Securities Industry Commentator by Bill Singer Esq

January 13, 2021

Owner of Bitcoin Exchange Sentenced to Prison for Money Laundering (DOJ Release)

Former CEO Of Real Estate Private Equity Investment Firm Charged With Securities Fraud (DOJ Release)

SEC Charges Real Estate Fund Manager With Misappropriating Over $7 Million From Retail Investors (SEC Release)
DOJ announced that Visa Inc. and Plaid Inc. have abandoned their planned $5.3 billion merger. The DOJ Release alleges in part that:

The department filed a civil antitrust lawsuit on Nov. 5, 2020, to stop the merger, alleging that Visa is a monopolist in online debit, charging consumers and merchants billions of dollars in fees each year to process online payments.  Plaid, a successful fintech firm, is developing a payments platform that would challenge Visa's monopoly.  According to the complaint, the transaction would have enabled Visa to eliminate this competitive threat to its online debit business before Plaid had a chance to succeed, thereby enhancing or maintaining its monopoly.  The case was scheduled for trial in the U.S. District Court for the Northern District of California on June 28, 2021.  As a result of Visa and Plaid's decision to terminate their merger agreement, the United States has filed a Joint Stipulation of Dismissal., DOJ filed a civil antitrust lawsuit to stop Visa Inc.'s $5.3 billion acquisition of Plaid Inc. The DOJ Release characterizes Visa a a "monopolist in online debit services, charging consumers and merchants billions of dollars in fees each year to process online payments.  Plaid, a successful fintech firm, is developing a payments platform that would challenge Visa's monopoly." As alleged in part in the DOJ Release: 

[P]laid powers some of the most innovative fintech apps.  Plaid's technology allows developers to plug into consumers' various financial accounts, with consumer permission, to aggregate spending data, look up balances, and verify other personal financial data.  Plaid connects to 200 million consumer bank accounts and 11,000 U.S. banks.  Because it accesses data on behalf of so many fintech app customers, Plaid has become the leading financial data aggregation company in the United States.  Plaid is planning to leverage its connections to build a bank-linked payments network that would compete with Visa.  Plaid's money movement platform would allow consumers to pay merchants directly from their bank accounts using bank credentials rather than a debit card.  Plaid's established connections and technology uniquely positions it to enter the payments market and disrupt Visa's monopoly. 

The complaint alleges that Visa's CEO viewed the acquisition as an "insurance policy" to protect against a "threat to our important US debit business."  This acquisition is the second-largest in Visa's history, with an extraordinary price tag of $5.3 billion.  Visa's CEO justified the deal to Visa's Board of Directors as a "strategic, not financial" move, and noted that in part because "our US debit business i[s] critical and we must always do what it takes to protect this business."  Unless acquired, Visa feared that Plaid "on their own or owned by a competitor [was] going to create some threat" with a "potential downside risk of $300-500M in our US debit business" by 2024.  If Plaid remained free to develop its competing payment platform, then "Visa may be forced to accept lower margins or not have a competitive offering."

Millions of American consumers and merchants depend on debit services to transact business online.  The complaint alleges that Visa has dominated online debit for years and has protected its monopoly with exclusionary tactics that have prevented rivals, including Mastercard, from expanding or entering. The lawsuit alleges that Visa's proposed acquisition of Plaid is a violation of both Section 2 of the Sherman Act and Section 7 of the Clayton Act.  The Department filed its lawsuit in the U.S. District Court for the Northern District of California.

Visa Inc. is a Delaware corporation headquartered in Foster City, California.  Visa is a global payments company that operates the largest debit network in the United States.  Visa's 2019 revenues were approximately $23 billion. 

Plaid Inc. is a Delaware corporation headquartered in San Francisco, California.  Plaid is a financial services company that operates the leading financial data aggregation platform in the United States.  In 2019, Plaid earned approximately $100 million in revenues.

