Securities Industry Commentator by Bill Singer Esq

September 26, 2019

READ FULL TEXT House Intelligence Committee
Whistleblower Letter: 

Featured in today's Securities Industry Commentator:
Clarance Jones, 80, pled guilty in the United States District Court for the District of Massachusetts to conspiring to commit tax fraud and filing false tax returns; and he was sentenced to two months in prison plus two years of supervised release with the first six month to be in-house confinement. Co-conspirator George Kinslieh, 69, pled guilty to filing false tax returns and was sentenced to one year of probation; and co-conspirator Bhavna Patel, 44, pled guilty to one count of conspiring to defraud the Internal Revenue Service and was sentenced to one year of probation and ordered to pay a $1,000 fine. As alleged in part in the DOJ Release:

From at least 2013 through 2015, Kinslieh and Patel, who were store owners, and others, purchased winning lottery tickets from the ticket holders for cash, at a discount to the value of the tickets, thereby allowing the ticket holders to avoid reporting the winnings on their tax returns - a scheme known as "ten-percenting." Kinslieh and Patel gave the winning tickets to Jones, who presented them to the Massachusetts State Lottery Commission as his own, and collected the full winnings. Jones reported the winnings on his tax returns, but offset them with purported gambling losses. Jones and the store owners then shared the excess winnings.

For the tax years 2011 through 2017, Jones paid less than $16,000 in federal tax on a total of approximately $52,000 of reported income. During this period, Jones claimed that he was a professional gambler and that all of his winnings were offset by alleged gambling losses. Patel and Kinslieh did not report to the Internal Revenue Service or pay taxes on the income that they received from the ticket scheme.

Bill Singer's Comment: They're putting 80-year-old Clarance Jones in prison for two months for this? Seriously -- you couldn't just sentence the guy to house arrest? Frankly, it's tough not to admire the sheer artistry of this tax dodge but for the fact that they all got caught -- so much for artistry.
Jonathan Lucas passed himself off as a Frenchman who had relocated to Las Vegas. He's really a 27-year-old from New Jersey. He also passed himself off as quite the brainiac. He claimed to have a full scholarship, funded by the NSA, to Stevens Institute of Technology, where he majored in applied physics and minored in women's and gender studies -- yes, truly -- and earned a BS in "cyber warfare." In fact, Jonathan never graduated from college.  He also claimed to have an angel investor (he didn't); to have a development team in place (identified online as Chris, Rick, and Hank but none of them were real); to have a beta site up and running (nothing that the SEC could find); to have raised $4.5 million (not even close); and to have earmarked proceeds for development (he really spent it on promotion)., investment advisory firm Strong Investment Management and its owner Joseph B. Bronson entered into a settled final judgment whereby both are permanently enjoined from violating the antifraud provisions of Sections 17(a)(l) and 17(a)(2) of the Securities Act, Section l0(b) of the Securities Exchange Act and Rule l0b-5 thereunder, Sections 206(1), 206(2), 206(4), 207 of the Investment Advisers Act of 1940, and Rule 206(4)-7 thereunder. Further, Strong and Bronson were ordered jointly and severally liable for $960,656 in disgorgement plus $100,501 in interest; and, separately,. Bronson was ordered to pay a $184,767 civil penalty. In a settled SEC administrative proceeding against Bronson,, he agreed to the issuance of an SEC order permanently barring him from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or national recognized statistical rating organization. As alleged in part in the SEC Release:

[F]or more than four years, Bronson traded securities in Strong's omnibus account but delayed allocating the securities to specific client accounts until he had observed the securities' performance over the course of the day. As alleged, Bronson reaped substantial profits at his clients' expense by "cherry picking" the trades, disproportionately allocating profitable trades to himself and unprofitable trades to Strong's clients. The complaint also alleged that Strong and Bronson misrepresented their trading and allocation practices in the firm's Forms ADV, including by falsely stating that all trades would be allocated in accordance with pre-trade allocation statements and that the firm did not favor any account, including those of the firm's personnel.
. . .

