Securities Industry Commentator by Bill Singer Esq

December 10, 2020

A NOTE FROM BILL SINGER: Today's Securities Industry Commentator is sooooo epic, soooooo lengthy, soooooo fabulous, that we're also publishing it at the Blog. Omigod, you should get yourself a huge mug of hot coffee and a box of donuts, but don't tell your spouse that you want to eat the entire dozen,  maybe eat like 6 -- no 8 -- of them, and then wrap the other 4 in aluminum foil, and then claim that you only bought 4 and want to share them with your beloved. Not that I would ever do anything like that. Perish the thought. Hmmm, donuts!

Five Defendants in a Microcap Fraud Scheme Attempting to Capitalize On the Covid-19 Pandemic Ordered to Pay Over $12 Million (SEC Release)
As set forth in the "Nature of the Case" portion of the FTC's Complaint:

1. Facebook is the world's dominant online social network. More than 3 billion people regularly use Facebook's services to connect with friends and family and enrich their social lives. But not content with attracting and retaining users through competition on the merits, Facebook has maintained its monopoly position by buying up companies that present competitive threats and by imposing restrictive policies that unjustifiably hinder actual or potential rivals that Facebook does not or cannot acquire. 

2. Facebook holds monopoly power in the market for personal social networking services ("personal social networking" or "personal social networking services") in the United States, which it enjoys primarily through its control of the largest and most profitable social network in the world, known internally at Facebook as "Facebook Blue," and to much of the world simply as "Facebook." 

3. In the United States, Facebook Blue has more than REDACTED daily users and more than REDACTED monthly users. No other social network of comparable scale exists in the United States. 

4. Facebook's unmatched position has provided it with staggering profits. Facebook monetizes its personal social networking monopoly principally by selling advertising, which exploits a rich set of data about users' activities, interests, and affiliations to target advertisements to users. Last year alone, Facebook generated revenues of more than $70 billion and profits of more than $18.5 billion. 

5. Since toppling early rival Myspace and achieving monopoly power, Facebook has turned to playing defense through anticompetitive means. After identifying two significant competitive threats to its dominant position-Instagram and WhatsApp-Facebook moved to squelch those threats by buying the companies, reflecting CEO Mark Zuckerberg's view, expressed in a 2008 email, that "it is better to buy than compete." To further entrench its position, Facebook has also imposed anticompetitive conditions that restricted access to its valuable platform-conditions that Facebook personnel recognized as "anti user[,]" "hypocritical" in light of Facebook's purported mission of enabling sharing, and a signal that "we're scared that we can't compete on our own merits." 

6. As Facebook has long recognized, its personal social networking monopoly is protected by high barriers to entry, including strong network effects. In particular, because a personal social network is generally more valuable to a user when more of that user's friends and family are already members, a new entrant faces significant difficulties in attracting a sufficient user base to compete with Facebook. Facebook's internal documents confirm that it is very difficult to win users with a social networking product built around a particular social "mechanic" (i.e., a particular way to connect and interact with others, such as photo-sharing) that is already being used by an incumbent with dominant scale. Even an entrant with a "better" product often cannot succeed against the overwhelming network effects enjoyed by a dominant personal social network. 

7. Despite strong network effects, important competitive threats to a dominant personal social networking provider can emerge, particularly during periods of technological or social transition and particularly if the newcomer is differentiated from the incumbent in a manner that exploits the technological or social transition. During such periods, a competitor may be able to gain scale despite the network effects enjoyed by the incumbent. 

8. Accordingly, Facebook's leadership has learned and recognized that the sharpest competitive threats to Facebook Blue come not from "Facebook clones," but from differentiated services and during periods of transition. 

9. In an effort to preserve its monopoly in the provision of personal social networking, Facebook has, for many years, continued to engage in a course of anticompetitive conduct with the aim of suppressing, neutralizing, and deterring serious competitive threats to Facebook Blue. This course of conduct has had three main elements: acquiring Instagram, acquiring WhatsApp, and the anticompetitive conditioning of access to its platform to suppress competition. 

10. Instagram Acquisition. In 2012, Facebook acquired Instagram, the most significant personal social networking competitor to emerge since Facebook Blue launched. 

11. Instagram-a mobile-first app that enables users to engage in personal social networking with family and friends through taking, editing, sharing, and commenting on photographs-emerged at a critical time of technological and social transition, when users of personal social networking were migrating from desktop computers to smartphones and toward a greater use of photo-based sharing. Smartphones combined high-quality cameras with mobile access to the internet, which gave consumers new ways to share moments from their lives. By satisfying users' demand for excellence in photo handling, social networking, and user experience via their smartphones, Instagram quickly seized a particularly strong position as a fast-growing provider of personal social networking. As users increasingly demanded and prioritized personal social networking services on their smartphones, and connecting with friends and family through photo-sharing, Instagram became an existential threat to Facebook Blue's personal social networking monopoly. 

12. Facebook initially tried to compete with Instagram on the merits by improving its own mobile photo-sharing features. But by September 2011, Mr. Zuckerberg saw that Facebook had fallen far behind, writing internally: "In the time it has taken us to get ou[r] act together on this[,] Instagram has become a large and viable competitor to us on mobile photos, which will increasingly be the future of photos." 

13. So Facebook fell back on the philosophy that "it is better to buy than compete." In February 2012, Mr. Zuckerberg acknowledged that if left independent-or in the hands of another acquirer like Google or Apple-Instagram threatened to leave Facebook Blue "very behind in both functionality and brand on how one of the core use cases of Facebook will evolve in the mobile 4 world." Emphasizing that this was a "really scary" outcome for Facebook, Mr. Zuckerberg suggested "we might want to consider paying a lot of money" for Instagram. 

