Securities Industry Commentator by Bill Singer Esq

August 6, 2020

SEC Obtains Default Judgment Against Microcap Executive Charged with Defrauding Retail Investors (SEC Release)

A Bill Singer Jeremiad for Plague Times at the SEC
In an Indictment filed in the United States District Court for the District of Utah, Kurt Jurgens Bauer was charged with three counts of wire fraud and two counts of false impersonation of an employee of the United States. As alleged in part in the DOJ Release:

[B]eginning in 2011 and continuing until April 2020, Bauer devised an advance-fee scheme to solicit money from victims using a variety of what the indictment alleges were fraudulent representations and promises.

Bauer told victims that the United States District Court for the District of Nevada had frozen funds due to him, according to the indictment. Bauer told victims that the court required "bond" payments to secure the frozen funds, and he solicited victims to make the payments - often on a weekly basis, the indictment alleges. Bauer had various explanations for the court's action.

Bauer represented to victim investors that the court was going to release funds to him in the near future. Once the funds were released, the victims would receive large returns in exchange for their upfront payments.

In reality, Bauer fabricated the information he provided to victims about his wealth and the court process to release funds. Bauer has relatively little wealth, the indictment says, apart from money he took from victims. He had no prospect of receiving large amounts of money and no court was holding money Bauer was entitled to. And, the indictment alleges, Bauer had no way of paying victims the promised returns.

The victims' bond payments were not sent to a court, the indictment alleges. Bauer spent the money on himself including paying hotel bills, credit card payments, and restaurants, among other things.

The indictment alleges Bauer received more than $300,000 from victims, including at least $200,000 from victims identified as C.B., age 82, and L.B., age 80, in the indictment.  

To further the scheme, Bauer created false identities of a New York attorney, a federal court employee, and a billionaire that he used to make misrepresentations to and solicit payments from victims. The indictment alleges he created phone numbers and email accounts for the false identities. Communications between the victims and the false identities were actually between the victims and Bauer or one of his accomplices.

In furtherance of the scheme, Bauer and his accomplices impersonated federal judges and a federal court administrator during communications with victims to convince them the court process was real and to persuade victims to continue making payments.
Prostitution. Scams. Humbuggery. Fraud. Lamborghini. Hacking. Neanderthals. Barack Obama. Kanye West. Q-Anon, Trump. Those are just a few of the topics covered by guest blogger Aegis Frumento in his [In]Securities column. Apparently, Aegis has a lot on his mind, or, how do I put this delicately . . . maybe some four months of quarantine are beginning to take their toll?

Without admitting or denying the findings in an SEC Order
/2020/34-89481.pdf, WBI Investments Inc. and Millington Securities consented to findings that they violated Section 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. The Order imposes a cease-and-desist and censures, and WBI will pay a penalty of $750,000, and Millington will pay a penalty of $250,000. As alleged in part in the SEC Release:

[W]BI and Millington served as advisers to a series of mutual funds and a series of exchange-traded funds, among other clients.  The order finds that Millington, which also served as WBI's primary introducing broker, agreed to route WBI's client orders to certain brokerage firms that agreed to pay Millington amounts they characterized as "payments for order flow."  According to the order, the payments to Millington were $0.0125 to $0.0150 per share. The order further finds that, in general and over time, the brokerage firms executing WBI's client trades adjusted the execution prices by $0.02 to $0.03 per share higher for client buy orders and lower for client sell orders.  According to the order, Millington and the brokerage firms mutually understood that the adjusted execution prices allowed the brokerage firms to recoup their payments to Millington and generate profits. The order finds, however, that on at least three occasions, WBI and Millington falsely assured the boards of the mutual funds and the ETFs that these institutional payment for order flow arrangements did not adversely affect the funds' execution prices.    

SEC Obtains Default Judgment Against Microcap Executive Charged with Defrauding Retail Investors (SEC Release)

In a Complaint filed in the United States District Court for the District of Columbia in 2018, the SEC charged Niel Martin Nielson, the Chief Executive Officer of E-Waste Systems, Inc. with orchestrating a scheme to artificially increase the company's share price and volume via a series of sham contracts, materially false and misleading statements, and booked false revenue designed to foster the impression that E-Waste was rapidly expanding across the United States, Europe, and Asia, when, in fact, the company purportedly had virtually no operations. The Court entered a final default judgment against Martin finding that he had:

violated, and permanently enjoins him from violating, the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, the books and records provisions of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder, the certification provision of Rule 13a-14 of the Exchange Act, and the ownership reporting provision of 16(a) of the Exchange Act and Rule 16a-3 thereunder. The judgment also determined that Nielson aided and abetted E-Waste's violations of the reporting provisions of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and permanently enjoins him from aiding and abetting violations of these provisions by others. The judgment imposes a 10-year officer-and-director bar and a 10-year penny-stock bar,and prohibits Nielson from directly or indirectly accepting compensation for consulting for or advising any penny-stock issuer. Nielson is ordered to pay disgorgement of $170,630 plus prejudgment interest and a civil penalty of $170,630.

We got COVID raging in full-blown pandemic fashion. 

We have millions of folks living in a country that they no longer recognize and not quite sure about the "when" or "if" of their next paycheck. 

We have an economy that seems on pause or in cardiac arrest. 

