Securities Industry Commentator by Bill Singer Esq

February 12, 2020

California Man Sentenced for Role in International Money Laundering Network (DOJ Release)
CNBC reporter Greg Iacurci warns:

State and federal authorities uncovered 60 alleged Ponzi schemes last year with a total of $3.25 billion in investor funds - the largest amount of money unearthed in these scams since 2010 and more than double the amount from 2018 . . .

Chasing Madoff / An Interview with Harry Markopolos (Fraud Magazine by Dick Carozza / May/June 2009)
How important are whistleblowers when it comes to uncovering Ponzi schemes? Consider these comments from 2009 by Harry Markopolos, who is widely recognized as having uncovered Bernie Madoff's fraud:

During your testimony, you recommended the establishment of an Office of the Whistle-blower within the SEC. What should the office look like? 

First, it needs a technological filter to winnow through the hundreds of thousands of e-mail complaints received each year to sort through the ones that are specific, credible, and worth following up by a trained investigator. Second, trained investigators who have excellent phone-interviewing skills need to conduct follow-up calls on the most promising leads. Third, these trained investigators have to be able to gain whistle-blowers' trust and develop additional information. Fourth, the whistle-blower program needs to provide a bounty for cases submitted under seal to the SEC that result in a successful recovery by the agency.

The Department of Justice and the Internal Revenue Service both pay rewards of 15 to 30 percent for successful cases submitted by whistle-blowers and, as a result, these two agencies receive lots of well-developed, large fraud cases each year. Fifth, a case-tracking system needs to be adopted that tracks cases from start to finish. Sixth, the SEC needs to data mine the complaints for useful data that raises red flags for further analysis about future fraud trends.'

Some seven years after launching its Whistleblower Program, it's now time for the SEC to find a way to timely process tips and timely pay Awards. Long after the SEC has collected fines from miscreants, the whistleblowers responsible for such successful enforcement efforts are left standing out in the cold and refused any meaningful indication of "how much longer." If the SEC's Whistleblower Program is to remain viable and potent, the federal regulator must hold itself more accountable for acting in a timely manner. A first step -- a token gesture of  good faith -- would be for the SEC to create and post on its website a Statistics page disclosing the historic average and the current trailing 12-month timeline from filing of a TCR to:
      • issuance of a Notice of Covered Action ("NoCA");
      • collection of fines for matters subject to a NoCA;
      • issuance of the CRS Preliminary Determination;
      • issuance of an SEC Award; and, 
      • payment of the first and last payments of any Award. 
Bill Singer's Comment:  Sadly, as Ponzi scams mount and investors are increasingly victimized, the SEC's Whistleblower program continues to drop anchor and refuses to expedite the processing of claimants' WB-APPs. Whistleblowers are a valuable asset but there is no meaningful effort by the SEC to timely pay awards after the SEC has settled its claims and the fines are fully paid. The statistics speak for themselves. As Ponzi schemes increase in number, the SEC's failed Whistleblower program promises those who submit Forms TCR little beyond delay, rebuff, and a despicable lack of ongoing communication about the status of their claims. Apparently, the SEC has not learned that much from the Madoff debacle.
Attorney Monique N. Brady, who was also the owner of a business specializing in preserving the condition of foreclosed homes for resale (referred to in the DOJ Release as "MSN"), pled guilty in the United States District Court for the District of Rhode Island to wire fraud, aggravated identity theft, and obstructing an IRS investigation; and she was sentenced to 96 months in prison plus three years of supervised release, and she was ordered her to pay $4.8 million in restitution. As alleged in part in the DOJ Release., Brady had:

previously admitted to the court that among those she defrauded were close friends in her community, a close friend from childhood and another from law school, a childcare provider for her children, an elderly Alzheimer's patient, her step-brother, and three firefighters in the same city where her now ex-husband is employed as a firefighter.

As part of the scheme, Brady told investors that her company had secured contracts to perform large scale rehabilitation projects on foreclosed properties in Rhode Island, Connecticut, Massachusetts, and New Hampshire. She represented to a total of thirty-one investors that payments ranging from approximately $20,000 to $80,000 were needed to pay subcontractors to perform the work. In exchange for their investment, they were promised a return of fifty percent of the profit realized on the project they invested in. Many investors realized little or no return on their investment. Some investors invested in multiple projects.

