants MXCU Holdings and Mash Transactions were ordered to pay a total of $342,491 and $65,877, respectively, in disgorgement and prejudgment interest.
O.C. Man Sentenced to 41 Months in Federal Prison for Investment Scam that Defrauded Local Businessman out of Nearly $650,000 (DOJ Press Release) After a two-day jury trial in the United States District Court for the Central District of California, Aiman Alexander was found guilty on eight counts of mail fraud and three counts of money laundering in connection with his defrauding an individual into investing in Ataba's Innovation Validation and Design Technologies, which would allegedly use the funds to manufacture and sell a device that would be used in hospitals for stem cell research. In furtherance of his fraud, Ataba had claimed that his company was on the verge of being acquired. Ataba converted the investment to pay for his rent, living expenses, dining out, and gambling, as well as overseas wire transfers. Ataba was sentenced to 41 months in federal prison and ordered to pay $648,070 restitution.
Eight Defendants Indicted for Stock Fraud-Related Offenses (DOJ Press Release) Luke Zouvas was indicted in the United States District Court for the Southern District of California for laundering money he believed to be proceeds of stock fraud schemes. Separately, Gannon Giguiere was charged with manipulating the market for the stock of Eco Science Solutions, Inc. and Kelvin Medical, Inc.; and Oliver Lindsay was charged with participating in the scheme.In yet another indictment, Andrew Hackett, Vikram Khanna, Kuldeep Sidhu, Annetta Budhu and Kevin Gillespie were charged with manipulating the market for the stock of Arias Intel, Corp.
Florida Man Sentenced to 7 Years in Prison for Role in Stock "Pump and Dump" Scheme (DOJ Press Release)
After pleading guilty to one count of conspiracy to commit mail and wire fraud, and one count of tax evasion, William Lieberman was sentenced in the United States District Court for the District of Connecticut to 84 months in prison and three years of supervised release. Federal prosecutors had alleged that between about 2010 and July 2016, Lieberman had engaged in a "pump and dump" scheme whereby he and his co-conspirators induced investors to purchase securities included Terra Energy Resources Ltd. (stock symbol "TRRE"); Mammoth Energy Group, Inc. (stock symbol "MMTE"), a company that later became Strategic Asset Leasing Inc. (stock symbol "LEAS"); Trilliant Exploration Corporation (stock symbol "TTXP"); Hermes Jets, Inc. (stock symbol "HRMJ"), which later became Continental Beverage Brands Corporation (stock symbol "CBBB"); Dolat Ventures, Inc. (stock symbol "DOLV"), and Fox Petroleum, Inc. (stock symbol "FXPT"). At various times, Lieberman was the Chief Executive Officer, Chairman of the Board, President, Secretary, and Treasurer of Mammoth Energy Group, Inc.; the President, Chief Executive officer, and Chairman of the Board of Strategic Asset Leasing Inc.; the President, Chief Accounting Officer, Chief Executive Officer, Chief Financial Officer, Secretary, and Treasurer of Fox Petroleum, Inc.; and the Chief Executive Officer, President, Treasurer, Secretary, and Chief Financial Officer of Trilliant Exploration Corporation. As part of the scheme, Lieberman purportedly arranged for attorneys to sign false and misleading opinion letters that were designed to provide assurances to securities transfer agents and prospective investors. After selling their own shares at a profit, the conspirators allowed the price of the securities to fall, leaving investors with worthless and unsalable stock. As a result, more than 12,000 victim investors collectively lost nearly $19 million. Between 2011 and 2015, Lieberman allegedly earned about $1.2 million through this scheme, which he failed to report to the Internal Revenue Service, evading $436,235 in federal income taxes for the 2011 through 2015 tax years. As part of his sentencing, Lieberman was ordered to $5,301,694 in restitution and $436,235 to the IRS. Co-conspirators Christian Meissenn, Corey Brinson, Diane Dalmy and three other individuals also pleaded guilty to various offenses stemming from this scheme. Brinson and Dalmy were each sentenced to 36 months of imprisonment; Damian Delgado a/k/a "Michael Neumann" was sentenced to 84 months of imprisonment. Brian Ferraioli and Thomas Heaphy, Jr., were each sentenced to 72 months of imprisonment. Meissenn awaits sentencing.
Crowdfunding Portal StartEngine Loses Customer Arbitration (BrokeAndBroker.com Blog)
Another day, another FINRA arbitration, and another complaint from BrokeAndBroker.com Blog's publisher Bill Singer, Esq about the lack of quality control over FINRA's arbitration decisions. Pointedly, Bill cites the lack of content and context sufficient to render a decision intelligible. On top of all of that, today's featured arbitration involves two interesting quirks: the Claimant is a FINRA funding portal member and the arbitration forum waived the firm's member surcharge and fees.
Woman Sentenced For Defrauding Donors Of Over $50,000 By Misrepresenting That She Had Terminal Cancer (DOJ Press Release) Vdoutie Hoobraj a/k/a "Shivonie Deokaran" pled guilty in the United States District Court for the Southern District of New York to an information alleging wire fraud in connection with defrauding donors by falsely claiming that she had been diagnosed with terminal cancer and needed money to pay for her treatments. She was sentenced to 24 months in prison, three years of supervised release, and ordered to pay a $51,938 forfeiture and $47,741.20 restitution.
Indiana, Pa. Bank Employee Sentenced for Embezzling Funds from Customers' Accounts (DOJ Press Release)
Former First Commonwealth Bank Assistant Manager Madeline Isenberg was sentenced in the United States District Court for the Western District of Pennsylvania to one day in prison, six months of community confinement, and six months of home confinement following her conviction of embezzling about $88,000 from customers' accounts. The Bank reimbursed the customers.
Seven Nigerian nationals indicted for operating online romance fraud scheme that cost victims nationwide over $1.5 million in losses (DOJ Press Release) In two indictments filed in the United States District court for the Northern District of Georgia, Olu Victor Alonge, a/k/a Serge Damessi, a/k/a Didier Baraze, a/k/a Mobo Marcus Adeh, a/k/a Ayo Baraze, a/k/a Nicolas Soglo; Ugochukwu Lazarus Onebunne, a/k/a Policap Tizhe, a/k/a Saheed Ademoha; Olajide Olalekan Adara, a/k/a Kelvin Mensah; Joshua Adedeji Ipoade;and Oladunni Temitope Oladipupo were charged with a total of 60 counts of wire fraud, money laundering, identity theft, and use of false passports. Two other defendants are fugitives. The indictments allege that the defendants created phony dating profiles on popular online dating websites and used their fake online personas to frequently target vulnerable individuals who were persuaded to send money to the conspirators.