Securities Industry Commentator by Bill Singer Esq

June 12, 2019
How does the purportedly pro-deregulation Trump Administration justify the expansion of DOJ's antitrust regulation? Is AAG Delrahim simply providing cover to the President in his ongoing attack against perceived enemies in the digital sector, or is Antitrust Division head launching a legitimate effort to restore competition and market access? Is "antitrust" regulation merely an excuse for creeping Socialism, or is it a fair and reasonable exercise of government regulation in defense of free and open markets? Among the most troubling challenges is who gets to decide what is monopolistic and anticompetitive versus what is a dominant market-share achieved via innovation and entrepreneurship? Pointedly, I leave it to my readers to reach whatever conclusions you wish. That being said, consider, for example, this comment by Delrahim:

Acquisitions of nascent competitors can be procompetitive in certain instances and anticompetitive in others.  They can be beneficial to the extent they combine complementary technologies or bring products and services to market that would not have been made available to consumers otherwise.  It is not possible to describe here each way that a transaction may harm competition in a digital market, but I will note the potential for mischief if the purpose and effect of an acquisition is to block potential competitors, protect a monopoly, or otherwise harm competition by reducing consumer choice, increasing prices, diminishing or slowing innovation, or reducing quality.  Such circumstances may raise the Antitrust Division's suspicions.

FINRA Fines Crypto MinerIn the Matter of Kyung Soo Kim, Respondent (FINRA AWC 2018058100701)
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Kyung Soo Kim submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA found that Kim had violated FINRA Rules 3270 and 2010, and imposed upon Kyung Soo Kim a $5,000 fine, and a one-month suspension from association with any FINRA member firm in any capacity. As set forth in part in the AWC:

In December 2017, Kim formed and incorporated an entity ("S Corporation"), for which he was the sole shareholder and director, to engage in cryptocurrency mining activities. Kim: (i) opened and funded a bank account for S Corporation; (ii) entered into a contract on behalf of S Corporation with another entity that was to build and operate computer hardware and software for S Corporation's cryptocurrency activities; and (iii) transferred funds from S Corporation to that entity pursuant to the contract. 

Kim failed to provide written notice to Merrill of the above-described activity.
In a recent FINRA customer arbitration, the public customer Claimants were looking for millions in damages as a result of alleged losses from their investments in Comerica Asset Management products. In filing their Statement of Claim, the customers named Comerica Securities, Inc. as the one and only Respondent. After all, you'd sorta think that Comerica is Comerica is Comerica, right? Well, in reality, no.
In an Indictment filed in the United States District Court for the Middle District of Tennessee, the founder and Chief Investment Officer of Clean Energy Advisors ("CEA"), Christopher B. Warren, was charged with 12-counts of mail fraud, wire fraud, securities fraud and money laundering, After pleading guilty to mail and securities fraud, Warren was sentenced to nine years in prison and ordered to pay $15,666,418.67 in restitution. As set forth in part in the DOJ Release:

[B]eginning in November 2013 and continuing through September 2017, Warren devised and operated a scheme to defraud investors by offering investment opportunities in solar farm projects purportedly owned by CEA.  To attract investors, Warren claimed that CEA owned working solar farms throughout the state of North Carolina and further claimed that Duke Power agreed to purchase the energy produced by CEA's farms and that he would use the revenue to pay dividends to investors. Warren recruited 60 investors for its private investment funds: Utility Solar IV and Utility Income Fund and made numerous false misrepresentations, including that CEA owned several solar farms and made millions of dollars selling solar energy to utility companies, knowing at the time that CEA had no earnings, no profits, and had no contracts with any utility company.  Warren also provided investors with a list of solar farms purportedly owned by CEA, many of which did not exist and others that were actually owned by other entities. 

To hide the fraud, Warren created phone audited financial statements and made regular Ponzi payments to select investors.  As the scheme was uncovered, Warren told investors he would repay the principal investments pending the imminent sale of the company to a foreign purchaser.  In fact, no sale could have ever materialized.