Bronson's brother and the former chief compliance officer of Strong, John Engebretson, was also charged in the complaint with failing to perform his compliance responsibilities and ignoring numerous "red flags" raised during the course of the fraudulent scheme. As a result, Engebretson was charged along with Bronson and Strong with violating the compliance requirements of the federal securities laws. Engebretson previously agreed to settle the charges against him and the Court entered a final judgment against him on June 15, 2018. As part of the settlement, Engebretson agreed to be enjoined, pay a civil monetary penalty in the amount of $15,000, and to be barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization.
Andrew N. LaVigne pled guilty in the United States District Court for the Northern District of New York to bankruptcy fraud, mail fraud, and money laundering; and hew was sentenced to 87 months in prison and ordered to pay over $3.6 million in restitution to his victims. As alleged in part in the DOJ Release:

LaVigne, a Certified Public Accountant ("CPA") who practiced in the Ithaca, New York area for more than 30 years, filed for personal bankruptcy in 2004.  At the time, he owed approximately $7.6 million to over 80 unsecured creditors following a failed scheme to use their money to purchase sports and entertainment memorabilia for resale.  During the course of LaVigne's years‑long bankruptcy proceedings, he claimed that his only asset was his home. He paid back no money to his 80 investors.  In pleading guilty, LaVigne admitted that during his bankruptcy he used his CPA practice's bank accounts to conceal between $3.5 and $9.5 million in assets from the United States Bankruptcy Court and the Office of the United States Trustee.  LaVigne laundered money by depositing funds unrelated to his CPA practice into his business accounts and then using that money for his own benefit and that of his family, including buying himself sports memorabilia and writing checks to himself totaling tens of thousands of dollars that were never disclosed in his bankruptcy proceeding.

In pleading guilty, LaVigne also admitted to defrauding an elderly client in a $4.6 million mail fraud scheme.  Between 2014 and 2016, LaVigne convinced the elderly victim to pay $3.6 million for shares of a company that LaVigne created, which LaVigne claimed would develop a piece of waterfront property on Pier Road in Ithaca.  After the victim bought 90% of the company, LaVigne obtained an additional $1 million from her, purportedly as a further investment in the company.  LaVigne did not use the $1 million to invest in the company, and he never developed the property.  Instead, he used the victim's money for his own purposes, including writing checks to himself, paying for the construction of a house for a family member, and funding payroll for his CPA practice.  LaVigne also laundered payments he received from this scheme through his CPA practice accounts.
Wallace Byers pled guilty in the United States District Court for the Middle District of Louisiana 
to three counts of wire fraud. As alleged in part in the DOJ Release:

[B]etween October 2014 and November 2018, Byers solicited victims in the Baton Rouge area and elsewhere to invest with his company, WBI Associates, Inc., promising victims large returns in a short time frame.  Byers focused his solicitations on older individuals and those who had been victims of prior schemes.  He promised his victims that the money would be invested, variously, in gold production, a lottery company, foreign currency, or "dark pools" or "blind pools."  Whenever his victims pressed for returns or refunds of their money, Byers gave various excuses for delays - the money was invested overseas, other individuals had to "sign off," or more money needed to be invested before any was paid out.  In truth, instead of investing the money as promised, Byers spent the money on personal expenditures, including among others, approximately $10,000 per month in rent for his residence in a Miami hotel, the lease of luxury cars, and gambling in casinos.  Byers admitted that he received between $3,500,001 and $9,500,000 as a result of his scheme, $3,000,000 of which he sent to a Swiss bank account he controlled.  Byers also admitted that he had two prior federal felony convictions, one of which was for a similar wire fraud scheme.