14. Mr. Zuckerberg recognized that by acquiring and controlling Instagram, Facebook would not only squelch the direct threat that Instagram posed, but also significantly hinder another firm from using photo-sharing on mobile phones to gain popularity as a provider of personal social networking. As Mr. Zuckerberg explained to Chief Financial Officer David Ebersman in an email, controlling Instagram would secure Facebook's enduring dominance around one of the few social mechanics that could provide a footing for a competing personal social networking provider: 

[T]here are network effects around social products and a finite number of different social mechanics to invent. Once someone wins at a specific mechanic, it's difficult for others to supplant them without doing something different. It's possible someone beats Instagram by building something that is better to the point that they get network migration, but this is harder as long as Instagram keeps running as a product. [Integrating Instagram's functions into Facebook] is also a factor but in reality we already know these companies' social dynamics and will integrate them over the next 12-24 months anyway. The integration plan involves building their mechanics into our products rather than directly integrating their products if that makes sense. . . . [O]ne way of looking at this is that what we're really buying is time. Even if some new competitors spring[] up, buying Instagram, Path, Foursquare, etc now will give us a year or more to integrate their dynamics before anyone can get close to their scale again. Within that time, if we incorporate the social mechanics they were using, those new products won't get much traction since we'll already have their mechanics deployed at scale. (Emphasis added.) 

15. On April 9, 2012-the day Facebook announced it was acquiring Instagram-Mr. Zuckerberg wrote privately to a colleague to celebrate suppressing the threat: "I remember your internal post about how Instagram was our threat and not Google+. You were basically right. One thing about startups though is you can often acquire them." 

16. The Instagram acquisition has given Facebook control over its most significant personal social networking competitor, which both neutralizes the direct threat that Instagram posed by itself, and, additionally, makes it more difficult for other firms to use photo-sharing via smartphones to gain traction in personal social networking. Through its control of Instagram, Facebook has attempted to prevent Instagram from "cannibalizing" Facebook Blue, confirming that an independent Instagram would constitute a significant threat to Facebook's personal social networking monopoly. Despite Facebook's efforts, Facebook Blue has lost users and engagement to Instagram REDACTED

17. WhatsApp Acquisition. After neutralizing the threat from Instagram, Facebook turned to what it considered "the next biggest consumer risk" for Facebook Blue: the risk that an app offering mobile messaging services would enter the personal social networking market, either by adding personal social networking features or by launching a spinoff personal social networking app. Facebook identified the popular and widely used mobile messaging app, WhatsApp, as the most significant threat in this regard. Once again, though, rather than investing and innovating in an effort to out-compete WhatsApp, Facebook responded to the competitive threat by acquiring it. 

18. By early 2012, the risk that a successful mobile messaging app available on multiple mobile operating systems could break into personal social networking had become a strategic focus for the company's leadership. In an April 2012 email, for example, Mr. Zuckerberg identified a troubling global trend of "messaging apps . . . using messages as a springboard to build more general mobile social networks." And by October 2012, the threat was widely recognized within Facebook, with a Facebook business growth director predicting internally that "[t]his might be the biggest threat we've ever faced as a company." 

19. Facebook's attention soon focused on WhatsApp, which, by 2012, had become a uniquely threatening competitor in mobile messaging and an obvious candidate to enter the personal social networking market. Not locked into a single mobile operating system like Apple's  iMessage, nor heavily localized in parts of Asia like LINE, Kakao, or WeChat, WhatsApp was the clear "category leader" in mobile messaging. In an August 2013 email, the head of Facebook's internal mergers and acquisitions ("M&A") group warned that WhatsApp's "kind of mobile messaging is a wedge into broader social activity/sharing on mobile we have historically led in web." 

20. Once again, Facebook decided it was better to buy than compete. After Facebook announced the acquisition of WhatsApp, employees internally celebrated the acquisition of "probably the only company which could have grown into the next FB purely on mobile[.]" Other industry observers shared that view. For example, investment bank SunTrust Robinson Humphrey observed in an analyst report: "We think WhatsApp and Facebook were likely to more closely resemble each other over time, potentially creating noteworthy competition, which can now be avoided." 

21. Just as with Instagram, WhatsApp presented a powerful threat to Facebook's personal social networking monopoly, which Facebook targeted for acquisition rather than competition. Facebook's control of WhatsApp both neutralizes WhatsApp as a direct threat and, separately, makes it harder for future mobile messaging apps to acquire scale and threaten to enter personal social networking. 

22. Anticompetitive Conditioning. In addition to its strategy of acquiring competitive threats to its personal social networking monopoly, Facebook has, over many years, announced and enforced anticompetitive conditions on access to its valuable platform interconnections, such as the application programming interfaces ("APIs") that it makes available to third-party software applications. 

23. In order to communicate with Facebook (i.e., send data to Facebook Blue, or retrieve data from Facebook Blue) third-party apps must use Facebook APIs. For many years- and continuously until a recent suspension under the glare of international antitrust and regulatory scrutiny-Facebook has made key APIs available to third-party apps only on the condition that they refrain from providing the same core functions that Facebook offers, including through Facebook Blue and Facebook Messenger, and from connecting with or promoting other social networks. 

24. This conduct-which is motivated by a desire to weaken and hinder potential competitive threats-harms competition and helps maintain Facebook's monopoly in personal social networking, in at least two ways. 

25. First, announcing these anticompetitive conditions changed the incentives of third-party apps that relied upon the Facebook ecosystem, by deterring them from including features and functionalities that might compete with Facebook or from working in certain ways with other firms that compete with Facebook. This deterrence suppresses the emergence of threats to Facebook's personal social networking monopoly. 