During the course of the scheme, Warren raised approximately $28 million from investors, misappropriated a significant portion of those funds, including using almost $7 million for the personal benefit of himself and family members, and caused investors to lose more than $15 million.

The United States District Court for the District of Massachussetss entered final judgments for violations of the registration and antifraud provisions of Sections 5 and 17(a) of the Securities Act  and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder against:
  • Heriberto C. Valdez and ordered him to pay $657,840 in disgorgement and prejudgment interest and a $551,403 civil penalty; and
  • DFRF Enterprises LLC and DFRF Enterprises, LLC, and ordered them to pay jointly and severally $17,840,352 in disgorgement and prejudgment interest, and  also imposed a $775,000 civil penalty on each of them.
As set forth in part in the SEC Release:

In June 2015, the SEC charged Heriberto C. Perez Valdes, a former Florida resident, Massachusetts-based DFRF Enterprises LLC, and Florida-based DFRF Enterprises, LLC, along with six other individual defendants, for their roles in a pyramid and Ponzi scheme that targeted investors in Spanish and Portuguese-speaking communities. The SEC alleged that investors were falsely told that the DFRF entities, purported gold mining companies, owned more than 50 gold mines in Africa and Brazil, and that an investment in these companies would be fully insured and guaranteed. The defendants allegedly raised more than $15 million from at least 1,400 investors between 2014 and 2015 by recruiting new members in pyramid scheme fashion to keep the fraud afloat. Commissions were allegedly paid to earlier investors in a Ponzi-like fashion to encourage their recruitment efforts.

SEC Obtains Judgments Against Insider Trading Ring Defendants (SEC Release)
In consent judgments entered into with the SEC before the United States District Court for the Southern District of New York, defendants Winson Tang and Deshan Govender, without admitting or denying the allegations in the Complaint, Tang and Govender consented to being permanently enjoined  from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Tang agreed to the imposition of a civil monetary penalty in the amount of $750,000 and a five-year officer and director bar; and Govender is awaiting the Court's determination of monetary relief. As set forth in part in the DOJ Release:

The SEC's complaint alleges that Tang, who was then a Vice President of Clinical Research for Sangamo and a close friend and business associate of Govender, tipped Govender about confidential licensing agreement negotiations. According to the complaint, Govender then tipped defendant Steven Fishoff and members of Fishoff's insider-trading ring, and Fishoff tipped others who traded. The complaint alleges that Fishoff and the individuals that Fishoff and Govender tipped purchased Sangamo stock and options before the deal with Biogen was announced in January 2014, ultimately making a total of approximately $1.5 million in illegal profits. According to the complaint, Fishoff paid Govender approximately $222,000 for the information.

. . .

In related actions filed in 2015 and 2017, the SEC and the U.S. Attorney's Office for the District of New Jersey charged Fishoff and four members of his group, Paul Petrello, Ronald Chernin, Steven Costantin and Joseph Spera, with illegal insider trading ahead of secondary public stock offerings. Fishoff and the others have pled guilty to the criminal charges. Other than Fishoff, each of them agreed to a partial settlement with the SEC, including for conduct related to trading in advance of the Sangamo-Biogen license agreement, with potential monetary sanctions to be determined at a later date. The SEC action against Fishoff in the District of New Jersey is continuing.
Final judgment was entered in the United States District Court for the District of Massachusetts against investment adviser Kimberly Pine Kitts, who was charged by the SEC with defrauding multiple clients by stealing over $3 million from their investment and retirement accounts. Kitts is enjoined from violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and ordered her to pay $2,882,221 in disgorgement and prejudgment interest; and, further, Kitts was barred by the SEC from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any offering of a penny stock. In a parallel criminal case, Kitts pled guilty and was sentenced to 87 months in prison and ordered to pay over $3 million in restitution, which will satisfy her SEC-related payment obligation in the civil matter.