Securities Industry Commentator by Bill Singer Esq

December 19, 2019

featured in today's Securities Industry Commentator:

MetLife to Pay $10 Million for Longstanding Internal Control Failures (SEC Release)

Five Defendants Arrested And Indicted For India-Based Telemarketing And Email Marketing Scheme Victimizing Seniors Throughout The United States / The Defendants Allegedly Obtained Over $2.4 Million from Victims (DOJ Release)

Federal Grand Jury in Austin Indicts Nigerian Citizen for Victimizing Previous Fraud Victims / Defendant Fraudulently Claimed to be a Representative of the Texas State Securities Board (DOJ Release)

Issuer Settles Unregistered ICO Charges, Agrees to Return Funds and Register Tokens (SEC Release)

[In]Securities Guest Blog: Not Dead Again Today? by Aegis Frumento Esq ( Blog)

SEC Charges CFO for Role in $910 Million Ponzi Scheme (SEC Release)

SEC Charges Broker-Dealers With Illicitly Profiting in Partial Tender Offer (SEC Release)


SEC Proposes to Update Accredited Investor Definition to Increase Access to Investments (SEC Release)
The SEC proposed to amend the definition of accredited investor in order to allow, in part,  more investors to qualify as accredited investors based on their professional knowledge, experience, or certifications. As alleged in part in the SEC Release:

The Securities and Exchange Commission today proposed amendments to the definition of "accredited investor" in the Commission's rules and the definition of "qualified institutional buyer" in Rule 144A under the Securities Act of 1933. The proposed amendments to the accredited investor definition would add new categories of qualifying natural persons and entities and make certain other modifications to the existing definition. The proposed amendments to the qualified institutional buyer definition would expand the list of eligible entities under that definition.

As further explained in part in the SEC Release:

The proposed amendments to the accredited investor definition would add new categories of natural persons based on professional knowledge, experience, or certifications.  The proposed amendments would also add new categories of entities, including a "catch-all" category for any entity owning in excess of $5 million in investments. In particular, the proposed amendments to the accredited investor definition would:
    • add new categories to the definition that would permit natural persons to qualify as accredited investors based on certain professional certifications and designations, such as a Series 7, 65 or 82 license, or other credentials issued by an accredited educational institution;
    • with respect to investments in a private fund, add a new category based on the person's status as a "knowledgeable employee" of the fund;
    • add limited liability companies that meet certain conditions, registered investment advisers and rural business investment companies (RBICs) to the current list of entities that may qualify as accredited investors;
    • add a new category for any entity, including Indian tribes, owning "investments," as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
    • add "family offices" with at least $5 million in assets under management and their "family clients," as each term is defined under the Investment Advisers Act; and
    • add the term "spousal equivalent" to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
The proposed amendments to the qualified institutional buyer definition in Rule 144A would add limited liability companies and RBICs to the types of entities that are eligible for qualified institutional buyer status if they meet the $100 million in securities owned and investment threshold in the definition.  The proposed amendments would also add a "catch-all" category that would permit institutional accredited investors under Rule 501(a), of an entity type not already included in the qualified institutional buyer definition, to qualify as qualified institutional buyers when they satisfy the $100 million threshold.

MetLife to Pay $10 Million for Longstanding Internal Control Failures (SEC Release)
Without admitting or denying the findings in an SEC Order Instituting Proceedings, MetLife agreed to cease and desist from committing or causing any future violations of these provisions and to pay a civil penalty of $10 million.  As alleged in part in the SEC Release:

[M]etLife improperly released reserves for annuity benefits associated with MetLife's Retirement and Income Solutions Business, which resulted in an increase in income.  For over 25 years, MetLife's practice was to presume annuitants had died or otherwise would never be found if they did not respond to only two mailing attempts made approximately five and half years apart.  MetLife later determined that its processes for locating and contacting unresponsive annuitants were insufficient to justify the release of reserves.  To correct this error, MetLife increased reserves by $510 million as of year-end 2017.

