Securities Industry Commentator by Bill Singer Esq

January 27, 2020


Two Men Sentenced to Prison for Their Roles in an Investment Fraud Scheme Targeting Elderly Victims (DOJ Release)

SEC Publishes Annual Reports on Credit Rating Agencies (SEC Release)
https://www.sec.gov/news/press-release/2020-19
The SEC published its annual report on nationally recognized statistical rating organizations ("NRSROs")m which discussed the state of competition, transparency, and conflicts of interest among the firms and also identifies any applicants for NRSRO registration.

https://www.sec.gov/files/nrsro-summary-report-2019.pdf

https://www.sec.gov/files/2019-annual-report-on-nrsros.pdf

Two Men Sentenced to Prison for Their Roles in an Investment Fraud Scheme Targeting Elderly Victims (DOJ Release)
https://www.justice.gov/opa/pr/two-men-sentenced-prison-their-roles-investment-fraud-scheme-targeting-elderly-victims
Following a three-week trial in the United States District Court for the Western District of North Carolina, Michael Allen Duke was found guilty of one count of conspiracy to commit mail and wire fraud, one count of wire fraud, one count of money laundering, and three counts of mail fraud; and Robert Leslie Stencil was found guilty of one count of conspiracy to commit mail and wire fraud, four counts of money laundering, and 13 counts of wire fraud. 
Stencil was sentenced to 135 months in prison, and was also ordered to pay $2,745,239 in restitution and to forfeit $868,317.58.  Duke was sentenced to 70 months in prison, and was ordered to pay $1,635,485 in restitution. Previously, Nicholas Fleming, Martin Delaine Lewis,Paula Saccomanno, Kristian F. Sierp, and Dennis Swerdlen, pled guilty to their roles and have been sentenced;  Daniel Thomas Broyles Sr., was also charged and remains a fugitive.  As alleged in part in the DOJ Release:

[F]rom 2012 through 2016, Stencil, Duke and their co-conspirators sold millions of dollars of worthless stock in a sham company named Niyato Industries Inc. (Niyato).  Stencil played the role of Niyato's chief executive officer.  Duke was Stencil's top salesperson.  Together with their co-conspirators, Stencil and Duke portrayed Niyato as a leader in its field, manufacturing electric vehicles and converting gasoline vehicles to run on compressed natural gas.  Stencil, Duke and their co-conspirators told victims that Niyato was run by a team of high-profile executives, and that Niyato had patented technology, state-of-the-art facilities and valuable contracts.  They also told victims that Niyato would use 97 percent of the money it raised selling stock to grow its business and expand operations.  Stencil, Duke and their co-conspirators used high-pressure tactics when pitching Niyato stock to victims, the evidence showed.  Among other things, they sold victims on the opportunity to "get in on the ground floor," offering them a portion of a supposedly limited supply of pre-IPO stock at $.50 per share and promising them a 10- to 16-fold return when Niyato went public.  From 2012 to 2016, Stencil, Duke and their co-conspirators repeatedly told victims that an IPO was imminent, the evidence showed.

In reality, Niyato had no patents, facilities, products or plans to commence an IPO.  Niyato's true business was the sale of worthless stock.  Stencil, Duke and their co-conspirators used nearly all of the money raised by selling Niyato stock for their own personal benefit, with Stencil paying salespeople - like Duke - half or nearly half of the money they solicited from each investor on behalf of Niyato.  Moreover, Stencil used Niyato's bank account as his own personal piggybank, the evidence showed. 

The evidence showed that, together, Stencil, Duke and their co-conspirators sold approximately $2.8 million in stock to approximately 140 victims, many of whom were elderly or vulnerable for other reasons.   

https://www.justice.gov/usao-edca/pr/top-executives-plead-guilty-participating-billion-dollar-ponzi-scheme-biggest-criminal