26. Second, enforcing the anticompetitive conditions by terminating access to valuable APIs hinders and prevents promising apps from evolving into competitors that could threaten Facebook's personal social networking monopoly. 

27. Harm to Competition. Through at least the foregoing conduct, Facebook suppresses, deters, hinders, and eliminates personal social networking competition, and maintains its monopoly power in the U.S. personal social networking market, through means other than merits competition. In doing so, Facebook deprives users of personal social networking in the United States of the benefits of competition, including increased choice, quality, and innovation. Facebook cannot justify this substantial harm to competition with claimed efficiencies, procompetitive benefits, or business justifications that could not be achieved through other means. 

28. By suppressing, neutralizing, and deterring the emergence and growth of personal social networking rivals, Facebook also suppresses meaningful competition for the sale of advertising. Personal social networking providers typically monetize through the sale of advertising; thus, more competition in personal social networking is also likely to mean more competition in the provision of advertising. By monopolizing personal social networking, Facebook thereby also deprives advertisers of the benefits of competition, such as lower advertising prices and increased choice, quality, and innovation related to advertising. 

29. Today, Facebook's course of conduct to unlawfully maintain its personal social networking monopoly continues, and must be enjoined. Facebook continues to hold and operate Instagram and WhatsApp, and continues to keep them positioned to provide a protective "moat" around its personal social networking monopoly. Facebook continues to look for competitive threats, and will seek to acquire them unless enjoined. Likewise, Facebook's imposition of anticompetitive conditions on APIs continued until suspended-at least for the time being-in the glare of attention from governments and regulators around the globe. Facebook will resume those policies or equivalent measures unless enjoined.
As set forth in the "Introduction" of the Complaint:

1. Every day, more than half of the United States population over the age of 13 turns to a Facebook service to keep them in touch with the people, organizations, and interests that matter most to them. For them, Facebook provides an important forum for sharing personal milestones and other intimate details about their lives to friends and family: for example, announcing the birth of a child or grieving the loss of a close relative; sharing photos and videos of children and grandchildren; and debating politics and public events. 

2. Users do not pay a cash price to use Facebook. Instead, users exchange their time, attention, and personal data for access to Facebook's services. 

3. Facebook makes its money by selling ads. Facebook sells advertising to firms that attach immense value to the user engagement and highly targeted advertising that Facebook can uniquely deliver due to its massive network of users and the vast trove of data it has collected on users, their friends, and their interests. The more data Facebook accumulates by surveilling the activities of its users and the more time the company convinces users to spend engaging on Facebook services, the more money the company makes through its advertising business. 

4. For almost a decade, Facebook has had monopoly power in the personal social networking market in the United States. As set forth in detail below, Facebook illegally maintains that monopoly power by deploying a buy-or-bury strategy that thwarts competition and harms both users and advertisers. 

5. Facebook's illegal course of conduct has been driven, in part, by fear that the company has fallen behind in important new segments and that emerging firms were "building networks that were competitive with" Facebook's and could be "very disruptive to" the company's dominance. As Facebook's founder and CEO, Mark Zuckerberg observed, "[o]ne thing about startups . . . is you can often acquire them," indicating at other times that such acquisitions would enable Facebook to "build a competitive moat" or "neutralize a competitor." 

6. Zuckerberg recognized early that even when these companies were not inclined to sell, if Facebook offered a "high enough price . . . they'd have to consider it." Facebook has coupled its acquisition strategy with exclusionary tactics that snuffed out competitive threats and sent the message to technology firms that, in the words of one participant, if you stepped into Facebook's turf or resisted pressure to sell, Zuckerberg would go into "destroy mode" subjecting your business to the "wrath of Mark." As a result, Facebook has chilled innovation, deterred investment, and forestalled competition in the markets in which it operates, and it continues to do so. 

7. Facebook's unlawfully maintained monopoly power gives it wide latitude to set the terms for how its users' private information is collected, used, and protected. In addition, because Facebook decides how and whether the content shared by users is displayed to other users, Facebook's monopoly gives it significant control over how users engage with their closest connections and what content users see when they do. Because Facebook users have nowhere else to go for this important service, the company is able to make decisions about how and whether to display content on the platform and can use the personal information it collects from users solely to further its business interests, free from competitive constraints, even where those choices conflict with the interests and preferences of Facebook users. 

8. Users of personal social networking services have suffered and continue to suffer a variety of harms as a consequence of Facebook's illegal conduct, including degraded quality of users' experiences, less choice in personal social networks, suppressed innovation, and reduced investment in potentially competing services. Facebook's conduct deprives users of product improvements and, as a result, users have suffered, and continue to suffer, reductions in the quality and variety of privacy options and content available to them. 

9. By eliminating, suppressing, and deterring the emergence and growth of personal social networking rivals, Facebook also harms advertisers in a number of ways, including less transparency to assess the value they receive from advertisements, and harm to their brand due to offensive content on Facebook services. 

10. Facebook's anticompetitive campaign to forestall competing services that might threaten its dominance in personal social networking services includes a variety of tactics. 

11. Facebook has intensively monitored the growth of scores of applications (or "apps") and purchased those it believed might threaten its monopoly power, sometimes snatching them from other firms in whose hands the acquired firms might flourish and become challengers to Facebook's dominant personal social networking service. 

12. Two of Facebook's largest acquisitions, the mobile social photo app Instagram and the mobile messaging service WhatsApp, each posed a unique and dire threat to Facebook's monopoly. Each had enormous and rapidly growing user networks, and each was well-positioned to encroach on Facebook's dominant market position. Facebook kept both services running after the acquisitions to fill the void, so they would not be replaced by another app with the potential to erode Facebook's dominance.  