In reality, MNB was hired by banks to perform menial tasks such as mowing grass, changing locks, winterizing properties, boiler or electrical inspections, and snow removal. The majority of projects secured by MNB were for less than $1,000. Many were for as little as $25 to a few hundred dollars.

To make potential investors believe she had secured contracts for large scale rehabilitation projects, Brady provided fraudulent emails purporting to be from a national property rehabilitation company claiming Brady had been approved to rehabilitate a property. Brady included in the emails fraudulent itemizations of work to be performed. Brady also included, without permission, the identity of an actual employee of the national property rehabilitation company in an attempt to make the emails appear authentic.

By the time the scheme ended after its discovery in the summer of 2018, twenty-three individuals had lost approximately $4.8 million to Brady. An investigation by Internal Revenue Service Criminal Investigation revealed that of the 171 properties for which Brady solicited and received funds from investors, 98 were for properties her company was never hired to preserve, on which no work was performed.

. . .

Brady also admitted to attempting to obstruct an Internal Revenue Service criminal investigation when, after being told by IRS criminal investigators she was under investigation, she asked investors to delete or destroy all email correspondence, texts, and documents relating to their investments in MNB rehabilitation projects.

According to court documents, after Brady became aware of the investigation, she and her paramour, a Rhode Island attorney, secured a meeting with the Rhode Island Department of the Attorney General and the Rhode Island State Police, requesting they investigate the victims of this case for usury.

As the case proceeded toward federal indictment, Brady purchased a one way ticket to Vietnam. Once the FBI discovered Ms. Brady's intention to leave the country, she moved her flight to an earlier departure date. Ms. Brady was arrested one day before her scheduled flight.

Bill Singer's Comment: A truly riveting story. Be that as it may, what's with the "she and her paramour " reference? Paramour? I mean, c'mon, this is 2020 not 1820. 

2019 Internet Crime Report Released / Data Reflects an Evolving Threat and the Importance of Reporting (FBI Release)
As set forth in part in the FBI Release, the 2019 Internet Crime Report, shows that:

Internet-enabled crimes and scams show no signs of letting up, according to data released by the FBI's Internet Crime Complaint Center (IC3) in its 2019 Internet Crime Report. The last calendar year saw both the highest number of complaints and the highest dollar losses reported since the center was established in May 2000.

IC3 received 467,361 complaints in 2019-an average of nearly 1,300 every day-and recorded more than $3.5 billion in losses to individual and business victims. The most frequently reported complaints were phishing and similar ploys, non-payment/non-delivery scams, and extortion. The most financially costly complaints involved business email compromise, romance or confidence fraud, and spoofing, or mimicking the account of a person or vendor known to the victim to gather personal or financial information.

Leader Of Fake Cryptocurrency Investment Scheme Charged With Fraud And Money Laundering (DOJ Release)

In an Indictment filed in the United States District Court for the Southern District of New York, Q3 Holdings LLC and Q3I, LP's Principal Michael Ackerman was charged one count each of wire fraud and money laundering. As alleged in part in the DOJ Release, Ackerman:

and others started a purported cryptocurrency "investment" fund (the "Fund") and recruited hundreds of individual investors into the Fund.  Under the terms of the Fund, investors were told that they would receive 50% of their trading profits, and that the founders of the Fund, including ACKERMAN, would receive the other 50%.  ACKERMAN falsely represented to potential investors that the fund had historical returns of approximately 15% each month.  Moreover, during the period alleged in the Complaint and Indictment, ACKERMAN prepared materials falsely purporting to show that the Fund was returning approximately 15% each month, and shared that information with Fund investors.  For example, in or about December 2019, ACKERMAN represented to investors and others that the Fund had a balance of over $315 million worth of cryptocurrencies available for trading in a Fund account.  Those representations by ACKERMAN included screenshots of trading data doctored by ACKERMAN in order to make it appear that the Fund was operating at that successful level, when its actual trading balance was less than the equivalent of half a million dollars.  ACKERMAN, moreover, regularly stole proceeds of this fraud from the Fund, and attempted to conceal those proceeds not only through his false representations to investors, but through the purchase of at least five pieces of real estate, all of which were titled to third parties., the SEC alleged that:

[M]ichael W. Ackerman, along with two business partners, raised at least $33 million by claiming to investors that he had developed a proprietary algorithm that allowed him to generate extraordinary profits while trading in cryptocurrencies. According to the SEC's complaint, physicians in particular made investments in two entities Q3 Trading Club and Q3 I LP when they were introduced to the digital currency investment opportunity by one of the business partners who also was a physician. The SEC's complaint alleges that Ackerman misled investors about the performance of his digital currency trading, his use of investor funds, and the safety of investor funds in the Q3 trading account.  The complaint further alleges that Ackerman doctored computer screenshots taken of Q3's trading account to create the illusion that Q3 was highly invested in cryptocurrencies and was extraordinarily profitable, holding assets of as much as $310 million. In reality, as alleged, at no time did Q3's trading account hold more than $6 million and Ackerman was personally enriching himself by using $7.5 million of investor funds to purchase and renovate a house, purchase high end jewelry, multiple cars, and pay for personal security services.

In a Complaint filed in the United States District Court for the Southern District of New York, the CFTC alleged that 

[F]rom at least August 2017 through December 2019 defendants operated a fraudulent scheme in which they solicited funds to purportedly trade digital assets and then misappropriated those funds. The defendants engaged in numerous misrepresentations that included making claims of (i) earning customers .5% in daily trading profits and roughly 15% per month, (ii) using algorithms that generated winning trades 75% of the time, and (iii) utilizing security measures that made it impossible for any principal to transfer or withdraw customer funds.

In reality, the defendants sent only a small portion of the customers' funds to digital asset trading accounts, did not earn the trading profits they claimed, and misappropriated funds. To conceal the fraud, the defendants provided customers with false accounting statements, newsletters containing false trading returns, and fictitious screenshots reflecting the amount of money under Q3's management.
The SEC obtained a partial consent judgment against defendant Ashik Desai, a former executive of Outcome Health, who was charged in a Complaint filed in the United States District Court for the Northern District of Illinois with fraud in connection with raising nearly half a billion dollars from unsuspecting investors. Desai consented to the entry of a judgment that permanently enjoins him from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b)(5) of the Exchange Act and Rule 10b-5 thereunder. As alleged in part in the SEC Release, Desai:

and three other executives engaged in a fraudulent scheme in which they falsely portrayed Outcome Health as an overwhelming success to investors, clients, and auditors.  As part of this scheme, Outcome Health allegedly overstated its revenue in its audited financial statements for 2015 and 2016 by millions of dollars while raising approximately $487 million from investors, who relied on the false financial statements and false representations about the company's growth. The amended complaint charges Desai and the three other Outcome Health executives with violating, as well as aiding and abetting the company's violations, of the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Act of 1934 and Rule 10b-5 thereunder.
Oghenetchouwe Adegor Ederaine, Jr. pled guilty in the United States District Court for the District of Massachusetts to one count each of conspiracy to engage in money laundering and aggravated identity theft; and he was sentenced to 40 months in prison plus three years of supervised release. As alleged in part in the DOJ Release:

Ederaine and his co-conspirators were members of an organization that engaged in wire fraud, money laundering and related criminal activity. Ederaine acted as a money mule for the organization by opening numerous bank accounts using different fraudulent identities for the purpose of receiving, withdrawing and transferring proceeds of criminal activity. Specifically, between March 2016 and November 2017, Ederaine used counterfeit passports and other false identification documents to open approximately 23 fraudulent bank accounts at different banks in the Los Angeles area using six different false identities. Ederaine personally laundered between $1.5 million and $3.5 million in fraudulent funds between March 2016 and February 2018. 

In January 2018, Ederaine's co-conspirators gained access to email accounts belonging to a Massachusetts real estate attorney. Ederaine's co-conspirators sent emails to individuals in Massachusetts that "spoofed" the real estate attorney's account in an attempt to cause these individuals, who were purchasing real estate, to transfer $531,981 to the account of a woman who, in turn, sent $60,000 to an account controlled by Ederaine. Ederaine then withdrew approximately $9,000 in cash from the account. 

In a separate scheme from approximately 2017 through 2018, Ederaine made fraudulent purchases and engaged in fraudulent online transactions using the personally identifiable information (PII) and financial information of numerous students at a Santa Monica ELS Education Services, Inc. Ederaine, who worked at ELS, had access to the PII and financial information of the students, and used that access to make purchases of personal items.