Securities Industry Commentator by Bill Singer Esq

A Wooster man was indicted in federal court after making threats purporting to be from women associated with an adult website.

Christopher Smallwood, 25, was indicted on one count of interstate transmission of a threat and one count of willfully making a threat.

Smallwood made a series of reports to the online ATF tip website about threats to kill people with explosives and firearms, to destroy government buildings and declarations of allegiance to terrorist organizations. Smallwood purported these threats came from women associated with the website myfreecams.com, according to the indictment. . .

From May 2005 to August 2016, Cody acted as an investment advisor and managed the retirement savings of three victims, including two in Massachusetts. Cody falsely assured the victims that their retirement savings were secure, when in fact he knew they were not. Contrary to his fraudulent assurances, by 2014, the total value of their retirement savings had substantially diminished, and the retirement savings of two victims were entirely gone. In order to conceal these losses, Cody provided the victims with fraudulent account statements and tax documents. In addition, Cody failed to inform his victims that regulators had suspended him in 2013 from acting as an investment advisor.

In addition, Cody lied to the SEC during a March 2017 sworn deposition in connection with a civil enforcement action the SEC had filed against him in December 2016. Cody made false declarations regarding fraudulent documents that he denied giving to two victims of the scheme.

WRIGHT participated in a scheme along with Craig Carton and Joseph Meli to induce investors to provide them with millions of dollars, based on representations that the investor funds would be used to purchase blocks of tickets to concerts and other live events, which would then be re-sold on the secondary market.  Carton and Meli purportedly had access to those blocks of tickets based on agreements that Meli had with a company that promotes live music and entertainment events (the "Concert Promotion Company") and that Carton had with a company that operates two arenas in the New York metropolitan area (the "Sports and Entertainment Company").  In fact, neither the Concert Promotion Company nor the Sports and Entertainment Company had any such agreement with Carton, Wright, or Meli, or any entity associated with them.  After receiving the investor funds, Carton, Wright, and Meli misappropriated those funds, using them to, among other things, pay personal debts and repay prior investors as part of a Ponzi-like scheme.  

For example, on December 8, 2016, a New York-based hedge fund (the "Hedge Fund") and Carton executed a revolving loan agreement (the "Revolving Loan Agreement"), under which the Hedge Fund agreed to provide Carton with up to $10 million, for the purpose of funding investments in the purchase of tickets of events.  The Revolving Loan Agreement provided, in sum and substance, that the proceeds of the loan would be used only to purchase tickets pursuant to agreements for the acquisition of tickets and for limited business expenses. The Hedge Fund would receive a share of the profits from the resale of the tickets.

Later in December 2016, Carton induced the Hedge Fund to wire $2 million to the Sports and Entertainment Company, based on a purported agreement he had with the Sports and Entertainment Company (the "Sports and Entertainment Company Agreement").  Under this supposed agreement, the Sports and Entertainment Company Agreement gave an entity controlled by Carton (the "Carton Entity") the right to purchase $2 million of tickets to concerts at one of the venues operated by the Sports and Entertainment Company.  Carton, among other things, sent the Hedge Fund a copy of the Sports and Entertainment Company Agreement that purportedly had been signed by the chief executive officer of the Sports and Entertainment Company.  However, this agreement was fraudulent and had never been entered into by the Sports and Entertainment Company or signed by the chief executive officer. 

On December 20, 2016, when the Hedge Fund wired the $2 million to the Sports and Entertainment Company for the purchase of tickets, Carton contacted the Sports and Entertainment Company and told them, in sum and substance, that the wire had been sent in error and should be sent to the bank account for an entity operated by Carton and WRIGHT, for which WRIGHT is the signatory. The prior day, December 19, 2016, WRIGHT had e-mailed Carton wire information for this account.   After the Sports and Entertainment Company's $2 million investment was diverted to that account, WRIGHT wired $966,000 to WRIGHT's bank account, of which WRIGHT sent approximately $690,000 to repay a gambling loan of Carton's which WRIGHT had guaranteed and approximately $250,000 to repay WRIGHT's personal home equity line of credit.  WRIGHT further diverted $40,000 of the Hedge Fund's investment for his own personal expenses, including to pay off credit card debt, and nearly $1 million to Carton's personal bank account.

