Securities Industry Commentator by Bill Singer Esq

October 10, 2019

featured in today's Securities Industry Commentator:
James Torchia was Indicted in the United States District Court for the Northern District of Georgia for his role ia an alleged fraud that caused investors to spend over $40 million on his company's promissory notes. As alleged in part in the DOJ Release:

[J]ames Torchia was the CEO of a Georgia company named Credit Nation.  Credit Nation purchased life insurance policies and subprime automobile loans and offered investors the opportunity to purchase promissory notes for those policies and loans. Torchia solicited investments in Credit Nation "promissory notes" that offered a 9% rate of return and that were purportedly "100% asset-backed" and "backed by hard asset dollar for dollar."  However, when making these representations, Torchia knew that these investments were not backed by hard assets "dollar for dollar" as Credit Nation had actually been operating at a significant financial loss.  Torchia also allegedly lied to investors about how their funds would be used and diverted investors' funds for undisclosed purposes. 

The indictment further alleges that even after Torchia's own forensic accountant produced a report to him showing that Credit Nation did not have sufficient assets to cover all outstanding promissory notes, Torchia continued to provide false information about the security of the promissory notes and the use of investors' funds.   All told, investors spent over $40 million on Credit Nation's promissory notes. 

In November 2015, the U.S. Securities and Exchange Commission ("SEC") filed a federal civil complaint alleging that Credit Nation investors had been defrauded out of millions of dollars.  Torchia allegedly sent a letter to investors refuting the SEC's allegations.  The letter also referenced steps that the company had taken during the SEC investigation, which included "hir[ing] a forensic accountant to assist the SEC with its understanding of our business operations and assets.  All of this was to no avail."  The letter, however, failed to disclose that the forensic accountant's report confirmed that Credit Nation could not pay back all of its investors.
Ho Jun Jia a/k/a Matthew was indicted in the United States District Court for the Western District of Washington on two counts of aggravated identity theft, four counts of access device fraud, and eight counts of wire fraud. As alleged in part in the DOJ Release:

[B]etween October 2017 and February 2018, following the surge in popularity, and value, of cryptocurrencies, HO ran a large-scale cryptocurrency mining operation, propelled predominantly, if not exclusively, through fraud and identity theft.  HO, allegedly used stolen identity and credit card information of a prominent California video-game developer to open cloud computing accounts at multiple U.S. cloud service providers, which he used to mine various cryptocurrencies, such as Bitcoin and Ethereum. HO created a web of phony email accounts and used social engineering techniques to trick cloud computing providers to approve heightened account privileges, increased computer processing power and storage, and deferred billing. 

HO used the fraudulently obtained computing power to mine cryptocurrency - a resource-intensive process by which "miners" essentially compete to verify blockchain transactions and receive an amount of cryptocurrency in return.  HO then used the cryptocurrency or exchanged it for traditional funds on various marketplace websites.  In the few months his scheme remained active, HO consumed more than $5 million in unpaid cloud computing services with his mining operation and, for a brief period, was one of Amazon Web Services (AWS) largest consumers of data usage by volume.  Some of the bills were paid by the California game developer's financial staff before the fraud was detected.  HO also used the identities of a Texas resident and the founder of a tech company in India and, in addition to AWS, opened cloud services accounts with Google Cloud Services, which he similarly used as part of his cryptocurrency mining operation.
Some have speculated that the elimination of trading commissions -- and with them the old-style broker -- is another step towards the institutionalization of the investment advisor. Maybe. But certainly the trend has been in the other direction, with the most successful broker groups leaving large firms and setting up independent shops. The thought that large firms will be able to leverage technology in ways that smaller practitioners can't seems more of a wish than a plan. The nature of technology is such that, except for processing machines that depend on volume (like order processing), it becomes more widely distributed, not less so, as it matures.