13. When Facebook opted not to purchase a firm presenting a competitive threat, or was rebuffed, Facebook cut off access to key components of its immensely valuable network. 

14. As part of its strategy to thwart competitive threats, Facebook pursued an open first-closed later approach in which it first opened its platform to developers so that Facebook's user base would grow and users would engage more deeply on Facebook by using third-party services. This strategy significantly boosted engagement on Facebook, enhanced the data it collected, and made the company's advertising business even more profitable. Later, however, when some of those third-party services appeared to present competitive threats to Facebook's monopoly, Facebook changed its practices and policies to close the application programming interfaces ("APIs") on which those services relied, and it took additional actions to degrade and suppress the quality of their interconnections with Facebook. 

15. This policy change thwarted particular competitive threats and more broadly, it told developers in no uncertain terms that valuable access to Facebook's APIs was conditioned on their staying away from Facebook's turf in personal social networking services, thus chilling, deterring, and suppressing competition. 

16. For these reasons, Plaintiff States, by and through their Attorneys General, bring this action to halt Facebook's anticompetitive conduct and the harm to the States, their economies, and their citizens that has flowed, and continues to flow, from that conduct; to prevent Facebook from continuing to engage in similar such conduct in the future; and to restore lost competition and enable future competition.
The SEC's order finds that GE violated the antifraud, reporting, disclosure controls, and accounting controls provisions of the securities laws.  Without admitting or denying the findings in an SEC Order, General Electric Co. ("GE") agreed to cease and desist from future violations of the charged provisions, pay a $200 million penalty, and report for a one-year period to the SEC regarding certain accounting and disclosure controls in its insurance and power businesses. GE has agree to pay a $200 million penalty to settle charges for disclosure failures in its power and insurance businesses. As alleged in part in the SEC Release

[GE] misled investors by describing its GE Power profits without explaining that one-quarter of profits in 2016 and nearly half in the first three quarters of 2017 stemmed from reductions in its prior cost estimates.  The order also finds that GE failed to tell investors that its reported increase in current industrial cash collections was coming at the expense of cash in future years and came primarily from internal receivable sales between GE Power and GE's financial services business, GE Capital.  In addition, the order finds that from 2015 to 2017, GE lowered projected costs for claims against its long-term care insurance portfolio and failed to inform investors of the corresponding uncertainties resulting from lower estimates of future insurance liabilities at a time of rising costs from long-term health insurance claims.
SEC Charges Technology Company, Former CEO, and Stock Promoter with Fraud (SEC Release), James Jeremy Barbera was charged with one count each of securities fraud, wire fraud, and conspiracy to commit securities fraud and wire fraud. As alleged in part in the DOJ Release:

Between in or about 2009 and in or about 2019, BARBERA was the founder and CEO of a privately held nanotechnology company that represented to investors that the company had developed a breathalyzer sensor technology that could detect cancer and narcotics in human breath, based on technology developed by the National Aeronautics and Space Administration ("NASA"), and that it was also partnered with a major U.S. research university. 

From at least in or about 2013 through in or about 2020, BARBERA and others perpetrated a scheme to defraud dozens of investors out of at least approximately $12.2 million (i) by soliciting investments in the company's equity and notes through false and misleading statements, (ii) by failing to use investors' funds as promised, and (iii) by converting investors' money to his own use.  BARBERA and others made false and misleading representations to actual and potential investors, including as set forth below:

BARBERA falsely represented that the company had developed a breathalyzer sensor, based on technology developed by NASA, that could detect narcotics and cancer from a person's breath.  In truth and in fact, and as BARBERA well knew, the company and NASA never developed such a technology.  Indeed, NASA conducted no research for the company related to this technology after in or about late 2017, and NASA did not permit research related to narcotics testing at NASA facilities.

BARBERA falsely represented that the company had an exclusive license with NASA for certain patents related to a breathalyzer sensor technology for the life of the patents, and used NASA's name and logo to solicit investors in the company.  In truth and in fact, and as BARBERA well knew, the company did not have an exclusive license with NASA.

BARBERA falsely represented to potential and actual investors that institutional investors, including a large, publicly traded chemical company, had made substantial investments in the company.  In truth and in fact, and as BARBERA well knew, that institutional investor never invested in the company.

BARBERA falsely represented that the company would soon have an initial public offering ("IPO"), which would result in large profits to investors.  In truth and in fact, and as BARBERA well knew, the company was not close to an IPO. 

BARBERA converted to his own use approximately 50 percent of the approximately $12.2 million in investor funds in the form of cash withdrawals and to pay personal expenses, including private school and college tuition for his children, mortgage payments on his Central Park West apartment, and for his other personal items, such as credit card bills, jewelry, automobiles, and daily living expenses.

Previously, BARBERA was the CEO of a publicly traded company. On or about July 29, 2014, the U.S. Securities and Exchange Commission ("SEC") announced the settlement of federal securities fraud charges against BARBERA and that company for making materially false and misleading statements about the true business operations and finances of that company.  As part of that settlement, BARBERA was permanently enjoined from future violations of the antifraud provisions of the federal securities laws, and agreed to pay a $100,000 penalty and to be permanently barred from acting as an officer or director of a public company.