The SEC's order also finds that MetLife overstated reserves and understated income relating to variable annuity guarantees assumed by a MetLife subsidiary.  MetLife disclosed that this error was caused by data mistakes, including a failure to properly incorporate policyholder withdrawals into MetLife's valuation model.  To correct this error, MetLife reduced reserves by $896 million as of year-end 2017.
In an Indictment filed in the United States District Court for the District of Nevada, Gina Marcks, Ladda Boonlert, Charles Hill, Wendi A. Maryniak, and Roger Bond were charged with one count of conspiracy to commit wire fraud in connection with telemarketing and email marketing; one count of conspiracy to commit money laundering; five counts of aggravated identity theft; and 16 counts of wire fraud in connection with telemarketing and email marketing. As alleged in part in the DOJ Release:

[F]rom about June 2015 through about April 2017, Marcks, Boonlert, Hill, Maryniak, Bond, and others conspired to commit a telemarketing and email marketing scheme that targeted seniors. Callers located primarily in India allegedly contacted victims in the United States and falsely represented that the callers were agents or employees of the IRS, state or local government agencies, law firms, or loan companies. The callers falsely represented that the victims had outstanding taxes due, open collection accounts, or other financial, civil, or criminal liabilities requiring immediate action. The callers threatened the victims with arrest, lawsuits, or other adverse action if the victims did not immediately send money, including via wire transfers. In other instances, the callers falsely stated that the victim had qualified for a loan, which would be disbursed once the victim sent initial payment via wire transfer or gift card.

The indictment further alleges that victims were also contacted via email. The emails falsely purported to be from law firms, lawyers, judges, and public officials, and claimed that the victims had outstanding taxes, personal debts, or other financial or legal obligations. The emails threatened imminent adverse action, such as arrest. Once a victim responded telephonically, the callers demanded that payments be sent to the defendants via wire transfer.

The defendants are alleged to have fraudulently obtained approximately $2,455,547 in payments from victims residing throughout the United States.
Ekeoma Jerry Onyeukwu a/k/a  "Jerry Ekeoma Onyeukwu" was indicted in the United States District Court for the Western District of Texas on two counts of wire fraud. As alleged in part in the DOJ Release:

The Texas State Securities Board (TSSB) is a state agency whose mission is to protect Texas investors, including by regulating securities and enforcing the Texas Securities Act.  In early 2018, an England-based cryptocurrency exchange called BitConnect shut down following a cease and desist order from the TSSB.  According to the indictment, from November 2018 through April 2019, fictitious websites similar to that of TSSB including "" and "" were created to falsely claim that TSSB controlled BitConnect and that TSSB was going to return a portion of the losses incurred by BitConnect victims and encouraged them to sign up.  Onyeukwu, subsequently, sent emails to Texas residents falsely presenting himself as a TSSB representative who could provide clients with refunds of 35% of money invested in BitConnect in exchange for a $300 "consent fee."  Onyeukwu led investors to believe that their $300 fee was going to TSSB, but in reality, Onyeukwu was pocketing the cash.
The SEC issued an Order settling charges against blockchain technology company Blockchain of Things Inc. (BCOT) for conducting an unregistered initial coin offering (ICO) of digital tokens. In furtherance of the settlement, without admitting or denying the findings in the Order,  BCOT agreed to cease and desist from committing or causing any violations of the registration provisions of the federal securities laws, will pay a $250,000 penalty, and will return funds to those investors who purchased tokens in the ICO and requested said refund. As alleged in part in the SEC Release:

[B]COT conducted the ICO starting in December 2017 after the Commission had warned in its DAO Report of Investigation that ICOs can be securities offerings.  BCOT raised nearly $13 million to develop and implement its business plans, including developing its blockchain-based technology and platform.  As noted in the SEC's order, BCOT explained that its platform was intended to allow third-party developers to build applications for message transmission and logging, digital asset generation, and digital asset transfer.  The SEC's order found that BCOT sold its digital tokens to U.S. investors and engaged four "resellers" to serve as the exclusive sellers of BCOT's digital tokens in certain foreign countries without restrictions on resale of those tokens to U.S. investors.  The order further found that BCOT did not register its ICO pursuant to the federal securities laws, nor did it qualify for an exemption from the registration requirements.
Gerald Cotten, the founder and CEO of the Canadian cryptocurrency exchange QuadrigaCX, died of Crohn's disease while trekking through India without leaving the passwords needed to access some $14 million worth of ether that Quadriga held for customers. Now we're not sure that Cotten is still dead. He is, you could say, in a state of superposition.