SEC Charges PetMed Express Former Executive with Repeated Insider Trading (SEC Release)
Without admitting or denying the allegations in an Complaint filed in the United States District Court for the Southern District of Florida, PetMed Express, Inc.' Director of Marketing and member of the company's Management Committee, James Alex Irvin, consented to a permanent injunction prohibiting him from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act  and Rule 10b-5 thereunder. Further, Irvin agreed to pay $227,795 in disgorgement, $34,494 in prejudgment interest, and a civil money penalty of $252,270; additionally, he agreed to a five-year officer-and-director bar. As alleged in part in the SEC Release:

[J]ames Alex Irvin, of Boca Raton, Florida, repeatedly traded in the securities of his employer, PetMed Express, Inc., on the basis of confidential information he obtained as PetMed's Director of Marketing and a member of its Management Committee. According to the SEC's complaint, Irvin purchased shares of PetMed common stock and call and put options in advance of six PetMed market-moving earnings announcements while in possession of confidential information concerning the Company's quarterly and year-end financial results. PetMed's Insider Trading Policy prohibited trading in PetMed options at any time. Additionally, all of Irvin's trades at issue took place during blackout periods, when Irvin was expressly prohibited from trading in PetMed stock. As a result, Irvin allegedly realized profits and avoided losses of $227,795. The SEC further alleges that Irvin engaged in insider trading based on tipping confidential information concerning PetMed's positive fiscal 2017 fourth quarter and year-end financial results to his close personal friend, who made modest profits from his trading.

In a Complaint filed in the United States District Court for the Middle District of Florida, the SEC charged Andres Fernandez and  Edison Denizard 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, and the registration provisions of Sections 5(a) and 5(c) of the Securities Act. The complaint seeks permanent injunctions, disgorgement plus prejudgment interest, and civil monetary penalties. As alleged in part in the SEC Release:

[F]rom January 2015 through March 2017, Andres Fernandez ("Fernandez") and his companies, Kadaae, LLC and Kadaae Entertainment Corp. (together, "Kadaae"), raised $20.7 million from at least 56 investors through an unregistered offering of securities. Over the same two-year period, the complaint alleges, Edison Denizard ("Denizard") and his company, Ahead of the Game, LLC, conducted an unregistered offering of securities, raising approximately $10.4 million from at least 78 investors. Defendants allegedly told prospective investors in both offerings that their money would be used to fund music concert events for major artists at large venues across the U.S. In truth, however, only a small portion of investor money was used by Kadaae to produce a handful of concert events. Instead, the complaint asserts that defendants operated Ponzi schemes -- using new investor money to pay earlier investors -- and each misappropriated more than $1 million in investor money for his own use.

SEC Obtains Final Judgment Against Former Officers of Wilmington Trust (SEC Release)
In response to an SEC Complain filed in the United States District Court for the District of  Delaware, consent judgments were entered against Wilmington Trust's former Chief Financial Officer, David R. Gibson, and former Controller, Kevyn Rakowski. The judgment against Gibson enjoins him from future violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Securities Exchange Act and Rules 10b-5, 13a-14, and 13b2-1 thereunder, and further enjoins him from aiding and abetting future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. Additionally,  Gibson is ordered to pay a $50,000 disgorgement  and $20,367 in prejudgment interest; and he is prohibited from serving as an officer or director of a public company. The judgment against Rakowski enjoins her from future violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and further enjoins her from aiding and abetting future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The judgment further orders Rakowski to pay $37,316 in disgorgement and $6,719 in  prejudgment interest. As set forth in part in the SEC Release:

[T]he SEC previously charged Gibson, Rakowski, and two other defendants with fraud for intentionally excluding hundreds of millions of dollars of past due real estate loans from financial reports that Wilmington Trust filed. The SEC's complaint alleged that Gibson and Rakowski - who were both convicted in a criminal trial involving the same underlying facts alleged in the SEC's complaint, and who are appealing their convictions - made or substantially participated in making false or misleading disclosures of material facts concerning Wilmington Trust's loans which were 90 days or more past due.