In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged Barbera, stock promoter Carl Smith, and Nanobeak with violations of the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and, additionally, charged Smith with aiding and abetting Barbera's violations. As alleged in part in the SEC Release:

[B]etween at least December 2015 and December 2019, Barbera, a New York City resident, and Nanobeak, a private Delaware company located in New York City, made false and misleading statements about the company's business while soliciting, and selling Nanobeak securities to, investors and potential investors. For example, the complaint alleges that Barbera and Nanobeak claimed that Nanobeak was working in conjunction with scientists at NASA and a nationally recognized research university, and that it had developed a sensor device that used a breathalyzer test to detect cancer and drug use. The complaint alleges that, in reality, Nanobeak never developed any such technology. The complaint further alleges that Barbera used at least $1.6 million, or nearly 45% of investor funds, for his own personal benefit. As alleged, after Barbera resigned as Nanobeak's CEO in April 2019, he enlisted Smith, a Sarasota, Florida resident, to sell Nanobeak securities. According to the complaint, Smith falsely told investors that he was a Nanobeak employee, that all investor funds would be used to benefit Nanobeak, and that he was not accepting compensation or taking commissions, when in fact, Smith was never a Nanobeak employee, and in 2019 he received at least $173,000 of investor funds purportedly raised for Nanobeak for his own personal benefit.

Cryptocurrency Founder "Bruno Block" Charged With Multimillion-Dollar Tax Evasion Scheme (DOJ Release)
SEC Charges Individual for Self-Minting Scam and Unregistered ICO (SEC Release)

In an Indictment filed in the United States District Court for the Southern District of New York, Amir Bruno Elmaani a/k/a "Bruno Block" was charged with two counts of tax evasion. As alleged in part in the DOJ Release:

In September and October 2017, ELMAANI began promoting online his new cryptocurrency known as Pearl tokens.  Using a variation of his online pseudonym "Bruno Block," ELMAANI stated that he planned to develop an online data-storage platform, known as Oyster Protocol, which would allow users to purchase online data storage with Pearl tokens.  Instead of using his real name, ELMAANI operated almost exclusively online under the pseudonym "Bruno Block."  ELMAANI concealed his true identity from his prospective employees and business associates and never met them in person.

In the fall of 2017 and thereafter, ELMAANI sold Pearl tokens to the investing public through an "initial coin offering" and on cryptocurrency market platforms.  ELMAANI announced that he intended to take a "founder's share" of Pearl tokens for his own personal use.  ELMAANI owned and controlled the subsequently established company Oyster Protocol Inc. through a shell company not associated with his true name. 

In a statement issued under ELMAANI's online pseudonym on June 7, 2018, ELMAANI stated that he was retaining millions of Pearl tokens as his "ownership stake" in Oyster Protocol, but that he had to move the tokens to a different cryptocurrency wallet "in order to avoid being double-taxed."  In truth, ELMAANI did not report or pay tax on any of his cryptocurrency proceeds.  At various points, ELMAANI used friends and family as nominees to receive cryptocurrency proceeds and transfer them or U.S. currency to his own accounts. 

ELMAANI dealt substantially in precious metals, kept gold bars in a safe on a yacht he owned, and used large amounts of cash to pay personal expenses. 

In late October 2018, although the number of Pearl tokens was purportedly fixed, ELMAANI used his access to the blockchain technology used to create Pearl tokens to mint new tokens, which he took for his own personal use (the "Exit Scheme").  ELMAANI thereby increased the total volume of Pearl tokens.  Shortly after creating the new tokens, ELMAANI converted the Pearl tokens he had obtained to other types of cryptocurrency on an online marketplace or exchange.  As a result of ELMAANI's conduct, trading in Pearl tokens halted on that exchange and the price of Pearl tokens held by investors dropped substantially.  Pearl tokens were subsequently de-listed from the primary exchange where they were traded.  Subsequent to the Exit Scheme, ELMAANI used his friends and family to receive cryptocurrency and to transfer funds to a bank account in his name. 

While ELMAANI initially attempted to hide even "Bruno Block's" involvement in the Exit Scheme, he later effectively admitted to the conduct online under his "Bruno Block" pseudonym.  In a recorded call with the then-chief executive officer ("CEO") of Oyster Protocol Inc., after the Exit Scheme, the CEO asked ELMAANI why he had to take the additional new Pearl tokens if he had already cashed out millions of dollars' worth of Pearl tokens in the past.  ELMAANI responded, in part, that "taxes are pretty nasty."  ELMAANI carried out the Exit Scheme only days before the exchange he had used to cash out his Pearl tokens was set to require "know your customer" personal identifying information from its users. 

ELMAANI filed a false 2017 tax return stating that he had only approximately $15,000 of income from a "patent design" business, and he filed no return and reported no income to the IRS in 2018.  Nevertheless, ELMAANI spent, in 2018, over $10 million for the purchase of multiple yachts, $1.6 million at a carbon fiber composite company, hundreds of thousands of dollars at a home improvement store, and over $700,000 for the purchase of two homes, one of which was titled in the name of a shell company and the other in the name of two of his associates.  

In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged Elmaani with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act and the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act  and Rule 10b-5 thereunder. In part the SEC Release alleges that:

[I]n the fall of 2017, Elmaani offered and sold tens of millions of digital tokens called Pearl tokens in connection with his venture, Oyster Protocol. According to the complaint, the Pearl tokens were securities, but Elmaani's offer and sale of Pearl tokens was not registered with the Commission. The complaint alleged that Elmaani unlawfully raised approximately $1.3 million through his unregistered sale of Pearl tokens. The complaint also alleged that, on or around October 29, 2018, Elmaani used a web of digital wallets to covertly mint approximately four million unauthorized Pearl tokens for himself for free and immediately began selling the tokens in the secondary market. As alleged in the complaint, Elmaani made approximately $570,000 in illicit gains through the minting and sale of Pearl tokens and, as a result of his sales, the price of Pearl tokens fell by nearly 65%, resulting in significant losses for investors.

Greenwich Resident Charged with Federal Offenses Stemming from Alleged Investment Fraud Scheme (DOJ Release)
In an Indictment filed in the United States District Court for the District of Connecticut, Samuel Klein was charged with one count of interstate transportation of property taken by fraud and one count of money laundering. As alleged in part in the DOJ Release:

[K]lein made false representations to a victim-investor, including that the victim-investor's funds would be invested in distressed debt, when Klein knew that all of the investment funds would not be used for the stated purposes.  Based on these false representations, the victim-investor wrote a check in the amount of $200,000 to Visual Group LLC, an entity Klein controlled, for the purpose of making a purported investment in distressed debt.  Klein caused the check to be transported from New York to Connecticut and deposited into a bank account in the name of Visual Group LLC.  Klein subsequently solicited and received an additional $50,010 from the victim-investor by falsely representing that Klein needed to purchase title insurance in approximately that amount.

Klein knew that all of the funds he solicited from the victim-investor would not be used for his stated purposes, and that some of the funds would be utilized by Klein for personal and other expenditures.

Former Chief Operating Officer Who Defrauded Asset Management Company And Its Clients Sentenced To 3 Years In Prison (DOJ Release)
Richard Diver pled guilty in the United States District Court for the Southern District of New York to investment adviser fraud, and he was sentenced to 36 month in prison plus three years of supervised release; and he was ordered to forfeit $5,248,197 and pay an additional $5,248,197 in restitution to his former employer. As alleged in part in the DOJ Release:

DIVER was the chief operating officer ("COO") of a Manhattan-based asset management company ("Company-1") that offers its customers investment planning and wealth management services.  As COO, DIVER's responsibilities included overseeing the company's payroll and billing functions, and he had unfettered access to the payroll controls. 

Beginning in 2011 and continuing into December 2018, DIVER fraudulently caused Company-1's third-party payroll vendor to pay him salary significantly beyond his authorized salary and bonus.  Over that period, DIVER caused over $4.5 million to be routed to his personal checking account above and beyond his approved compensation.

In 2017, DIVER began to also defraud Company-1's clients.  Typically, Company-1 billed its clients quarterly, in most cases having been authorized by the clients to deduct its investment advisory fees directly from their custodial accounts.  DIVER began to cause an employee to run the billing process, which was based on a fixed percentage of the assets the clients had under the company's management, at off-cycle intervals as to certain clients in addition to the regular quarterly intervals at which it billed legitimately.  These billings were not accompanied by any notice.  The clients affected by this practice therefore had their accounts debited twice, but were only notified of the single legitimate billing in periodic reports and correspondence from the company.  DIVER routed the excess funds to his own personal bank accounts through the company's payroll system.  Through this mechanism, DIVER defrauded the clients of over $700,000.

In December 2018, certain clients noticed the overbilling and complained to Company-1's president, who confronted him.  DIVER admitted to both fraudulent practices, stating that the funds he had stolen were consumed by his own "wild" spending.  Prior to his arrest, law enforcement agents recorded a conversation in which DIVER acknowledged having defrauded the company of $4.5 million through the payroll fraud and certain clients of over $700,000 through the billing fraud.
Without admitting or denying the findings in an SEC Order,, ICE Data Pricing & Reference Data LLC agreed to cease and desist from future violations of the charged provision, to a censure, and to pay an $8 million penalty. The SEC Order found that ICE Data PRD had failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act and its rules. As alleged in part in the SEC Release:

[F]rom at least 2015 through September 2020, ICE Data PRD delivered to its clients prices based on single broker quotes while failing to adopt and implement policies and procedures reasonably designed to address the risk that these prices would not reasonably reflect the value of the securities.  The order further finds that the company's quality controls for prices based on single broker quotes were not effectively or consistently implemented. These failures impaired ICE Data PRD's ability to assess the reliability of quotes it received from market participants and determine whether a quote provider was an accurate source of information. This conduct affected the prices ICE Data PRD provided for more than 40,000 fixed-income securities. The SEC's order finds that, due to these failures, ICE Data PRD at times provided clients with prices based on single broker quotes that were inconsistent with the nature of, and that did not reasonably reflect the value of, certain securities.  

Bill Singer's Comment: In the spirit of "yeah BUT," let's take a moment to note that as the ink was drying on the SEC Order imposing the much-trumpeted $8 million penalty, the SEC immediately issued In the Matter of Intercontinental Exchange, Inc.(Order Granting Waiver From Being Ineligible Issuer; '33 Act Rel. No. 10898 / December 9, 2020)

The United States District Court for the District of Massachusetts entered Default Judgments against
FFS Capital Limited, Paifang Trading Limited, Artefactor Limited, Meadow Asia Limited, and Thyme International Limited. 
  • FFS Capital was enjoined from further violations of the registration and antifraud provisions of Sections 5(a), 5(c), 17(a)(1) and 17(a)(3) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder, barred from participating in any offering of a penny stock, and ordered to pay disgorgement and prejudgment interest in the total amount of $8,186,376 and a civil penalty of $963,837; and a conduct-based injunction restricting FFS Capital's future trading in any stock was imposed. 
  • Paifang, Artefactor, Meadow Asia, and Thyme International were enjoined from further violations of the registration provisions of Sections 5(a) and 5(c) of the Securities Act and barred from participating in any offering of a penny stock. 
  • Paifang, Artefactor, Meadow Asia, and Thyme International were ordered to pay disgorgement and prejudgment interest in the amounts of $1,148,864, $1,236,234, $236,409, and $40,190 respectively, and civil penalties of $481,920, $481,920, $100,000, and $20,000, respectively.
As alleged in part in the SEC Release:

[B]eginning around January 2018 Canadian citizen Nelson Gomes, working with Canadian Michael Luckhoo-Bouche and others, ran a fraudulent business through which corporate control persons could conceal their identities while illegally dumping their company's stock into the market for purchase by unsuspecting investors. The complaint alleges that these illegal stock sales were often boosted by promotional campaigns that, in some instances, included false and misleading information designed to fraudulently capitalize on the COVID-19 pandemic. The complaint also charged Canadians Shane Schmidt, Douglas Roe, and Kelly Warawa with fraudulently dumping shares of a microcap company, Sandy Steele Unlimited, Inc. The individual defendants used the entities FFS Capital, Paifang, Artefactor, Meadow Asia, and Thyme International to secretly hold shares for undisclosed control groups and sell those shares into increased demand that was generated through false and misleading stock promotions.
After pleading guilty to an Information charging him with wire fraud, Jose Angel Aman was sentenced in the United States District Court for the Southern District of Florida to 84 months in prison and ordered to pay over $23 million in restitution. As alleged in p art in the DOJ Release:

From about May 2014 through May 2019, defendant Jose Angel Aman and his partners solicited people throughout the United States and Canada to invest in diamond contracts.  Aman and his partners promised investors that they would use the money to purchase rough colored diamonds for Aman to cut, polish and resell at a profit.  They reassured investors that their money was safe because it was secured by Aman's inventory of diamonds (purportedly valued at $25 million). Aman and his partners presented the investment as a high return, no risk deal.

These promises and statements were false.  Aman rarely used investors' money to purchase, cut, and resell rough diamonds.  Nor did Aman have a $25 million diamond inventory.  To conceal the fraud, Aman made purported interest payments to existing investors with money from new investment victims.  At the end of the investment period, Aman and the partners would convince the investors to roll over their money by falsely claiming that the investors had the full value of their investments to put into new deals.  They provided sham "Reinvestment Contracts" to the investors, a tactic they used to buy time until Aman could locate new investors and additional money.

When this scheme was about to collapse, Aman set up a new business, Argyle Coin, LLC, which was purportedly in the business of developing a cryptocurrency token backed by diamonds.  Aman solicited new investors for Argyle, promising high rates of return with no risk.  Aman used only a fraction of the money received from Argyle investors to develop a cryptocurrency token.  He used most of it to pay purported interest payments to the earlier investors and to benefit himself and his partners.

During the course of the Ponzi scheme, Aman and his partners collected over $25 million from hundreds of investors.  Among other things, Aman used the money to support his lavish lifestyle.

The SEC adopted rules to purportedly modernize the infrastructure for the collection, consolidation, and dissemination of market data for exchange-listed national market system stocks ("NMS market data").  As noted in part in the SEC Release:

[T]he national securities exchanges and the Financial Industry Regulatory Authority ("FINRA" and collectively, the "SROs") have acted jointly to collect, consolidate, and disseminate information for NMS stocks.  For each NMS stock, the SROs were required to provide specified NMS market data to exclusive securities information processors ("SIPs").  The SIPs then consolidated that information and made it available to the public.  The rules adopted today are designed to modernize and improve upon that historical infrastructure, by expanding the content of NMS market data and replacing the historical "exclusive SIP" model with a decentralized model of "competing consolidators." 

As adopted, the rules are designed to update and expand the content of NMS market data to include: 

(1) information about orders in share amounts smaller than the current round lot size (e.g., 100 shares); (2) information about certain orders that are outside of an exchange's best bid and best offer (i.e., certain depth of book data); and (3) information about orders that are participating in opening, closing, and other auctions.

Further, the rules call for the creation of a a decentralized consolidation model under which competing consolidators, rather than the existing exclusive SIPs, will collect, consolidate, and disseminate certain NMS information:

[T]o support this decentralized model, the rules require each SRO to make available the data that is necessary to generate consolidated market data to two new categories of entities:  (1) competing consolidators, which will be responsible for collecting, consolidating, and disseminating consolidated market data products to the public; and (2) self-aggregators, which will be brokers, dealers, SROs, and investment advisers registered with the Commission that elect to collect and consolidate market data solely for their internal use. 

Competing consolidators will be required to register with the Commission under new Rule 614 of Regulation NMS.  All competing consolidators will be subject to certain standards with respect to the promptness, accuracy, reliability, and fairness of their operations, and competing consolidators meeting a market share threshold that are "SCI competing consolidators" will be subject to Regulation SCI.  Self-aggregators will not be required to register with the Commission in a separate capacity.
Chair Clayton notes in part that:

[F]irst, the amendments would replace the exclusive, centralized SIP model established in the 1970s, with a competitive, decentralized consolidation model in which multiple competing consolidators would be responsible for collecting, consolidating, and disseminating consolidated market data to the public. In addition, the amendments would allow certain firms and self-regulatory organizations to process, or "self-aggregate," NMS market data feeds, in a way that is similar to and consistent with the way in which firms self-aggregate proprietary data feeds today. Significantly, this framework would seek, for the first time, to introduce competitive forces into the model for processing and distributing NMS market data.

Second, the amendments would update and expand the content of NMS market data to include: (1) information about orders in share amounts smaller than the current round lot size (typically 100 shares), which will improve pre-trade transparency and execution quality, particularly for higher-priced securities; (2) information about certain orders that are outside of an exchange's best bid and best offer (i.e., certain depth of book data), which will help market participants place orders more effectively; and (3) information about orders that are participating in opening, closing, and other auctions, which will facilitate more informed participation in those auctions.

Roadwork Ahead: Upgrading Market Data Infrastructure (Statement by SEC Commissioner Allison Herren Lee)
Commissioner Lee notes in part that:

Moreover, while this rule provides a critical building block in modernizing the National Market System infrastructure, more work remains to be done. The Commission should consider more holistically the standard by which best execution is gauged and achieved. The complexities of today's National Market System and electronic trading can make determining best execution difficult. The Commission should consider broadly what constitutes best execution in today's trading environment and what measures may be taken to ensure that investors have adequate transparency into the quality of execution they receive, including the costs of trading.

Indeed, today's release highlights an important principle regarding best execution. Market participants that have access to data streams of varying degrees of speed and content, cannot use those data streams in a way that would disadvantage customer orders. For instance, a market participant that uses a low-latency or content-rich market data stream for its proprietary trading would be expected to use that same data stream when pursuing best execution of customer orders, especially if orders between the firm and its customers may interact. In short, it would be inconsistent with best execution for a firm to use higher quality data for its own proprietary trading while using lower quality data for customer orders. The Commission emphasizes and reiterates that fact in today's release.

Statement at Open Commission Meeting to Adopt Market Data Infrastructure Rules under Regulation NMS by SEC Commissioner Elad L. Roisman
Commissioner Roisman notes in part that [Ed: footnotes omitted]:

[I] have said several times that I think the Commission should consider providing a non-prescriptive interpretation of, or guidance on, the regulatory requirement to achieve best execution. Doing so would help better differentiate what is required from what firms choose to do for commercial reasons. In response to comments, we provided some guidance in the adopting release that I hope is helpful regarding the application of the duty of best execution. However, we also reiterate that we are not specifying the minimum data elements necessary to achieve best execution. While I recognize that best execution is unique to the circumstances of a particular order, or a particular customer, I believe there is more we could and should do.

Second, in the course of this rulemaking, as in the course of all other discussions on market data, most commenters stated their belief that fees for data are too high. As I mentioned earlier, as part of standing up this new model, the Commission will need to address proposals for various fees related to the provision of data content underlying core data. In addition, SROs will continue to file proposals related to all sorts of data, connectivity, transaction, and regulatory fees in the ordinary course of operating their markets. While the reduction of fixed trading costs for certain scale players may have benefits, the Commission has previously recognized that SRO fees should be considered in the broader context of an SRO's role as both front-line regulator and market operator. In this vein, I have previously asked whether it is time to revisit the Commission's 2004 SRO concept release. Doing so would provide us the opportunity to put a framework around the application of the statutory standards for SRO fees that considers the context for both the full-suite of functions performed by SROs as well as the full-suite of costs incurred by the brokerage industry.

And third, the release discusses in several places the importance of market information to investors, including retail investors. I completely agree. As the Commission has previously stated, one of the most important things we can do for retail investors is provide them access to the information they need to protect and further their own interests. However, I believe that any serious discussion of the potential benefits for retail investors from access to additional market information must also consider the current prevailing modes of intermediation in the equity markets. The Commission should undertake an assessment of the state of intermediation in the equity markets that includes a consideration of the prevailing means by which retail investor orders are executed. Such an assessment seems critical to any thoughtful determination of whether there are further efforts we could take to enhance the ability of retail investors to control, to a greater degree, the quality of their executions, such as through enhanced Rule 605 disclosures or other measures relating to trading activity on different types of market centers.

Market Data Infrastructure: Open Meeting Statement by SEC Commissioner Hester M. Peirce (SEC Release)
Commissioner Peirce notes in part that:

[U]nfortunately, nothing that we are doing today takes us out of the role of serving as market data price referee for core data. However, the new competing consolidator mechanism might be an effective way to inject competition into the market for data dissemination. The benefits of this approach will depend on how many entities sign up to be competing consolidators. I would have supported measures to limit the costs of being a competing consolidator, such as not requiring them to be subject to Regulation SCI. The success of the new dissemination approach will turn in large part on what happens during the long, costly, and complicated implementation process that lies ahead.

This rulemaking does not address my bigger concerns about the distortive effect the Order Protection Rule is having on our markets. The final rule extends, rather than pares back, the OPR. As one commenter warned,

Permitting market makers to post displayed quotes in economically insignificant sizes while providing them the benefits of order protection will ultimately lead to a market where everyone is forced to display quotes in very small sizes [requiring] asset managers with large transactions [to] increasingly have to further "slice" their trading activity into smaller increments to avoid signaling their full trading interest to the market.

Statement on Market Data Infrastructure by SEC Commissioner Caroline A. Crenshaw
Commissioner Crenshaw notes in part that [Ed: footnotes omitted]:

I believe today's rule, by improving both the speed and the content of the public data feeds, is a step toward remedying this conflict. First, participants relying on the public data feeds can have access to crucial market information that, until now, had largely been available only to those who subscribe to high-priced prop data feeds. Second, introducing competition into the market for the consolidation and distribution of the public data feeds has the potential to meaningfully improve the speed, quality, and affordability of the data in those feeds.

While I do believe this rulemaking is a positive first step, it is not a panacea. It is imperative that we carefully monitor the effects of the rule to ensure that it is benefitting investors, and to identify the areas where we need to continue to modernize. For example, using the information the consolidators will be required to report under today's rule, we should assess quality and consider whether we need to implement minimum data standards for the public feeds. Additionally, we should closely watch how market participants use the proprietary and public feeds for their own trading and for their customers, to ensure that investors are being treated fairly.