Securities Industry Commentator by Bill Singer Esq

December 2, 2020

SEC Awards Over $6 Million to Joint Whistleblowers (SEC Release)

SEC Charges Boiler Rooms Operator with Defrauding Retail Investors (SEC Release)

San Antonio Father and Son Arrested for Alleged Ponzi Scheme (DOJ Release)

Florida Attorney Admits Role in $7.5 Million Bank Extortion Scheme (DOJ Release)

SEC Charges Unregistered Investment Adviser with Defrauding Puerto Rico Municipality (SEC Release)

CFTC Division of Enforcement Issues Annual Report / Agency Ordered Over $1.3 Billion in Monetary Relief and Brought Record Number of Actions in FY 2020 (CFTC Release)
Wall Street's customers have every right to expect -- to demand -- that their personal information is not freely bartered to the highest bidder. Expectations and demands aside, the sale of personal info has become the stock and trade of far too many fintech service providers, but that's a whole other article for another day. One man's Fintech is another's Fintheft. Like I said, be that as it may, FINRA has maintained a vigilant posture when it comes to the misuse of customers' so-called nonpublic personal information, which is often referred to as "NPI" (gotta love acronyms, no?). In today's blog, we consider the missteps of two respondents when it came to their handling of NPI. And then we ponder the imponderable of how long is too long.

In a Complaint filed in the United States District Court for the Eastern District of New York, Mark Lisser was charged with wire fraud. As alleged in part in the DOJ Release:

[B]etween October 2018 and January 2019, Lisser was a partner in Knightsbridge Private Partners LLC ("Knightsbridge"), which operated a series of websites and call centers used to solicit investments in purported pre-IPO shares of companies.  Lisser and employees of Knightsbridge solicited these investments by telling investors and potential investors that Knightsbridge owned the shares it was selling, that Knightsbridge was on the capitalization table of the pre-IPO companies and that Knightsbridge and its employees did not earn any commissions or fees until after the shares were issued to the public and the investor made money.  In fact, as Lisser knew, Knightsbridge did not directly own any of these pre-IPO shares, was not on the capitalization table of any of the pre-IPO companies, and Lisser and Knightsbridge employees received money and commissions from the investments at the time they were made.  As a result of this fraud scheme, Lisser misappropriated more than $700,000 in investors' funds which he used to make payments to companies controlled by Knightsbridge employees, pay salaries and sales commissions, pay his personal credit card bill and make payments on a mortgage., the SEC charged Lisser with violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. As alleged in part in the SEC Release:

[F]rom approximately October 2018 to March 2019, Lisser, and salespeople that he directed in the boiler rooms, solicited investors for Knightsbridge Capital Partners, an unregistered fund manager he operated, by misrepresenting that the Knightsbridge-managed funds had purchased "pre-IPO" shares in three well-known companies directly from employees of the companies.  As the complaint alleges, Knightsbridge did not own any shares at the time it solicited investors and subsequently purchased shares or interests in shares of the companies from third parties, not employees.  Additionally, as alleged in the complaint, Knightsbridge never owned enough shares to cover the sales it had made to investors. 

The complaint further alleges that Lisser and his salespeople falsely claimed to investors that Knightsbridge only charged investors a fee based on the profits after the pre-IPO companies went public, such that Knightsbridge and the investors were on the "same side of the trade," despite significantly marking up sales and charging commissions.  According to the complaint, Lisser misappropriated over $900,000 of investor funds, including by transferring some of the funds to his personal bank account and using investor funds to pay credit card bills.
In an Indictment filed in the United States District Court for the Western District of Texas, Earl Roberts, Sr., 76, and his son, Larry Roberts, 50, were charged with one count of conspiracy to commit wire and mail fraud, two counts of wire fraud, and two counts of mail fraud. As alleged in part in the DOJ Release:

Earl Roberts, Sr., was the president and owner, and Larry Roberts was the Chief Operating Officer of FACTAC, Inc., a company engaged in the business of "factoring" invoices and receivables from other companies.  "Factoring" is a business process whereby a company purchases invoices and accounts receivable from other companies at a discount.  The purchasing company then makes a profit when the invoices and receivables are paid at full value at a later time.

The indictment alleges that the defendants ceased factoring operations in December 2016, but continued to solicit investor funds until February 2018.  Investors were told that their money would only be used to factor receivables when in fact the defendants used investor funds to pay withdrawals and interest payments to previous investors.  The defendants also transferred parts of the investor funds to other companies under their control and used the funds to pay for their own personal expenses, fraudulently enriching themselves.
Attorney Richard L. Williams, 73, pled guilty in the United States District Court for the District of New Jersey to an Information charging him with conspiracy to transmit an interstate communication with intent to extort As alleged in part in the DOJ Release:

Beginning in May 2020, Williams and his client (Client-1) conspired to extort $7.5 million from a commercial bank headquartered in California (Bank-1). Williams threatened Bank-1 that if it did not pay Client-1 $7.5 million, Client-1 would publicly disclose that Client-1 had accessed and obtained certain confidential data from the bank that did not belong to Client-1 and that Client-1 was not authorized to retain.

On June 18, 2020, Williams sent an email to an attorney for Bank-1 that attached a proposed agreement that Bank-1 had not requested. The agreement - titled "Settlement, Assistance, and Confidentiality Agreement" - provided for Bank-1 to pay Client-1 approximately $7.5 million as a "settlement, assistance and confidentiality fee" within 48 hours of signing the agreement. The payment was purportedly in exchange for Client-1 serving for one week as an "advisor" to Bank-1, a service that Bank-1 had not requested, and agreeing not to publicize confidential Bank-1 data that Client-1 had accessed and obtained. The agreement was designed to conceal that Williams and Client-1 were extorting Bank-1.

From July through August 2020, Williams also engaged in a series of telephone conversations with an undercover law enforcement agent (UC-1) who Williams believed was a representative of Bank-1 located in New Jersey, with authority to transfer funds to Williams. During a telephone call with UC-1 on July 24, 2020, Williams warned UC-1 that if Bank-1 did not pay Client-1 it should "fear" that Client-1 might reveal to various third parties that Client-1 had accessed and obtained the confidential data from Bank-1 or issue a press release disclosing that information. Williams also implied that if Bank-1 refused to accede to his demands and pay Client-1, there may be violent consequences from third parties unrelated to Williams. Williams warned UC-1 that "FBI agents were murdered a couple of blocks from where [he was] sitting," and that if Williams were in Bank-1's position, "what would scare the [expletive] out of [him] would be" the reaction of those third parties to the public revelation of Client-1's access and retention of the data.
The SEC awarded over $6 million to joint whistleblowers. As set forth in part in the SEC Order Determining Whistleblower Award Claims ('34 Act Rel. No. 90537, Whistleblower Award Proc. File No. 2021-11), the SEC explained the somewhat unusual "joint" designation as follows in Footnote 1:

A joint award is appropriate as Claimants jointly submitted their tip and Forms WB-APP via the same counsel. See Securities Exchange Act of 1934 ("Exchange Act") Section 21F(a)(6) (defining "whistleblower" to mean "2 or more individuals acting jointly who provide[] information relating to a violation of the securities laws to the Commission"). Our proceeding in this way has not impacted the net total award percentage to Claimants. Unless Claimants, within ten (10) calendar days of the issuance of this Order, make a joint request, in writing, for a different allocation of the award between the two of them, the Office of the Whistleblower is directed to pay each of them individually 50% of their joint award.

In adopting the recommendation of its Claims Review Staff ("CRS"), the SEC noted in part that it had considered:

[(i)] Claimants submitted a joint whistleblower tip providing information that significantly contributed to the Commission's investigation and led to an investigation initiated by the Other Agency; (ii) Claimants' information led to Redacted actions related to a complex Redacted Redacted scheme involving multiple individuals and tens of millions of dollars in ill-gotten gains; and (iii) Claimants substantially assisted the Commission and the Other Agency by, among other things, submitting information and documents, participating in interviews, and identifying key individuals involved in the misconduct. Based on the facts and circumstances of this matter, we believe a *** % joint whistleblower award would recognize the significance of Claimants' information and the high law enforcement interest involved in this matter.
In a Complaint filed in the United States District Court for the District of Puerto Rico the SEC charged unregistered investment adviser  Eugeno Garcia Jimenez, Jr. with violating the antifraud provisions of the federal securities laws. As alleged in part in the SEC Release:

[I]n 2016, Eugenio Garcia Jimenez, Jr. told municipal officials that he could invest approximately $9 million of the municipality's funds with no risk to principal and earn the city annual returns of approximately 10%.  As set forth in the complaint, the city intended to use returns from this investment to fund municipal projects, including the construction of a new trauma center.  The complaint alleges that Garcia falsified documents, including bank correspondence and brokerage opening documents, to convince municipal officials to entrust him with the municipality's funds.   As alleged in the complaint, instead of executing an investment strategy designed to generate the promised returns, Garcia purchased U.S. Treasury notes, immediately took out a margin loan pledging the notes as collateral and, over a period of six months, misappropriated $7.1 million by transferring funds to himself, entities he controlled, and his associates.
The CFTC's Division of Enforcement issued its annual report for Fiscal Year 2020  The CFTC Release notes in part:
  • The most enforcement actions filed in CFTC history (113)-an increase over the previous high (102) and significantly higher than the 30-year average (58).
  • A total of $1,327,869,760 in monetary relief ordered-the fourth highest total in CFTC history, the third straight year-over-year increase, and the second straight year in excess of $1 billion.
  • The largest monetary relief ordered in CFTC history ($920 million), which included the highest restitution ($311,737,008), disgorgement ($172,034,790) and civil monetary penalty ($436,431,811) amounts in a spoofing case.
  • The most retail fraud actions (56) in a single fiscal year in CFTC history, including a record number of actions involving digital assets (7) and a total of 28 actions since the COVID-19 national emergency was declared on March 13, 2020.
  • A total of 16 actions filed in parallel with federal criminal authorities, raising the three-year total of such actions to 46-nearly double the prior seven fiscal years (27).
  • Filed a joint enforcement action with 30 state regulators-the most partners in a single case in CFTC history.
  • Issued the first civil monetary penalty guidance since the Commission published its guidelines in 1994 and the first guidance regarding evaluation of compliance programs in connection with enforcement matters.