Securities Industry Commentator by Bill Singer Esq

August 19, 2020

Operators Of Global Cryptocurrency Ponzi Scheme And Attorney Charged With Fraud And Money Laundering / Defendants Defrauded Victims of Tens of Millions of Dollars (DOJ Release)

"Lottery Lawyer" and Three Co-Conspirators Indicted in $107 Million Scheme to Defraud Lottery-Winning Clients / Two Defendants Also Charged with Threatening to Kill Recipient of Usurious Loan (DOJ Release)
The former employee was never the subject of the Customer's complaint, which was directed against the former brokerage firm employer and a different broker. Making matters worse, the employee was not involved in the underlying transactions, and he did not recommend or execute the sales complained about. So -- how come the former employee's industry record was marked up with the customer complaint? Well, that's what prompted the FINRA arbitration. In a sign of these COVID pandemic times, the dispute was adjudicated via a virtual FINRA Arbitration hearing. 

It's a fun case to the extent that a major financial institution engages in the same goof that so many of us commit with our own finances. Sometimes it's the "fat thumb." Sometimes we have a brain fart. Sometimes we're just distracted. Whatever . . . been there, done that. As Bloomberg's Hughes notes in part:

It will sound familiar. You're doing an electronic transfer for $10 and just stop short of sending $1,000 by mistake. Sometimes bungled transactions like this go through - but rarely on the scale of last week's $900 million payments blunder by Citigroup Inc., which paid debt investors roughly 100 times more than it was supposed to.

Operators Of Global Cryptocurrency Ponzi Scheme And Attorney Charged With Fraud And Money Laundering / Defendants Defrauded Victims of Tens of Millions of Dollars (DOJ Release)
In an Indictment filed in the United States District Court for the Southern District of New York, Pablo Renato Rodriguez, Gutemberg Dos Santos, and Cecilia Millan were each charged with one count of conspiracy to commit wire fraud, one count of conspiracy to commit bank fraud, and one count of conspiracy to commit money laundering; Scott Hughes was charged with one count of conspiracy to commit bank fraud and one count of conspiracy to commit money laundering; Jackie Aguilar was charged with one count of conspiracy to commit wire fraud. As alleged in part in the DOJ Release:

RODRIGUEZ, DOS SANTOS, HUGHES, MILLAN, and AGUILAR participated in a coordinated scheme in which victim-investors (the "Victims") were induced to invest in AirBit Club based on the promise of guaranteed profits in exchange for cash investments in club "memberships" (the "AirBit Club Scheme" or the "Scheme").  Beginning in late 2015, AirBit Club, through its founders, RODRIGUEZ and DOS SANTOS, as well as its promoters (the "Promoters"), including MILLAN and AGUILAR, marketed AirBit Club as a multilevel marketing club in the cryptocurrency industry.  Promoters falsely promised Victims that AirBit Club earned returns on cryptocurrency mining and trading and that Victims would earn passive, guaranteed daily returns on any membership purchased.

RODRIGUEZ, DOS SANTOS, HUGHES, MILLAN, and AGUILAR traveled throughout the United States, and around the world to places in Latin America, Asia, and Eastern Europe, where they hosted lavish expos and small community presentations aimed at convincing Victims to purchase AirBit Club memberships.  In furtherance of the AirBit Club Scheme, the Victims were induced to buy memberships in cash, including in the Southern District of New York.  Following a Victim's investment, a Promoter provided the Victim with access to an online AirBit Club portal to view the purported returns on memberships (the "Online Portal").  While Victims saw "profits" accumulate on their Online Portal, those representations were false: no Bitcoin mining or trading on behalf of Victims in fact took place.  Instead, RODRIGUEZ, DOS SANTOS, MILLAN, and AGUILAR enriched themselves, and spent Victim money on cars, jewelry, and luxury homes, and financed more extravagant expos to recruit more Victims. 

HUGHES, an attorney licensed to practice law in California, had previously represented RODRIGUEZ and DOS SANTOS in a Securities and Exchange Commission investigation related to another investment scheme known as Vizinova before aiding RODRIGUEZ and DOS SANTOS in perpetrating the AirBit Club Scheme by, among other things, helping to remove negative information about AirBit Club and Vizinova from the internet. 

In many instances, as early as 2016, Victims who attempted to withdraw money from the AirBit Club Online Portal and complained to a Promoter were met with excuses, delays, and hidden fees amounting to more than 50% of the Victim's requested withdrawal, if they were able to make any withdrawal at all.  In one instance, AGUILAR told one Victim of the AirBit Club Scheme who was complaining about her inability to withdraw AirBit Club returns that she should "bring new blood" into the AirBit Club Scheme in order to receive her returns.

In April 2020, another victim received a notice on the AirBit Club Online Portal that his account was closed - and principal investment lost - due to "execution of financial sustainability Reserve, policy #34 of the Airbit Club Terms and Conditions, due to the economic and financial crisis caused by (Covid-19)."

RODRIGUEZ, DOS SANTOS, HUGHES, and MILLAN sought to conceal the AirBit Club Scheme, as well as their respective control of the proceeds of that Scheme, by requesting that Victims purchase memberships in cash, using third-party cryptocurrency brokers, and by laundering the Scheme's proceeds through several domestic and foreign bank accounts, including an attorney trust account managed by HUGHES (the "Hughes Trust Account").  The Hughes Trust Account was ostensibly intended to maintain custody of HUGHES's law practice's client funds.  Instead, the Hughes Trust Account was used by RODRIGUEZ, DOS SANTOS, HUGHES, and MILLAN to conceal the nature and origin of the AirBit Club Scheme's illicit proceeds.  Through that account, HUGHES directed Victim funds to the personal expenses of RODRIGUEZ, DOS SANTOS, MILLAN, and himself, and funded promotional events and sponsorships designed to further promote the AirBit Club Scheme.  In total, the defendants laundered at least $20 million in proceeds of the Scheme through these various methods.

"Lottery Lawyer" and Three Co-Conspirators Indicted in $107 Million Scheme to Defraud Lottery-Winning Clients / Two Defendants Also Charged with Threatening to Kill Recipient of Usurious Loan (DOJ Release)
In an Indictment filed in the United States District Court for the Eastern District of New York attorney Jason Kurland, Christopher Chierchio, former securities broker Francis Smookler, and Frangesco Russo were charged with wire fraud, wire fraud conspiracy, money laundering and money laundering conspiracy; and, additionally, Kurland was charged with honest services fraud, and Russo and Smookler were further charged with extortionate extension and collection of credit for threatening to kill an individual and his family for failure to repay a usurious loan. As alleged in part in the DOJ Release:

The Scheme to Defraud the Lottery Victims

As set forth in court filings, Kurland is a self-dubbed "Lottery Lawyer" purporting to represent dozens of lottery winners throughout the country with total winnings of approximately $3 billion.  One of the winners won the $1.5 billion Mega Millions lottery, another won the $245 million Powerball jackpot, and the third won the $150 million jackpot (together, the "Lottery Victims").  The Lottery Victims each paid Kurland and his law firm hundreds of thousands of dollars, in part so that he could advise them on how to safely invest their money.  After gaining their trust with primarily traditional investments, Kurland steered his clients to invest in various entities and business deals controlled and directed by Russo, Smookler and Chierchio, and received kickbacks in return - which Kurland failed to disclose to his clients.  The defendants then used the money from the Lottery Victims' investments to keep their scheme going and to enrich themselves.  A portion of these funds was funneled back to the Lottery Victims and falsely presented to them as "interest payments" on their investments, other funds went to Kurland as kickbacks, and millions of dollars were stolen to support the defendants' lavish lifestyles - private jets, expensive vacations and luxury vehicles including two yachts.  The funds that the defendants actually invested in various entities and deals were, in large part, eventually lost. 

In intercepted calls cited in court documents, the defendants can be heard discussing their scheme, attempting to cover their tracks and expressing concern about what might happen to them if they were caught by law enforcement.                  