The indictment alleges that between approximately 2013 and 2016, Boustani, Allam, Nhangumele, do Rosario, Chang, Pearse, Singh, Subeva and their co-conspirators ensured that the Investment Bank, and another foreign investment bank, would arrange for more than $2 billion to be extended, in three loans, to companies owned and controlled by the Mozambican government:  Proindicus S.A. (Proindicus), Empresa Mocambicana de Atum, S.A. (EMATUM) and Mozambique Asset Management (MAM).  The proceeds of the loans were intended to fund three maritime projects for which Privinvest was to provide the equipment and services.  Specifically, Proindicus was to perform coastal surveillance, EMATUM was to engage in tuna fishing and MAM was to build and maintain shipyards. 

Instead, the defendants and their co-conspirators illegally facilitated Privinvest's criminal diversion of more than $200 million of the proceeds of the loans.  These stolen funds included more than $150 million that Privinvest - at the direction of Boustani, Allam and others - used to bribe Chang, Nhangumele, do Rosario and other Mozambican government officials to ensure that companies owned and controlled by the Mozambican government would enter into the loan arrangements, and that the government of Mozambique would guarantee those loans.  In addition, Privinvest diverted approximately $50 million in kickback payments to Pearse, Singh and Subeva, who assisted the co-conspirators to obtain financing for the loans through the Investment Bank and the other foreign investment bank.  The loans were subsequently sold in whole or in part to investors worldwide, including in the United States.  In doing so, the participants in the scheme conspired to defraud these investors by misrepresenting how the loan proceeds would be used, the amount and maturity dates of other financial obligations held by Mozambique and the ability of the government of Mozambique to repay the loans. 

To date, the companies controlled by the government of Mozambique have failed to make more than $700 million of loan repayments that have become due.

Hager received $4.7 million dollars from 92 investors, with investment amounts from $1,000 to $267,000. After taking into account money repaid to investors during the course of the scheme, and money paid to investors by Hager after the scheme was exposed, the total loss amount is $3,236,547.

Hager deposited $394,074 into his business bank account. He also used the proceeds of the scheme, among other things, to make substantial payments on the mortgage of his 46.6-acre residential property and to purchase a Ford F-150 pickup truck, a Toyota 4Runner, and two Winnebago travel trailers. All of Hager's interest in that property has been forfeited to the government.

Hager convinced his victims that he was locating herds of cattle that farmers in distress needed to sell. He told them he would use investor funds to buy such herds, then transport the cattle to pastures/feed lots owned by himself or his company, 5A Holdings, where the cattle would be cared for, fattened, and eventually sold to slaughterhouses where Hager had "contacts." Hager consistently represented that these transactions would produce a net "return" of from 23 to 28 percent on each investment. Hager paid an individual to pose as a veterinarian when at least one investor traveled to Missouri to inspect the cattle herds. . .

Respondent Richard Wayne Demetriou, a registered representative employed by Respondent Titan Securities, is fined $40,000 and suspended from associating with any FINRA member in any capacity for one year and nine months; Respondent Brad C. Brooks, the sole owner, chief executive officer, and president of Titan, and Titan, are fined $50,000 jointly and severally, and Titan is fined an additional $15,000; and Brooks is suspended from associating with any FINRA member in any principal or supervisory capacity for two months. 

With regard to the first cause of action in the Complaint, Demetriou made false or misleading misrepresentations of fact in three widely distributed emails to 36 current and former customers. Demetriou is liable on the first cause of action and ordered to pay restitution in the amount of $84,425, plus prejudgment interest. The Hearing Officer dissents as to the amount of restitution. 

With regard to the second cause of action, a majority of the Hearing Panel finds that Enforcement failed to meet its burden of proof that Demetriou was employed or compensated as a result of an outside business activity. The second cause of action is dismissed. The Hearing Officer dissents. 

With regard to the third cause of action, a majority of the Hearing Panel finds that Enforcement failed to meet its burden of proof that Brooks and Titan had an obligation to supervise Demetriou's involvement in a securities offering as an outside business activity because Demetriou was neither employed nor compensated by any person in the offering. The third cause of action is dismissed. The Hearing Officer dissents. 