When a defendant is charged with false reporting based on an ambiguous reporting requirement, what is the prosecution's burden at trial as to the element of falsity? Is it sufficient for the prosecution to prove the statement was false only under the Government's interpretation of the requirement, or must it prove the statement was false under each objectively reasonable interpretation of the requirement? In the balance hang the convictions of four former executives of Wilmington Trust Corporation, a bank that, in the wake of the Great Recession of 2008, excluded certain commercial real estate loans from those it reported as "past due" to the Securities and Exchange Commission and the Federal Reserve. The executives maintained that, under a reasonable interpretation of these requirements, the exclusion of the loans was proper, but the District Court denied their requests to introduce evidence concerning or instruct the jury about that alternative interpretation. The jury then found the executives' reporting constituted "false statements" for purposes of 18 U.S.C. § 1001, 15 U.S.C. § 78m, and related statutes and convicted Defendants on all counts. 

We hold today that to prove falsity beyond a reasonable doubt in this situation, the Government must prove either that its interpretation of the reporting requirement is the only objectively reasonable interpretation or that the defendant's statement was also false under the alternative, objectively reasonable interpretation. And because the Government here produced insufficient evidence from which a rational jury could find Defendants' statements false under this rule, we will reverse Defendants' false statements convictions and remand on those counts for entry of judgments of acquittal. As for Defendants' conspiracy and securities fraud convictions, however, which were charged in the alternative on an independent theory of liability, we will vacate and remand for retrial.
After a two-week trial in the United States District Court for the Eastern District of Kentucky,  Rossen G. Iossifov was found guilty of conspiracy to commit a Racketeer Influenced and Corrupt Organizations Act (RICO) offense and conspiracy to commit money laundering; and he was sentenced to 121 months in prison. Previously, 17 members of the conspiracy were convicted and, to date, seven have been sentenced to prison terms:
  • Livui-Sorin Nedelcu: 82 months 
  • Marius Dorin Cernat: 50 months
  • Stefan Alexandru Paiusi: 31 months
  • Eugen Alin Badea: 40 months
  • Florin Arvat: 30 months
  • Alin Ionut Dobric: 37 months
  • Austin Edward Nedved: 96 months
As alleged in part in the DOJ Release:

[I]ossifov owned and managed RG Coins, a cryptocurrency exchange headquartered in Sofia, Bulgaria. According to the evidence at trial, Iossifov knowingly and intentionally engaged in business practices designed to both assist fraudsters in laundering the proceeds of their fraud and to shield himself from criminal liability. At least five of Iossifov's principal clients in Bulgaria were Romanian scammers, who belonged to a criminal enterprise known in court records as the Alexandria (Romania) Online Auction Fraud (AOAF) Network. 

More specifically, according to court documents and evidence presented at trial, Iossifov and his co-conspirators participated in a criminal conspiracy that engaged in a large-scale scheme of online auction fraud that victimized at least 900 Americans. Romania-based members of the conspiracy posted false advertisements to popular online auction and sales websites - such as craigslist and eBay - for high-cost goods (typically vehicles) that did not actually exist. Once victims were convinced to send payment, the conspiracy engaged in a complicated money laundering scheme wherein domestic associates would accept victim funds, convert these funds to cryptocurrency, and transfer proceeds in the form of cryptocurrency to foreign-based money launderers. Iossifov was one such foreign-based money launderer who facilitated this final step in the scheme.

According to evidence at trial, Iossifov designed his business to cater to criminal enterprises by, for instance, providing more favorable exchange rates to members of the AOAF Network. Iossifov also allowed his criminal clients to conduct cryptocurrency exchanges for cash without requiring any identification or documentation to show the source of funds, despite his representations to the contrary to the major bitcoin exchanges that supported his business. Evidence submitted during trial and his sentencing hearing revealed that Iossifov laundered nearly $5 million in cryptocurrency for four of these five scammers in a period of less than three years. This represented over $7 million in funds defrauded from American victims. In return, Iossifov made over $184,000 in proceeds from these transactions.