The Scheme to Extort Altieri

Russo's and Smookler invested some of the Lottery Victims' money with Gregory Altieri, a jewelry merchant, and then extended him a $250,000 "street loan."  Conversations recorded during the government's investigation revealed that Russo and Smookler expected to be repaid over $400,000 for the $250,000 loan, and the threats Russo and Smookler made to Altieri in their attempt to collect it.  Russo informed Altieri that he had a "few tactical shotguns . . . with lasers," and Smookler told Altieri that if he did not fully repay the loan, "it's just going to be unbelievable."  Russo compared himself to the mob-affiliated character in "Uncut Gems," a movie that ends with the indebted diamond dealer shot dead.  On another call, Russo told Altieri, "They're gonna pop your head off in front of your f------ kids.  This guy has no clue what he's getting into."  Smookler told Altieri, "You watch my man, you f-----d me, now watch what I am gonna do to you, I'm coming brother.  Full f-----g steam ahead." 

Russo and Smookler also threatened to harm Altieri's family if Altieri did not repay the loan.  Smookler told Altieri that, "[W]e are gonna find your wife today.  That's happening."  Russo informed Altieri that the people coming for him are "going to make you watch as they rip your son's teeth out of his mouth, watch, they're going to do worse things to your wife." 

SEC Charges Promoters of Multi-Level Digital Asset Marketing Scheme (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC alleged that Cecilia Millan and Margarita Cabrera violated the broker-dealer registration provision of Section 15(a) of the Securities Exchange Act. As alleged in part in the SEC Release, the Defendants are characterized as:

two high-level promoters for acting as unregistered brokers when selling the securities of AirBit Club, an investment scheme that targeted LatinX and Spanish-speaking communities and promised returns through a purported digital asset trading program and from the recruitment of others.

The SEC's complaint, filed today, alleges that Cecilia Millan and Margarita Cabrera solicited investors for AirBit Club, including through social media platforms and in-person meetings, without registering with the Commission. According to the complaint, Millan and Cabrera posted videos to thousands of followers on their YouTube channels and received substantial compensation from AirBit for the sale of the securities.

In a FINRA Arbitration Statement of Claim filed in May 2019, customer Claimants asserted "breach of contract and warranties, promissory estoppel; conversion; state fraud statutes; violation of the California Consumer Legal
Remedies Act; and claims under common law. The causes of action relate to the escheatment of each Claimant's shares of Cadence Design Systems, Inc., which were in their accounts with Respondent, and subsequent losses incurred by Claimants as the result of negligence by Respondent." Initially, Claimants sought between $100,000 and $500,000 in damages, punitive damages, interest, and costs. Respondent E*Trade generally denied the allegations and asserted various affirmative defenses.

In a sign of the times, the FINRA Award advises that:

On May 26, 2020, Claimants filed a request for an order compelling a virtual arbitration hearing. On June 2, Respondent filed an opposition to the request for a virtual hearing. On June 5, Claimants filed a reply in support of their request for a virtual hearing. On June 15, the Panel held a pre-hearing conference to hear oral arguments on the request for a virtual hearing. By Order dated June 16, the Panel granted Claimants' request for a virtual hearing. 

On July 28-30, 2020, the Panel held the evidentiary hearing in this matter via videoconference.

The FINRA Arbitration Panel found Respondent E*Trade liable and ordered it to pay to Claimants $139,318.30 in compensatory damages plus interest; $3,415.97 in costs; $300 in reimbursed filing fee; and $45,975.04 in attorneys' fees. 
Bill Singer's Comment: An interesting case on several levels but, sadly, the FINRA Award is bereft of any meaningful content and context. The allegation that the Claimants suffered damages attendant to the escheatment of their Cadence shares raises a number of interesting issues; not the least of which is the extent of the possible negligence involved in allowing said shares to escheat. To the extent that E*Trade had implemented a compliance protocol that failed to detect various circumstances ending in escheatment, it would have been a public service for the Panel to have provided some details for other similarly situated customers. Unfortunately, FINRA's policy of unexplained decisions and minimal content and context in its arbitration forum's decisions once again deflects a more meaningful inquiry to the detriment of the investing public.