With regard to the fourth cause of action, Demetriou sent investment summaries and three widely distributed emails to his customers and former customers that contained inaccurate information and failed to provide a sound basis for evaluating the facts. Demetriou sent the three emails without obtaining approval by an appropriately qualified registered principal of Titan. Demetriou is liable on the fourth cause of action. 

With regard to the fifth cause of action, Brooks and Titan failed to establish, maintain, and enforce adequate supervisory systems for the capture, review, and retention of Titan's securities-related emails, and Titan failed to preserve such emails. Brooks and Titan are liable on the fifth cause of action. A majority of the Hearing Panel concludes that Enforcement did not meet its burden of proof that Titan committed a willful violation. The Hearing Officer dissents and would find that Titan's violation was willful. 

With regard to the sixth cause of action, Demetriou used two unauthorized personal email accounts to conduct securities business with customers of Titan. Demetriou is liable on the sixth cause of action. 

With regard to the seventh cause of action, a majority of the Hearing Panel finds that, in a "minimum-maximum" offering of limited partnership units, Titan unlawfully released investment funds from escrow before the minimum offering amount was raised from bona fide investors. One of the Hearing Panelists dissents and would find that Enforcement failed to meet its burden of proof in this regard. A majority finds that Enforcement failed to meet its burden of proof that Brooks and Titan made prohibited representations in connection with the minimum-maximum offering. Titan is liable, in part, on the seventh cause of action. The Hearing Officer dissents and would find that Enforcement proved all the violations alleged in the seventh cause of action, including that the violations were committed willfully.

At two points in time in April 2016 and March 2018, Sunderland, while a supervisor at Questar, falsified certain firm records to create the appearance that he had reviewed the records as part of his supervisory review. He also provided those falsified records to Questar knowing that they would be provided, as if they were genuine documents, to FINRA in response to Rule 8210 requests sent to the Firm. And, on June 28, 2018, Sunderland gave false and misleading testimony about the records in his on-the-record interview with FINRA. By falsifying firm records, Sunderland violated FINRA Rule 2010. By causing the Firm to maintain inaccurate books and records, Sunderland violated FINRA Rules 4511 and 2010. By falsifying documents he knew would be provided to FINRA and giving false and misleading testimony, Sunderland violated FINRA Rules 8210 and 2010. 

Between December 2014 and May 2015, Halifax America made misleading statements to FINRA in connection with its application for registration as a new FINRA member in violation of FINRA Rules 1122 and 2010. Between May and October 2015, Halifax America permitted an unregistered person to engage in securities activities requiring registration in violation of NASD Rule 1031 and FINRA Rule 2010. During January and February 2016, Halifax America made two payments totaling approximately $4,460 to an unregistered entity in violation of FINRA Rules 2040 and 2010. Between October 2015 and February 2016, Halifax America failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to review the trading activity in customer accounts in violation of FINRA Rules 3110 and 2010

Between May and November 2015, Halifax America failed to establish, document, and maintain a reasonable Customer Identification Program in violation of FINRA Rules 3310 and 2010.

In October 2014, Halifax America applied for registration as a FINRA member. As part of the application process, the firm submitted a letter to FINRA's Member Application ("MAP") group in December 2014, stating, among other things, "Halifax [America] does not intend to conduct business activities with any of its affiliates." In February 2015, during an interview with the MAP group, a representative of the firm stated that the firm did not anticipate any changes to its planned business activities during its first year of business. In May 2015, Halifax America was approved as a FINRA member. 

Despite the firm's representation that it did not intend to conduct business activities with any of its affiliates, the firm knew that it intended to rely upon, and had made arrangements for, an affiliate entity to solicit and refer prospective customers to the firm in exchange for compensation. Further, the firm relied upon that affiliate entity to solicit prospective customers between at least February and October 2015. 

[H]alifax America agreed to pay the unregistered affiliate entity 90% of the commissions it received from accounts opened through introductions made by the unregistered individual. In accordance with that arrangement, in January and February 2016, Halifax America made two payments to the unregistered affiliate entity totaling approximately $4,460. 

• Securities Industry Commentator
• Bill Singer