-and-

https://www.sec.gov/news/press-release/2020-18

The owners of DC Solar:
Jeff Carpoff https://www.justice.gov/usao-edca/press-release/file/1238796/download, and
Paulette Carpoff (Jeff's wife) https://www.justice.gov/usao-edca/press-release/file/1238801/download
pled guilty in the United States District Court for the Eastern District of California to, respectively, conspiracy to commit wire fraud and money laundering; and conspiracy to commit an offense against the United States and money laundering. Previously, Joseph W. Bayliss,  Ronald J. Roach, Robert A. Karmann, and Ryan Guidry pled guilty to related charges. Characterized as the biggest criminal fraud in the Eastern District of California, over $120 million in assets have been forfeited and $500 million has been returned to the United States Treasury. The forfeiture included seizing and auctioning 148 of the Carpoffs' luxury and collector vehicles, including the 1978 Firebird previously owned by actor Burt Reynolds. As alleged in part in the DOJ Release:
 
[A]ccording to court documents, between 2011 and 2018, DC Solar manufactured mobile solar generator units (MSG), solar generators that were mounted on trailers that were promoted as able to provide emergency power to cellphone towers and lighting at sporting events. A significant incentive for investors were generous federal tax credits due to the solar nature of the MSGs.

The conspirators pulled off their scheme by selling solar generators that did not exist to investors, making it appear that solar generators existed in locations that they did not, creating false financial statements, and obtaining false lease contracts, among other efforts to conceal the fraud. In reality, at least half of the approximately 17,000 solar generators claimed to have been manufactured by DC Solar did not exist.

The SEC Complaint https://www.sec.gov/litigation/complaints/2020/comp-pr2020-18.pdf alleged that between 2011 and 2018. Jeffrey and Paulette Carpoff raised about $910 million from 17 investors in the form of investment contracts. As alleged in part in the SEC Release:

[T]he Carpoffs allegedly promised investors tax credits, lease payments, and profits from the operation of mobile solar generators. In reality, the complaint alleges, most of the generators were never manufactured, and the vast majority of the purported lease revenue paid to investors in fact came from new investor funds. As part of the scheme, the Carpoffs arranged for investors to receive false documents, including financial statements, lease arrangements, and generator certifications. Throughout the scheme, the Carpoffs allegedly siphoned off investor funds and used at least $140 million of investor money to fund their lavish lifestyle, which included 150 luxury and sports cars, dozens of properties, and a share in a private jet service.

https://www.finra.org/sites/default/files/fda_documents/2017052466302
%20Robert%20F.%20Spiegel%20CRD%205861656%20AWC%20va.PDF
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Robert F. Spiegel submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Robert F. Spiegel was first registered in 2010, and from October 2014 through November 2018, he was was registered with FINRA member firm First Standard Financial Company LLC. The AWC alleges that Robert F. Spiegel "does not have any disciplinary history with the Securities and Exchange Commission ("SEC"), any state securities regulators, FINRA, or any other self-regulatory organization." In accordance with the terms of the AWC, FINRA found that Robert F. Spiegel had violated FINRA Rules 2111 and 2010; and the self regulator imposed upon him a $5,000 fine and a four-months suspension from association with any FINRA member firm in all capacities; and he was ordered to pay $18,047 in restitution to a customer. As alleged in part in the AWC, during the relevant period between October 2016 and December 2017::

[S]piegel engaged in quantitatively unsuitable trading in the account of customer JM, a 70-year old farmer. Spiegel recommended all of the trading in JM's account, including executing a significant number of trades using margin, and JM followed his recommendations. As a result, Spiegel exercised de facto control over JM's account. 

Spiegel's trading of JM's account resulted in a high turnover rate and cost-to-equity ratio, as well as significant losses. In particular, JM's account exhibited an annualized turnover rate of 34 and an annualized cost-to-equity ratio of 113%. JM's account incurred losses of $77,334 and IM paid $18,047 in commissions and fees. Spiegel's trading in JM's account was excessive and unsuitable given the customer's investment profile. 

http://www.brokeandbroker.com/5028/finra-arbitration-13206/
When is "enough" enough?  When does "reasonable" become "unreasonable?" How many times does it take before "infrequent" is deemed "frequent?" In a recent FINRA intra-industry arbitration, the Arbitrator was asked to decide whether an expungement claim was filed "timely." FINRA's so-called Six-Year Eligibility Rule offers some guidance on the issue, but it depends upon when you set the date by which the countdown begins. Be that as it may, are there some claims that are just too old for expungement? How about one that's been steeping and brewing for 17 years?