Securities Industry Commentator by Bill Singer Esq

November 15, 2019

featured in today's Securities Industry Commentator:

California Man Indicted in $300 Million Nationwide Investment Fraud and Ponzi Scheme (DOJ Release)

Former Financial Advisor Admits To Engaging In Ponzi Scheme Targeting Elderly Investors (DOJ Release)

Six Charged In Multi-Million Dollar Elder Fraud Scheme (DOJ Release)

Edward D. Jones & Co., L.P., Plaintiff, v. Michael Peterson, Defendant (Temporary Restraining Order, United States District Court for the District of Nevada)
Modernizing our Regulatory Framework: Focus on Authority, Expertise and Long-Term Investor Interests (Speech by SEC Chairman Jay Clayton, University of Pennsylvania Distinguished Jurist Lecture / Nov. 14, 2019)
A thoughtful presentation by SEC Chair Clayton of his vision of the SEC's regulatory role and limitations. As set forth in part in his introductory remarks, Clayton discusses:

(1) the Commission's actions over the past year, with reference to our "organic" and transparent approach to our agenda setting, and certain key modernization efforts and a more general discussion of modernization as an effective policy-making lens for an administrative agency;

(2) our "engagement agenda" with a focus on market monitoring and a few words about the important topics of investor education and oversight and enforcement; and

(3) how our mission, market realities, the statutory constructs under which we operate, and other factors, including hopefully, a dose of practical wisdom, inform our efforts more broadly, with a specific discussion of the relationship among scope of authority, scope of actions and independence.
In an Indictment filed in the United States District Court for the District of South Carolina, Scott A. Kohn and Future Income Payments, LLC ("FIP") were charged with conspiracy to engage in mail and wire fraud. As alleged in part in the DOJ Release:

[F]IP operated a Ponzi scheme in which it actively recruited pension holders who were desperate for money, including many veterans of the United States Armed Forces.  The pensioners made monthly payments to FIP in exchange for a lump sum payment or loan.  The adjusted annual percentage rate on these transactions often exceeded 100%.

FIP then solicited investors to purchase "structured cash flows," which were the pensioners' monthly pension payments.  FIP promised the investors a rate of return between 6.5% and 8%.  It took active steps to conceal from the investors the usurious nature of its transactions with the pension holders.  FIP diverted new investor funds flowing into the business to fund payments to earlier investors in order to keep the scheme operational.  When FIP ceased doing business in early 2018, investors were owed approximately $300 million.  The scheme alleged in the Indictment victimized over 2,600 individuals.

Former Financial Advisor Admits To Engaging In Ponzi Scheme Targeting Elderly Investors (DOJ Release)
Former financial advisor Daniel Rivera, 60, pled guilty in the United States District Court for the 
District of New Jersey to a Superseding Information charging him with one count of wire fraud and one count of aiding and abetting in the false subscribing to a tax return. As alleged in part in the DOJ Release:

From 2008 through 2017, Rivera solicited primarily elderly investors to invest their money in a company called Robbins Lane Properties Inc. Rivera represented to investors that Robbins Lane was a company staffed by experienced real estate professionals that invested in real estate ventures. Rivera told investors that by investing in Robbins Lane, senior investors would share in the company's investment portfolio by lending it money to invest in real estate. Rivera further promised investors that they would receive a guaranteed monthly income, and that the company's rate of return was based on secure real estate investments in the company's portfolio. In reality, Robbins Lane had no employees, no real estate portfolio, and the monies used to pay investors as a purported return on their investments was from funds he received from other investors. Rivera also used funds sourced from investors to pay his personal and unrelated business expenses, including paying his child's college tuition and sorority fees.

During the course of the fraudulent scheme, on March 5, 2014, Rivera filed with the IRS a federal income tax return that underreported his taxable income by $33,276.
In an Indictment filed in the United States District Court for the District of Nevada, Mario Castro, Jose Salud Castro, Salvador Castro, Miguel Castro, Jose Luis Mendez, and Andrea Burrow were each charged with mail fraud and conspiracy to commit mail fraud; additionally, Salvador Castro was charged with making a false statement to investigators.  As alleged in part in the DOJ Release, the Defendants operated a prize-notification scheme from 2010 to February 2018, whereby hundreds of thousands of victims were defrauded into paying $10 million in fees for purported cash prices. The Defendants:

allegedly worked at the printing and mailing businesses that sent the fraudulent mail and shared the profits from the fraudulent prize notices.  The remaining defendant, Andrea Burrow, opened victim return mail, sorted cash and other payments, and entered data from the victims' responses into a database that the scheme used to target past victims with more fraudulent mail, according to the indictment.

The defendants are alleged to have ignored multiple cease and desist orders from the United States Postal Service that prohibited their mailing companies from sending fraudulent mail.  The defendants responded by changing the names of their companies and using straw owners to hide their continuing fraud. 

Three of the defendants' co-conspirators - Patti Kern, Edgar Del Rio, and Sean O'Connor - pleaded guilty to conspiracy to commit mail fraud earlier this year.
As the old "light bulb and coffee cake" tale is told, a brokerage firm customer (often a widow) is befriended by the stockbroker who had handled her former husband's transactions. The widow regaled her family and friends with stories about how the charming, young stockbroker came to her home and changed the light bulbs she could not reach, brought her a coffee cake, and picked up the brokerage statements that he told her not to worry about and leave for him to review. After the widow's death, when an accountant reviews the estate assets, a lot of curious trading is disclosed, much of which seems to be churning or unsuitable. Then there are a number of unexplained outbound wire transfers to some unknown destination. As if those revelations were not distressing enough, it often gets worse when it turns out that the stockbroker was listed in a recently revised will as the deceased's sole beneficiary -- or the stockbroker's spouse was so listed. 

Edward D. Jones & Co., L.P., Plaintiff, v. Michael Peterson, Defendant (Temporary Restraining Order, United States District Court for the District of Nevada, 19-CV-1968)
The United States District Court for the District of Nevada granted Edward Jones' Motion for a Temporary Restraining Order ("TRO"), ordered Peterson to appear for a November 25th preliminary injunction hearing, and restrained Peterson, in part, from direct/indirect solicitation of any current Edward Jones customer " who Peterson served or whose name became known to Peterson during his employment with Edward Jones." 
As set forth in the "Background" section of the TRO:

This action arises from defendant Michael Peterson's purported misappropriation and use of Edward Jones' trade secrets and confidential information. (ECF No. 1). Edward Jones alleges the following: Edward Jones is an investment and financial advisory firm that deals almost exclusively with individual investors. Id. Peterson was employed by Edward Jones as a financial advisor in Henderson, Nevada from February 2006 until his resignation on October 25, 2019. Id. Jones has since obtained employment with Ameriprise Financial Services, Inc. ("Ameriprise"), an investment firm that competes with Edward Jones. Id. 

Peterson executed an "Investment Representative Employment Agreement" ("employment agreement") when he accepted employment with Edward Jones. Id. The employment agreement provided that Peterson would have access to confidential, proprietary, and trade secret information of Edward Jones. (ECF No. 1-1). In the information, use it only in the course of his employment, and return it to Edward Jones upon termination of his employment. Id. 

Prior to his resignation, Peterson printed a "Total Value Sequence Summary Report" ("customer list") on September 17, 2019, which details all Edward Jones customers he provided services to, their account numbers, and the assets contained in their accounts. (ECF No. 1, 1-3). Edward Jones has been unable to locate the customer list in Peterson's former Henderson, Nevada branch office. (ECF No. 4). After beginning employment with Ameriprise, Peterson "contacted, via telephone, at least eleven Edward Jones customers" and "sent transfer paperwork to at least fifteen Edward Jones customers." (ECF No. 1-2, 1-4). Peterson continues to solicit Edward Jones' current customers. (ECF No. 1). 

On November 8, 2019, Edward Jones filed a complaint alleging four causes of action: (1) misappropriation of trade secrets pursuant to the Defend Trade Secrets Act ("DTSA"), 18 U.S.C. §§ 1836, et seq.; (2) misappropriation of trade secrets pursuant to Nevada's codification of the Uniform Trade Secrets Act ("UTSA"), NRS Chapter 600A; (3) breach of contract; and (4) injunctive relief. Id. Edward Jones is presently pursuing these claims in arbitration pursuant to the Financial Industry Regulatory Authority ("FINRA") Code of Arbitration. (ECF No. 4). Edward Jones requests that the court issue a temporary restraining order enjoining Peterson from violating the employment agreement until a FINRA arbitration panel can determine whether a longer injunction should be entered. Id. 

Defendants Charged in Fraudulent ICO Ordered to Pay Nearly $9.5 Million (SEC Release)
In a Complaint filed in the United States District Court for the Eastern District of New York ("EDNY"), the SEC alleged that Veritaseum, Inc. and Veritaseum, LLC ("Veritaseum"), and their owner, Reginald Middleton had fraudulently raised millions of dollars in virtual currency from the unregistered sales of securities called "VERI," As further alleged in the SEC Release, the Defendants made a:

series of false and misleading statements to potential and actual investors, including misrepresentations about the potential profitability and viability of Veritaseum's purported operations, the use of funds raised in the VERI ICO, and the amount of funds raised in the VERI ICO. The SEC also alleged that Middleton manipulated the price and volume of VERI on secondary digital-asset trading platforms during the VERI ICO.

Without admitting or denying the SEC's allegations, a final judgment was entered on consent in EDNY against Middleton and Veritaseum whereby they are enjoined from further violations of registration provisions of Sections 5(a) and 5(c) of the Securities Act, and the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and are additionally enjoined from participating in any digital-securities offerings. Additionally, Middleton is permanently barred from service as an officer or director of a publicly traded entity and he is enjoined from further violations of the market manipulation provision of Section 9(a) of the Exchange Act; and all  Defendants are ordered to disgorge, on a joint and several basis, $7,891,600 in ill-gotten gains from the VERI ICO plus $582,535 in prejudgment interest.

Two Massachusetts Men Arrested and Charged with Nationwide Scheme to Steal Social Media Accounts and Cryptocurrency (DOJ Release)
Eric Meiggs and Declan Harrington were indicted in the United States District Court for the District of Massachusetts on one count of conspiracy, eight counts of wire fraud, one count of computer fraud and abuse and one count of aggravated identity theft. As alleged in part in the DOJ Release:

Meiggs and Harrington allegedly targeted executives of cryptocurrency companies, and others, who likely had significant amounts of cryptocurrency and those who had high value or "OG" ("Original Gangster") social media account names.  It is alleged that Meiggs and Harrington conspired to hack into, and take control over, these victims' online accounts so they could obtain things of value, such as cryptocurrency.  They used an illegal practice known as "SIM-swapping" and other techniques to access, take control of, and in some cases steal cryptocurrency from, the accounts. 

As alleged in the indictment, with "SIM swapping," cybercriminals convince a victim's cell phone carrier to reassign the victim's cell phone number from the SIM card inside the victim's cell phone to the SIM card inside a cell phone controlled by the cybercriminals. Cybercriminals then pose as the victim with an online account provider and request that the provider send account password-reset links or an authentication code to the SIM-swapped device now controlled by the cybercriminals. The cybercriminals can then reset the victim's account log-in credentials and then access the victim's account without authorization, or "hack into" the account. 

Meiggs and Harrington allegedly targeted at least 10 identified victims around the country. Members of the conspiracy allegedly stole, or attempted to steal, over $550,000 in cryptocurrency from the victims. Meiggs allegedly took control over two victims' "OG" accounts with social media companies.