Former CEO Of Real Estate Private Equity Investment Firm Charged With Securities Fraud (DOJ Release)

In a Complaint filed in the United States District Court for the Southern District of New York, Eric Malley, the founder and former Chief Executive Officer of MG Capital Management L.P. was charged with one count of securities fraud and one count of wire fraud. As alleged in part in the DOJ Release:

MALLEY founded MG Capital Management L.P. ("MG Capital") in approximately January 2013, and served as its chief executive officer ("CEO") from that time until approximately December 2019.  MALLEY described MG Capital as an opportunity for investors to invest in luxury residential real estate properties through limited partnership interests, and formed two real estate investment funds, MG Capital Management Residential Fund III ("Fund III") and MG Capital Management Residential Fund IV ("Fund IV") (collectively, "the Funds"), in approximately February 2014 and September 2017, respectively.

In connection with marketing the Funds to investors, MALLEY touted two purportedly extremely successful prior funds he had formed, Fund I and Fund II.  MALLEY also assured investors that the Funds would be and were debt-free, and that the properties held by the Funds would be and were leased primarily to corporate tenants.  MALLEY's representations about the existence and performance of Funds I and II were largely fabricated.  Furthermore, the Funds were not debt-free, but instead held mortgaged properties, and the properties that made up the Funds were almost entirely leased to individual, not corporate, tenants.

Investors in the Funds, many of whom invested the entirety of their retirement savings, lost all or almost all of their investments.  As to Fund III, in total, approximately 60 investors invested approximately $23 million.  Fund III incurred net operating losses of approximately $860,000, and its investors never received either distributions or a return of their investments.  MALLEY nevertheless distributed at least approximately $278,000 to himself in his capacity as general partner.  As to Fund IV, in total, approximately 275 investors invested approximately $35 million.  Fund IV incurred millions of dollars in losses, and MALLEY did not disclose those losses until approximately two years into Fund IV's operation.

In or about mid-December 2019, MALLEY stepped down from his role as CEO of MG Capital.  Between in or about February 2020 and on or about March 31, 2020 - after MALLEY had become aware that the U.S. Securities and Exchange Commission ("SEC") was investigating him - MALLEY accessed MG Capital's server and deleted approximately 10,000 files from the server, including broker information and closing documents detailing the closing costs associated with acquisition of properties, which were used to obtain funding from the Funds' administrators.

In a Complaint filed in the United States District Court for the Southern District of New York, the SEC 
Malley and MG Capital Management L.P. 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 further charged Malley with aiding and abetting the violations of MG Capital and violating the control person provision of Section 20(a) of the Exchange Act. The Complaint named MG GP III LP, and MG CAPITAL REALTY MANAGEMENT LLC as Relief Defendants. As alleged in part in the SEC Release:

[B]eginning in 2014, Malley - a licensed real estate broker with no investment management experience - and MG Capital solicited investments in two real estate funds, MG Capital Management Residential Funds III and IV, respectively, raising a total of $58 million primarily on the strength of a fabricated investment track record. The complaint alleges that in marketing Funds III and IV, Malley and MG Capital falsely claimed that they had previously managed two highly-successful real estate funds with a combined portfolio value of $1.18 billion that had significantly outperformed the S&P 500 Index over a 10-year period when, in fact, those prior funds never existed. As alleged, Malley and MG Capital made numerous other misrepresentations in their marketing materials and offering documents, including claiming that investors' capital was "100 percent protected from loss" and secured by a non-existent $250 million balance sheet and that they had partnerships with hundreds of prospective tenants with pre-signed, multi-year lease agreements. Finally, the complaint alleges that Malley and MG Capital misappropriated more than $7 million in investor assets while using falsified financial reports to conceal huge losses that ultimately forced the two funds into wind-down.