Securities Industry Commentator by Bill Singer Esq

July 15, 2019

Staff Statement on LIBOR Transition (Division of Corporation Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant)
As noted in part in the SEC Staff Statement [Ed: footnotes omitted]:

[I]t is expected that a number of private-sector banks currently reporting information used to set LIBOR will stop doing so after 2021 when their current reporting commitment ends, which could either cause LIBOR to stop publication immediately or cause LIBOR's regulator to determine that its quality has degraded to the degree that it is no longer representative of its underlying market.  As regulators and market participants seek to avoid business and market disruptions resulting from the expected discontinuation of LIBOR, implementing alternative reference rates in advance of the discontinuation has taken on urgency. . . .

. . .

The Commission staff encourages market participants who have not already done so to begin the process of identifying existing contracts that extend past 2021 to determine their exposure to LIBOR.  Many legacy contracts have interest rate provisions referencing LIBOR that, when drafted, did not contemplate the permanent discontinuation of LIBOR and, as a result, there may be uncertainty or disagreement over how the contracts should be interpreted.  In addition, in circumstances where the contractual interpretation is clear, the adjustment may be inconsistent with expectations of the affected parties.  In certain cases, for example, a floating rate obligation may become a fixed rate obligation.  There are rarely quick fixes to these types of issues and the Commission staff encourages market participants to focus on them now to avoid business and market disruptions after 2021. . . .
In a Complaint filed in the United States District Court for the Eastern District of New York the SEC charged attorney William Scott Lawler and so-called microcap agent Natlie Bannister with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) Securities Exchange Act and Rule 10b-5 thereunder, and the registration provisions of Section 5(a) and 5(c) of the Securities Act; and, additionally, charged Lawler with violating the market manipulation provision of Section 9(a) of the Exchange Act. As set forth in part in the SEC Release:

[F]rom February 2015 to April 2017, attorney William Scott Lawler engaged in schemes to fraudulently transfer control over the shares of two publicly-traded shell companies to his client. The SEC alleges that Lawler represented his client on the purchase of Broke Out Inc. (BRKO) and the predecessor to Immage Biotherapeutics Corp. (IMMG). Microcap agent Natalie Bannister participated in the BRKO scheme by arranging the sale of BRKO to the client. Among other deceptive conduct, the complaint alleges that Lawler directed and Bannister engaged in sham transactions. Lawler also drafted false attorney-opinion letters, one of which Bannister submitted to a broker, to falsely represent that the stock of BRKO and IMMG could be immediately sold publicly once his client took control of the companies. Further, Lawler and Bannister ensured a market for the BRKO stock when Bannister placed phony bids and offers for the stock at Lawler's direction. After Lawler's client gained control of the shares of BRKO and IMMG, the stocks were subject to promotional campaigns with drastic increases in volume and price.  Brokerage accounts associated with Lawler's client profited over $3 million before the Commission suspended trading.
Human beings have an amazing capacity for getting themselves embroiled in all sorts of nonsense, then doing whatever it takes to make matters worse, and then, when all else fails, blaming everyone else for their predicament. A recent FINRA OHO Panel Decision displays human folly in all its dubious glory. Sometimes you just have to shake your head. 

Jon E Montroll  a/k/a "Ukyo," was sentenced in the United States District Court for the Southern District of new York to 14 months in prison plus three years of supervised release, and ordered to pay a $167, 480 forfeiture. As set forth in part in the DOJ Release:

JON E. MONTROLL operated two online bitcoin services:  WeExchange Australia, Pty. Ltd. ("WeExchange") and ("BitFunder").  WeExchange functioned as a bitcoin depository and currency exchange service.  BitFunder facilitated the purchase and trading of virtual shares of business entities that listed their virtual shares on the BitFunder platform.

Between the launch of Bitfunder, in or about December 2012, and at least in or about July 2013, MONTROLL converted a portion of WeExchange users' bitcoins to his personal use without the users' knowledge or consent.  For example, MONTROLL exchanged numerous bitcoins taken from WeExchange into United States dollars, then spent those funds on personal expenses, such as travel and groceries.

Beginning on or about July 18, 2013, MONTROLL promoted a security referred to as "Ukyo.Loan."  As described by MONTROLL in a public post about Ukyo.Loan, MONTROLL encouraged investors to "think of [Ukyo.Loan] as a sort of round-about investment" in BitFunder and WeExchange and, at the same time, described Ukyo.Loan as "a personal loan" and "for private investment purposes."  MONTROLL further promised to pay purchasers of Ukyo.Loan daily interest on their investment and promised shares could be "redeemed at face value anytime upon request."

During the summer of 2013, one or more individuals (the "Hackers") exploited a weakness in the BitFunder programming code to cause BitFunder to credit the Hackers with profits they did not, in fact, earn (the "Exploit").  As a result, the Hackers were able to wrongfully withdraw from WeExchange approximately 6,000 bitcoins, with the majority of those coins being wrongfully withdrawn between July 28, 2013, and July 31, 2013.  As a result of the Exploit, BitFunder and WeExchange lacked the bitcoins necessary to cover what MONTROLL owed to users.

Notwithstanding the scope of the Exploit, MONTROLL failed to disclose the Exploit to users of BitFunder and WeExchange, or investors in Ukyo.Loan.  Instead, MONTROLL continued to promote and sell Ukyo.Loan to customers and, on at least one occasion, falsely represented to customers that BitFunder was commercially successful.  As a result of his omissions and misrepresentations, MONTROLL raised approximately 978 bitcoins through Ukyo.Loan after his discovery of the Exploit.

The SEC's New York Regional Office began an investigation into BitFunder and the Exploit.  During the course of the investigation, MONTROLL provided the SEC with a falsified screenshot purportedly documenting, among other things, the total number of bitcoins available to BitFunder users in the WeExchange Wallet as of October 13, 2013.  Additionally, during sworn investigative testimony on both November 14, 2013, and October 6, 2015, MONTROLL provided materially false and misleading answers to certain questions about, among other things, the timing of MONTROLL's discovery of the Exploit.
After a 17-day jury trial in the United States District Court for the Central District of California, former Hunter World Markets stockbroker and co-owner Todd Ficeto was found guilty of  one count of conspiracy to commit securities fraud and wire fraud, seven counts of securities fraud, two counts of investment adviser fraud, one count of money laundering conspiracy, five counts of unlawful money transactions, one count of obstruction of justice, and one count of making false statements. The other co-owner of Hunter World Markets is hedge fund manager Florian Wilhelm Jurgen Homm, who was the founder and chief investment officer of Absolute Capital Management Holdings (ACMH), a Cayman Islands-based investment advisor that operated from Palma de Majorca in Spain and managed eight hedge funds (the Absolute Funds). As set forth in part in the DOJ Release:

Between September 2004 and September 2007, Homm directed the Absolute Funds to buy billions of shares of thinly traded, United States-based "penny stocks" through Hunter World Markets that Ficeto located and brought to Homm through investment banking deals. Ficeto then facilitated the manipulative stock purchases and caused millions of shares of the same penny stocks to be given to Homm, Hunter World Markets, and CIC Global Capital, which was controlled by co-defendants Colin Heatherington, of Port Alberni, British Columbia, Canada; and Craig Heatherington, of Queensland, Australia. 

Ficeto, Homm, and other co-conspirators fraudulently manipulated the penny stocks to inflate and artificially prop up their prices to exaggerate the purported profitability of the Absolute Capital hedge funds. As a result, the co-conspirators were able to sell their own shares of the penny stocks at the inflated prices to the hedge funds. The stock price inflation also served to fraudulently overstate the performance of the hedge funds which, in turn, generated substantial performance fees and other compensation for defendant Homm and his co-conspirators. The co-conspirators then used the inflated performance figures to induce investments from unsuspecting victim-investors. 

Ficeto and his co-conspirators worked together in an elaborate conspiracy to launder the illicit proceeds throughout the world.

Ficeto also engaged in unlawful monetary transactions by sending nearly $10 million of illicit proceeds to an account in the Cook Islands days before his testimony before the Securities and Exchange Commission, and then lied to the SEC about the Cook Islands account. Ficeto also used a hedge fund called the Hunter Fund, in which the Absolute Funds invested and also was used to conceal investments by the Absolute Funds in the penny stocks and to manipulate the stock market.

As the scheme unraveled, Homm abruptly resigned from the firm in the middle of the night on September 18, 2007, according to court documents.

In March 2013, Homm was taken into custody in Italy after being arrested at the Uffizi Gallery in Florence. Homm was arrested pursuant to a provisional arrest warrant sought by federal prosecutors in Los Angeles after they filed a criminal complaint containing charges related to the alleged fraud scheme. The United States sought Homm's extradition to the United States and he was ordered extradited by the Italian Ministry of Justice, but Homm ultimately was released and is believed to have fled to Germany, where he remains a fugitive. . . .

In a Complaint and Amended Complaint
/comp24431.pdf filed in the United States District Court for the Southern District of New York, the SEC charged Barry Honig, GRQ Consultants, Inc., Elliot Maza, and Brian Keller with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Also, Keller is charged with aiding and abetting violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder; and, further, Honig is charged with violating the manipulative trading provisions of Exchange Act Sections 9(a)(1) and (2), and the registration provisions of Securities Act Sections 5(a) and (c). Both Honig and GRQ are additionally charged violating the reporting provisions of Exchange Act Section 13(d) and Rule 13d-1(a) thereunder, and Maza and Keller with aiding and abetting violations of the reporting provisions of Section 15(d) of the Exchange Act and Rule 15d-1 thereunder. Without admitting or denying the SEC's allegations, Honig, GRQ, Maza, and Keller consented to bifurcated settlements under which they will be enjoined from violations of the above-cited provisions; Honig, GRQ, and Keller consented to penny stock bars; and, further,  Honig and GRQ fconsented to conduct-based injunctions. The Complaint had alleged that the Defendants (of which Honig was cited as the "primary strategist") participated in microcap schemes that generated over $27 million from unlawful stock sales.