We got whistleblowers who filed a Form TCR (Tip, Complaint, or Referral) through which they provided original information to the SEC that resulted in millions of dollars in collected fines, but those tipsters have no idea as to whether they will be paid a bounty or how many dollars will be awarded. They filed a Form WB-APP applying for their reward but that paperwork was sucked into a vortex. Somewhere in the SEC's claims-processing-pipeline, the all-important Forms WB-APP are swirling, round and round -- so much paper fluttering in a silent vacuum. If you ask where in the process your claim is, they tell you that they can't tell you. They can. They just won't. If you ask how much longer, they tell you that they are not at liberty to divulge that information. They are at liberty. They just opt to jerk you around. Someone knows but no one knows. We have journeyed to the Oracle at Delphi, we have undergone the necessary purification, we have been brought into the temple, we stand in the adyton, we have our question for the Pythia -- but they can't find her. No one knows where she is. No one knows where she went. No one knows when she's coming back. And so we wait. Endlessly. Forever. Worse, there are no Greek gods at the SEC to intercede on our behalf.

Shame on the SEC for tolerating a system that leaves whistleblowers waiting for years without the courtesy of a substantive status report as to where their claims repose in the SEC's vast and impenetrable continuum. And, no, "we have your claim and it is being processed," is not even remotely a professional update. Consider this apparently anonymous 2018 comment that is published on the SEC's website (and "no," I did not write it and have no idea who did):

To date, I have filed one WB-APP after the publication of a Notice of Covered Action. The Commission has not issued a Preliminary Determination more than 18 months after receiving my WBAPP. The relevant Notice of Covered Action concerned a small, expeditiously resolved administrative proceeding. The adjudication of my application should have been a straightforward exercise that is not particularly resource-intensive. Yet, without any explanation from the Claims Review Staff, my application has languished without response for even longer than the apparent duration of the associated investigation, which is both perplexing and frustrating. I understand that many other applicants are similarly situated.

While I applaud the Commission's attempt to eliminate frivolous claims and the resulting backlog of WB-APPs, the Commission can begin to address this problem without waiting for the outcome of the rulemaking process. Specifically, the Commission should: i) hire additional attorneys in the Office of the Whistleblower and/or appoint additional individuals to the Claims Review Staff; 2 ii) prioritize easily processed claims; iii) establish a reasonable deadline for issuing each Preliminary Determination; and iv) provide applicants with periodic updates on the status of pending claims. 

Accordingly, I wholeheartedly agree with the comment letter issued by Kohn, Kohn & Colapinto, LLP on July 24, 2018 (the "Kohn Letter"), which stated: "The most significant problem with the SEC's current whistleblower program is . . . the prolonged delay in processing reward applications. These delays can drag on for years and based on our direct experience, can be as long as four (4) years and running." 

I was particularly disappointed that the proposed rule changes did not establish a deadline for the initial review of WB-APPs. The Kohn Letter opines, "Moreover, just as whistleblowers must adhere to strict timing requirements for filing TCR and APP applications, the SEC staff should similarly be bound by strict time requirements for approving reward applications." A formal deadline would help ensure that the Office of the Whistleblower would process claims in a timely fashion. Considering the potential complexity of competing claims and burdens on Claims Review Staff, I would be satisfied with any reasonable deadline, as long as the deadline was explicitly documented. This requirement could be easily included in Section 240.21F-11(d), which as proposed by the Commission states, "Following this evaluation, the Office of the Whistleblower will send you a Preliminary Determination setting forth a preliminary assessment[.]" It would only take a minor edit to establish this much needed deadline. Moreover, such a change follows directly from the stated goal of the amendments to "more efficiently process award applications."
= = = = =
FOOTNOTE 1: On page 114, the Commission reveals that the Office of the Whistleblower has received approximately 660 properly completed WB-APPs over the past six years, not including repeat submissions from frivolous claimants. During that time, the Commission has issued 128 final orders. Since many orders cover multiple applications and preliminary determinations are not publicly available, the size of the current backlog is unknown.  

FOOTNOTE 2: According to the 2017 Annual Report of the SEC's Whistleblower Program, the 11 attorneys in the Office of the Whistleblower assess each award application before making a recommendation to the 5 senior Enforcement officers who act as Claims Review Staff. At a rate of 110 WB-APPs each year, each attorney could conceivably be tasked with making a recommendation on one application per month. If this is overly burdensome, I encourage the Commission to consider devoting additional resources to processing award applications.

Also see: 

"SEC Whistleblower Program: Three Persons Deemed One Claimant And The 8/10ths Of A Human Being" ( Blog /  November 19, 2019)

"SEC Whistleblower Program Is A Black Hole Of Despair"
( Blog, April 9, 2015)

Given that a decade has now passed since the July 21, 2010, launch date of its Whistleblower Program, it's now time for the SEC to find a way to timely update those who have submitted Forms WB-APP and to promptly pay Awards. 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
Yesterday, I was angered when I found a plethora of public statements from the SEC's chair and commissioners posted on the federal regulator's website. The comments address procedures for nominating candidates to some useless, idiotic committee. The comments address the tailoring -- yes, the "tailoring" -- of reports to shareholders that, frankly, no one reads, no one understands, and serve no purpose other than to obfuscate disclosure and cover the asses of those issuing such nonsense. And this is the crap that the SEC is wasting its limited time and resources on -- in these days of COVID?

In these dire times, the SEC should be focused on prosecuting investment fraud, clearing out the backlog of stale appeals, and having the Claims Review Staff prepare Preliminary Determinations for the Forms WB-APP that are clogging up the pipeline. After the SEC has purged its system of the accumulated sludge, then the chair and commissioners can bloviate about nominating candidates to another in a long line of useless advisory committees, or propose rules and/or amendments whose only likely outcome will be to add more pages of indecipherable disclosures to already overblown documents, or, in the alternative, to strip away some of the few provisions that made any sense to begin with. Whistleblowers who did all that was asked of them should not be left to rot in some tawdry waiting room while the SEC's chair and commissioners pen self-indulgent statements and fail to tackle the dangerous and enervating processing delays that have long plagued the Office of the Whistleblower. 

Clearly, I am not amused with the just-published statements noted below and I will not provide my usual abstracts and extracts of the various releases: