Securities Industry Commentator by Bill Singer Esq

BREAKING STORY: United States of America, et al., Plaintiffs, v. Google LLC., Defendant (Complaint, United States District Court for the District of Columbia, 20-CV-03010 / October 20, 2020)

Six Russian GRU Officers Charged in Connection with Worldwide Deployment of Destructive Malware and Other Disruptive Actions in Cyberspace / Defendants' Malware Attacks Caused Nearly One Billion USD in Losses to Three Victims Alone; Also Sought to Disrupt the 2017 French Elections and the 2018 Winter Olympic Games (DOJ Release)

Montrose Man Arrested on Wire Fraud Charge that His Adult Entertainment Website Venture Was Million-Dollar Scam (DOJ Release)

Senior Executive Of Venture Capital Funds Pleads Guilty In Manhattan Federal Court To Securities And Wire Fraud (DOJ Release)

SEC Charges Attorney with Assisting Fraudulent Microcap Scheme (SEC Release)

SEC Obtains Final Judgment Against Investment Adviser Who Defrauded Members of the Israeli-American Community (SEC Release)

SEC Obtains Final Judgment Against Individual Charged in Account Takeover Scheme (SEC Release)

Goldman Sachs expects rejection of SEC plan to raise 13F reporting threshold (Reuters by Chuck Mikolajczak)

FINRA Imposes Fine and Suspension on Rep for Discretion in Deceased Customer's Account and Willful Non-Disclosure of Tax Liens

In the Matter of John Henry Geary, Respondent (FINRA AWC)

FINRA Imposes Fine and Suspension on Rep for Signing Customer's Signature

In the Matter of Travis R. Nelson, Respondent (FINRA AWC)

1. Two decades ago, Google became the darling of Silicon Valley as a scrappy startup with an innovative way to search the emerging internet. That Google is long gone. The Google of today is a monopoly gatekeeper for the internet, and one of the wealthiest companies on the planet, with a market value of $1 trillion and annual revenue exceeding $160 billion. For many years, Google has used anticompetitive tactics to maintain and extend its monopolies in the markets for general search services, search advertising, and general search text advertising-the cornerstones of its empire. 

2. As in many other businesses, a general search engine must find an effective path to consumers for it to be successful. Today, general search engines are distributed primarily on mobile devices (smartphones and tablets) and computers (desktops and laptops). These devices contain web browsers (software applications for accessing information on the internet) and other "search access points" that call on a general search engine to respond to a user's query. Over the last ten years, internet searches on mobile devices have grown rapidly, eclipsing searches on computers and making mobile devices the most important avenue for search distribution in the United States. 

3. For a general search engine, by far the most effective means of distribution is to be the preset default general search engine for mobile and computer search access points. Even where users can change the default, they rarely do. This leaves the preset default general search engine with de facto exclusivity. As Google itself has recognized, this is particularly true on mobile devices, where defaults are especially sticky. 

4. For years, Google has entered into exclusionary agreements, including tying arrangements, and engaged in anticompetitive conduct to lock up distribution channels and block rivals. Google pays billions of dollars each year to distributors-including popular-device manufacturers such as Apple, LG, Motorola, and Samsung; major U.S. wireless carriers such as AT&T, T-Mobile, and Verizon; and browser developers such as Mozilla, Opera, and UCWeb- to secure default status for its general search engine and, in many cases, to specifically prohibit Google's counterparties from dealing with Google's competitors. Some of these agreements also require distributors to take a bundle of Google apps, including its search apps, and feature them on devices in prime positions where consumers are most likely to start their internet searches. 

5. Google's exclusionary agreements cover just under 60 percent of all general search queries. Nearly half the remaining queries are funneled through Google owned-andoperated properties (e.g., Google's browser, Chrome). Between its exclusionary contracts and owned-and-operated properties, Google effectively owns or controls search distribution channels accounting for roughly 80 percent of the general search queries in the United States. Largely as a result of Google's exclusionary agreements and anticompetitive conduct, Google in recent years has accounted for nearly 90 percent of all general-search-engine queries in the United States, and almost 95 percent of queries on mobile devices. 

6. Google has thus foreclosed competition for internet search. General search engine competitors are denied vital distribution, scale, and product recognition-ensuring they have no real chance to challenge Google. Google is so dominant that "Google" is not only a noun to identify the company and the Google search engine but also a verb that means to search the internet. 

7. Google monetizes this search monopoly in the markets for search advertising and general search text advertising, both of which Google has also monopolized for many years. Google uses consumer search queries and consumer information to sell advertising. In the United States, advertisers pay about $40 billion annually to place ads on Google's search engine resultspage (SERP). It is these search advertising monopoly revenues that Google "shares" with distributors in return for commitments to favor Google's search engine. These enormous payments create a strong disincentive for distributors to switch. The payments also raise barriers to entry for rivals-particularly for small, innovative search companies that cannot afford to pay a multi-billion-dollar entry fee. Through these exclusionary payoffs, and the other anticompetitive conduct described below, Google has created continuous and self-reinforcing monopolies in multiple markets. 

8. Google's anticompetitive practices are especially pernicious because they deny rivals scale to compete effectively. General search services, search advertising, and general search text advertising require complex algorithms that are constantly learning which organic results and ads best respond to user queries; the volume, variety, and velocity of data accelerates the automated learning of search and search advertising algorithms. When asked to name Google's biggest strength in search, Google's former CEO explained: "Scale is the key. We just have so much scale in terms of the data we can bring to bear." By using distribution agreements to lock up scale for itself and deny it to others, Google unlawfully maintains its monopolies. 

9. Google's grip over distribution also thwarts potential innovation. For example, one company recently started a subscription-based general search engine that does not rely on advertising profits derived from monetizing user information. Another, DuckDuckGo, differentiates itself from Google through its privacy-protective policies. But Google's control of search access points means that these new search models are denied the tools to become true rivals: effective paths to market and access, at scale, to consumers, advertisers, or data. 

10. Google's practices are anticompetitive under long-established antitrust law. Almost 20 years ago, the D.C. Circuit in United States v. Microsoft recognized thatanticompetitive agreements by a high-tech monopolist shutting off effective distribution channels for rivals, such as by requiring preset default status (as Google does) and making software undeletable (as Google also does), were exclusionary and unlawful under Section 2 of the Sherman Act. 

11. Back then, Google claimed Microsoft's practices were anticompetitive, and yet, now, Google deploys the same playbook to sustain its own monopolies. But Google did learn one thing from Microsoft-to choose its words carefully to avoid antitrust scrutiny. Referring to a notorious line from the Microsoft case, Google's Chief Economist wrote: "We should be careful about what we say in both public and private. 'Cutting off the air supply' and similar phrases should be avoided." Moreover, as has been publicly reported, Google's employees received specific instructions on what language to use (and not use) in emails because "Words matter. Especially in antitrust law." In particular, Google employees were instructed to avoid using terms such as "bundle," "tie," "crush," "kill," "hurt," or "block" competition, and to avoid observing that Google has "market power" in any market. 

12. Google has refused to diverge from its anticompetitive path. Earlier this year, while the United States was investigating Google's anticompetitive conduct, Google entered into agreements with distributors that are even more exclusionary than the agreements they replaced. Also, Google has turned its sights to emerging search access points, such as voice assistants, ensuring that they too are covered by the same anticompetitive scheme. And Google is now positioning itself to dominate search access points on the next generation of search platforms: internet-enabled devices such as smart speakers, home appliances, and automobiles (so-called internet-of-things, or IoT, devices). 

13. Absent a court order, Google will continue executing its anticompetitive strategy, crippling the competitive process, reducing consumer choice, and stifling innovation. Google is now the unchallenged gateway to the internet for billions of users worldwide. As a consequence, countless advertisers must pay a toll to Google's search advertising and general search text advertising monopolies; American consumers are forced to accept Google's policies, privacy practices, and use of personal data; and new companies with innovative business models cannot emerge from Google's long shadow. For the sake of American consumers, advertisers, and all companies now reliant on the internet economy, the time has come to stop Google's anticompetitive conduct and restore competition. 

According to the indictment, beginning in or around November 2015 and continuing until at least in or around October 2019, the defendants and their co-conspirators deployed destructive malware and took other disruptive actions, for the strategic benefit of Russia, through unauthorized access  to victim computers (hacking).  As alleged, the conspiracy was responsible for the following destructive, disruptive, or otherwise destabilizing computer intrusions and attacks:

Cybersecurity researchers have tracked the Conspirators and their malicious activity using the labels "Sandworm Team," "Telebots," "Voodoo Bear," and "Iron Viking."

[F]rom November 2009 to October 2016, Khalafian solicited investments for businesses - including 168 Entertainment LLC, Empire Entertainment Group Inc., and EEG LLC - that purportedly developed and operated adult entertainment websites.

Khalafian allegedly represented that victims' investments would be used for business operations, including developing software and the platform for the proposed websites, paying for servers, hiring employees and purchasing advertising. He also promised that victims' investments would be repaid by a certain date, according to the indictment.

Instead, Khalafian allegedly used the victim investors' funds on gambling, luxury shopping sprees, and to pay back other investors. Khalafian allegedly lied to his victims about the status of the adult entertainment websites and eventually stopped responding to victims, disconnected his phone number and changed his email address. 

In July 2015, Khalafian received $1 million of ill-gotten gains wired from a victim's bank account in Canada to a bank account he controlled in Woodland Hills, according to the indictment. Prosecutors believe this amount comprises approximately half of the money Khalafian raised via this scheme.

From at least in or about December 2013 through at least in or about 2017, Wagner, the chief executive officer of Downing, and LAWRENCE, the president of several Downing entities, solicited investments in Downing, a purported venture capital firm that would invest in healthcare start-ups referred to as "portfolio companies" and provide sales, operations, and management expertise to the portfolio companies in order to bring their products to market and generate returns for Downing investors, who also worked for Downing (the "employee-investors").  Wagner and LAWRENCE, and others acting at their direction, solicited more than approximately $8 million in investments in Downing from employee-investors located across the United States, including in the Southern District of New York, as a requirement of employment with Downing. 

After making the required investment of between $150,000 and $250,000 in Downing and starting their employment at Downing, employee-investors soon learned, among other things, that contrary to representations made by Wagner and LAWRENCE, and others acting at their direction, Downing did not have access to millions of dollars in funding, often could not make payroll, had virtually no products to sell, and employee investments were the overwhelming source of funding.  Employee-investors also learned that Wagner and LAWRENCE had misrepresented the companies in Downing's portfolio, their product readiness, and ability to generate revenue.  While the particular formulation of these misrepresentations shifted over time, Wagner and LAWRENCE systematically sought and obtained employee-investor money through materially false and misleading statements.

Beginning in or about May 2016, after several employee-investors had brought lawsuits against Wagner, LAWRENCE, and several Downing entities alleging claims based on, among other things, fraud, Wagner and LAWRENCE continued the scheme by recruiting employee-investors into a new company called Cliniflow Technologies, LLC ("Cliniflow"), through materially false and misleading statements about Cliniflow's cash reserves, portfolio companies, and exposure to litigation.  In fact, Cliniflow purportedly held majority ownership in the same primary portfolio company as other Downing entities and was simply a new name used by Wagner and LAWRENCE to solicit investments from new employee-investors that was not tainted by the lawsuits filed against Downing entities.  A majority of the over $1.5 million raised by Wagner and LAWRENCE through Cliniflow was transferred to other Downing entities and used to pay for, among other things, Wagner's personal expenses and the repayment of prior investors.

[S]idoti facilitated the fraudulent dumping of securities of penny stock company Blake Insomnia Therapeutics. According to the complaint, as an attorney for Blake, Sidoti drafted and signed documents that she knew contained materially false information regarding the operations and control of Blake, including a private placement memorandum and registration statements filed with the Commission. As alleged in the complaint, Sidoti then arranged to sell almost all of Blake's stock to nominee shareholders to obscure that the shares were actually being sold to shareholders affiliated with Blake. The complaint also alleges that Sidoti authored opinion letters containing false statements about the control of Blake in order to induce the transfer agent to remove restrictive legends from stock certificates held by the control group. As alleged, Sidoti's actions enabled the control group to evade legal restrictions on the sales of stock by affiliates and sell over five million shares of Blake's stock into the public market.

On January 2, 2020, the SEC charged 15 defendants in connection with a scheme that allegedly generated more than $35 million from illegal sales of stock of at least 45 microcap companies, including sales of Blake's stock that Sidoti facilitated.

took advantage of the artificially higher or lower stock prices that resulted from the unauthorized trades placed in the victims' accounts by knowingly trading the same securities in his own accounts. The complaint further alleged that he disguised his real identity using a pseudonym while communicating with at least one other individual through online direct messaging applications.  To mask his payments to the other individual as part of a profit-sharing arrangement, Willner allegedly transferred proceeds of profitable trades to a digital currency company that converts U.S. dollars to Bitcoin and then transmitted the bitcoins as payment.

In November 2018, LPL prohibited registered representatives from using discretion in a brokerage account, except for time and price discretion. However, on November 21, 2018, Respondent sold 500 shares of a stock from a customer's brokerage account without discussing the transaction with the customer on the date of the trade. Unbeknownst to Respondent, the customer had passed away two days before Respondent effected the transaction.

. . .

On or about November 19, 2015, Respondent became aware that the IRS had filed a $70,242 tax lien against him. Respondent belatedly disclosed this lien on his Form U4 on January 12, 2016, after FlNRA inquired with the firm about it in November 2015. 

On or about August 17, 2016, Respondent became aware that the IRS had filed a $19,419 tax lien against him. Respondent belatedly disclosed this lien on his Form U4 on July 12, 2017, after the firm identified the lien and asked him about it. 

On or about July 5, 2017, Respondent became aware that the IRS had filed a $55,900 tax lien against him. Respondent belatedly disclosed this lien on his Form U4 on April 4, 2019, after FINRA inquired with the Firm about it in March 2019. 

The IRS released all of Respondent's liens after he satisfied his tax liabilities. 

Respondent understands that this settlement includes a finding that he willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this omission makes him subject to a statutory disqualification with respect to association with a member.   

In April 2019, in an attempt to effect higher value transfers requested by a customer, Nelson created a letter requesting an increased fund transfer limit, in accordance with Schwab procedure. However, Nelson signed the customer's signature on the letter without the customer's authorization and submitted it to Schwab. As a result, Nelson violated FINRA Rule 2010.

. . .

In the course of FINRA's investigation regarding Nelson's alleged signing of a customer's signature, Nelson provided false statements regarding his conduct in August 2019 and January 2020 responses to FINRA Rule 8210 requests. Nelson subsequently recanted his false statements in a declaration provided to FINRA in September 2020. 

• Securities Industry Commentator
• Bill Singer