Inland Empire Man Indicted on Bank Fraud Charges Alleging He Orchestrated $2.4 Million "Bust-Out" Scheme (DOJ Release)
In an Indictment filed in the United States District Court for the Central District of California, Steven Michael Banks Hubbard Jr., a/k/a "Marcus" and "Man" was charged nine counts of bank fraud and two counts of aggravated identity theft. As alleged in part in the DOJ Release:

[B]etween May 2015 and July 2019, Hubbard executed his scheme to defraud by first convincing individuals to open a checking account at Wells Fargo. Once the accounts were opened, the customers gave Hubbard their debit cards, PIN codes, and their personal identifying information, the indictment alleges.

Using a customer's account, Hubbard allegedly would deposit an average of more than $2,000 in cash into the customer's account via a Wells Fargo ATM. Typically the same day, Hubbard would withdraw the cash that he had deposited into the customer's account, according to the indictment.

Hubbard would then call Wells Fargo customer service, impersonate the bank customer, and report the debit card as being stolen; resulting in the cash withdrawal being deemed as fraudulent, according to an affidavit filed with a criminal complaint in this matter. Wells Fargo then would issue a provisional credit in the amount Hubbard claimed had been fraudulently withdrawn from the account, the affidavit states. Once Wells Fargo deposited the provisional credit into the account, Hubbard allegedly immediately withdrew that money as well. In some instances, Hubbard repeated the scheme on the same account until Wells Fargo closed the account due to fraudulent activity, according to the affidavit.

The indictment alleges Hubbard committed specific acts of bank fraud on several occasions in December 2017, March 2019 and May 2019.

Wells Fargo estimated the loss to the bank to be $2,433,341 and involved approximately 950 compromised accounts, according to the affidavit. Wells Fargo informed law enforcement of Hubbard's alleged "bust-out" scheme.

SEC Charges Scheme Victimizing New Jersey Jewish Community (SEC Release)
As set forth in part in a Complaint filed by the SEC against Defendant Sam A. Antar in the United States District Court for the Southern District of New York:

1. Between January and June 2019, Antar knowingly or recklessly engaged in a fraudulent scheme that victimized numerous investors, many of whom were friends and acquaintances from the Syrian Jewish community in Monmouth County, New Jersey where he grew up. Antar stole at least $550,000 from investors and used the money for gambling, making gifts to his family members, paying for his daughter's lavish wedding, and making partial repayments to some of the early investors.'

2. Antar made material misrepresentations to his investors, telling them he would use their funds to buy blocks of shares in emerging companies whose stock had not yet begun trading publicly ("pre-IPO shares"}. Antar falsely told investors that he had identified holders of the pre-IPO shares who wanted to sell them, and buyers who would pay a premium far them. Antar falsely told investors he would use their funds to purchase the pre-IPO shares and then quickly sell the shares so that the investors would get their money back plus profits within a few weeks. 

3. In some cases, Antar executed contracts with investors in which investors agreed to loan him funds to purchase pre-IP4 shares and he agreed. to purchase and then sell the shares and return the investment with a profit. In other cases, Antar executed agreements to make the investor a partner in his limited liability company, which, he told investors, owned the shares. In still other cases, Antar executed promissory notes by which investors loaned him money so that he could buy blocks of shares. 

4. Contrary to his written and verbal representations, Antar never used investor money to buy blacks of pre-IPO shares, or make any other investment. Investors at first received the returns Antar promised and after some investors made additional investments with Antar, at least one of which was based on a falsified document, Antar misappropriated their funds and stopped returning investors' calls and text messages. 

As alleged in the SEC Release, the SEC charged Antar with violating Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act  and Rule 10b-5 thereunder. A parallel criminal action was filed by the New Jersey Office of the Attorney General Division of Criminal Justice. In 2013, Antar pled guilty to an Information charging him with federal wire fraud in connection with a "joint venture to purchase and profit from the resale of electronic equipment and then divert those funds for his personal use." He was sentenced to 21 months in prison and three years of supervised release, which ended around June 2018. Antar's uncle, Eddie Antar, co-founded Crazy Eddie. 

SEC Charges CFO for Role in $910 Million Ponzi Scheme (SEC Release)
In a Complaint filed in the United States District Court for the Eastern District of California, the SEC charged Robert A. Karmann with violating the antifraud provisions of Section 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Securities Exchange Act, as well as Rules 10b-5(a) and (c) thereunder. Karmann consented to permanent injunctions, with monetary relief to be determined by the court. Charges are pending in a parallel criminal case. As alleged in part in the SEC Release:

[R]obert A. Karmann, the CFO for one of the two companies, was an integral participant in a massive Ponzi scheme that raised approximately $910 million from 17 investors between 2011 and 2018. Investors allegedly were induced by others involved in the scheme to invest in tax credit investment contracts and sale leaseback investments through promises of gains in the form of tax credits, guaranteed lease payments, and profits from the operation of mobile service generators. In reality, the complaint alleges, thousands of the purportedly profitable generators were never even manufactured, let alone put into use, and the vast majority of revenue to investors came from Ponzi-like payments, where funds from new investors were used to pay off old investors, not from actual lease payments.

The SEC's complaint alleges that, beginning in late 2014, Karmann advanced the scheme by transferring or coordinating the transfer of funds among the bank accounts of the two California-based companies to hide the lack of legitimate lease revenue. He also provided brokers, investors and prospective investors reports and financial statements that he knew contained false information.
In response to two Orders Instituting Proceedings, registered broker-dealers, Bluefin Trading LLC; and Critical Trading LLC entered into settlements with the SEC over allegations of  violating the so-called "short tender rule" and enriching themselves at the expense of other participants in a partial tender offer. Without admitting or denying the SEC's findings, Bluefin and Critical agreed to be censured and to cease and desist from future violations of Rule 14e-4. Also, Bluefin agreed to pay  $253,638 in disgorgement/interest and a $50,000 penalty; and Critical has agreed to pay $169,092 disgorgement/interest and a $50,000 penalty. The SEC's Orders find that Bluefin and Critical willfully violated Rule 14e-4 under the Securities Exchange Act of 1934.  As alleged in part in the SEC Release:

[A]s part of a 2016 partial tender offer for the common stock of Lockheed Martin Corp., Bluefin and Critical each independently tendered more Lockheed shares than their net long positions in that security in violation of the short tender rule.  Because partial tender offers are for less than all of the outstanding shares of a security, if the tender offer is oversubscribed, the company accepts shares pro rata.  Here, Lockheed's partial tender offer was oversubscribed, and the orders finds that, by tendering excess shares, Bluefin and Critical caused Lockheed to accept more shares from them and fewer shares from other participants.  The orders further find that Bluefin's excess tender produced $223,836 in unlawful profits, while Critical's produced $149,224.  

Statement of Chairman Jay Clayton at Open Meeting

Statement at Open Meeting on Commission Actions Relating to Implementation of Title VII of the Dodd-Frank Act - Commissioner Hester M. Peirce

Statement at Open Meeting on Commission Actions Relating to Implementation of Title 
VII of the Dodd-Frank Act - Commissioner Elad L. Roisman

Statement on Adoption of and Changes to Security-Based Swap Rules - Commissioner Allison Herren Lee

Statement on Proposed Disclosure of Issuer Payments Related To Extraction of Natural Resources - Commissioner Robert J. Jackson Jr.

Statement at Open Meeting on Disclosure of Payments by Resource Extraction Issuers - Commissioner Hester M. Peirce

Statement at Open Meeting on Resource Extraction - Commissioner Elad L. Roisman

Statement on Proposed Resource Extraction Rule - Commissioner Allison Herren Lee

Statement on Reducing Investor Protections around Private Markets - Commissioner Robert J. Jackson Jr.

Statement at Open Meeting on Amending the "Accredited Investor" Definition - Commissioner Hester M. Peirce

Statement at Open Meeting on Proposed Amendments to the Accredited Investor Definition - Commissioner Elad L. Roisman

Statement on the Proposed Expansion of the Accredited Investor Definition - Commissioner Allison Herren Lee