Securities Industry Commentator by Bill Singer Esq

February 24, 2021








SEC Awards More Than $9.2 Million to Whistleblower for Successful Related Actions, Including Agreement With DOJ (SEC Release)

Atomic Trading (Speech by SEC Commissioner Hester M. Peirce)

Behind the Process: How an  Enforcement Action Becomes an Enforcement Action (FINRA Unscripted)


Okay, so, you're right -- not exactly a snappy-dappy headline but the underlying issues are important and the Settlement Agreement is likely a harbinger of things to come.
https://ag.ny.gov/sites/default/files/2021.02.17
_-_settlement_agreement_-_execution_version.
b-t_signed-c2_oag_signed.pdf

If nothing else, the NYAG's Settlement should force folks to step back and ask a few preliminary questions before investing in crypto. Pointedly, if you're investing in a non-physical, digital, cryptocurrency, what proof do you even have that such an asset exists? Similarly, if you're told "not to worry" because someone is "backing" the crypto asset, what proof do you have that the backer is real and has the financial wherewithal to, you know, "back" what you can't see or touch? Moreover, if you're going to have to depend upon a payment processor, who the hell is that processor and how reliable are they? 

You remember those old movies where they loaded all the stolen gold bullion from the bank vault into a stolen Brink's truck and then drove away as the closing credits scrolled? Well, in 2021, there are no heavy, precious metal bars, there is no vault with a time-lock and alarm, you don't need to load anything on to any vehicle, and the theft is accomplished by the click of a key on a keyboard as the digital stash is effortlessly transported from one digital wallet to another, from one account to another. No muss. No fuss. Perhaps not the stuff of great cinema but progress is what it is. As set forth in part in the NYAG Release:

New York Attorney General Letitia James today continued her efforts to protect investors from fraudulent and deceptive virtual or "crypto" currency trading platforms by requiring Bitfinex and Tether to end all trading activity with New Yorkers. Millions around the country and the world today use virtual currencies as decentralized digital currencies - unlike real, regulated government currencies, including the U.S. dollar - to buy goods and services, often times anonymously, through secure online transactions. Stablecoins, specifically, are virtual currencies that are always supposed to have the same real-dollar value. In the case of Tether, the company represented that each of its stablecoins were backed one-to-one by U.S. dollars in reserve. However, an investigation by the Office of the Attorney General (OAG) found that iFinex - the operator of Bitfinex - and Tether made false statements about the backing of the "tether" stablecoin, and about the movement of hundreds of millions of dollars between the two companies to cover up the truth about massive losses by Bitfinex. An agreement with iFinex, Tether, and their related entities will require them to cease any further trading activity with New Yorkers, as well as force the companies to pay $18.5 million in penalties, in addition to requiring a number of steps to increase transparency.

Founder of International Cryptocurrency Companies Indicted in Multi-Million Dollar Securities Fraud Scheme (DOJ Release)
https://www.justice.gov/usao-edny/pr/founder-international-cryptocurrency-companies-indicted-multi-million-dollar-securities
In an Indictment filed in the United States District Court for the Eastern District of New York
https://www.justice.gov/usao-edny/press-release/file/1369921/download,  Krstijan  Krstic was charged with conspiracy to commit securities fraud, securities fraud, conspiracy to commit wire fraud and conspiracy to commit money laundering. 
As alleged in part in the DOJ Release:

[K]rstic was the founder of two digital-asset investment platforms, "Start Options" and "B2G," and also served as the chief financial officer of Start Options.  Between approximately 2017 and 2018, Krstic and others fraudulently induced U.S.-based investors to purchase securities in the form of investment contracts in Start Options and B2G.  To perpetuate the fraud, Krstic used the alias "Felix Logan" and created the Twitter handle "@felixlogan_cfo" to communicate with investors in Start Options and B2G. 

Start Options purported to be an online investment platform that provided cryptocurrency mining and digital-asset trading services, including trading in cryptocurrencies, commodities, stocks and indices.  Start Options also claimed that it was "the largest Bitcoin exchange in euro volume and liquidity" and that it was "consistently rated the best and most secure Bitcoin exchange by independent news media."  B2G purported to be an "ecosystem" that would allow users to trade B2G tokens, as well as digital and fiat currencies, "on a secure, comprehensive platform."  Krstic and others represented that once investors opened a B2G account, a deposit of B2G "open[ed] a door to all the curtains inside Aladdin's cave. Dollars buy B2G; B2G tokens can be exchanged back into dollars, or for Euros, or for other national fiat currencies. B2G holdings can be traded for original bitcoin or other altcoins."

In reality, the money sent by investors in Start Options and B2G was never invested as promised, and instead was funneled to a Philippines-based financial account and digital-currency wallet, and to a U.S.-based promoter of the fraud.  Subsequently, the U.S.-based promoter transferred approximately $7 million in investor funds from B2G and Start Options to Krstic, and Krstic thereafter stopped responding to all communications and absconded with those investors' funds.  A press release issued by Start Options falsely claimed that the company had been sold to Russian venture capitalists.

In sort of keeping with going from the sublime to the ridiculous -- we follow the crypto cases immediately above with a chicken fraud of multi-million-dollar proportions! Pursuant to a Plea Agreement entered into in the United States District Court for the District of Colorado
https://www.justice.gov/opa/press-release/file/1369896/download, Pilgrim's Pride Corporation pled guilty to conspiracy to fix prices and rig bids, and the company was sentenced to pay $107,923,572 million in criminal fines. Pilgrim's is the first company to plead guilty for its role in a conspiracy to fix prices and rig bids for broiler chicken products; however, 10 executives and employees at major broiler chicken producers have also previously been charged. As alleged in part in the DOJ Release:

[F]rom as early as 2012 and continuing at least into 2017, Pilgrim's participated in a conspiracy to suppress and eliminate competition for sales of broiler chicken products in the United States that affected at least $361 million in Pilgrim's sales of broiler chicken products. 

See exclusive FBI video surveillance of Pilgrim below:


SEC Charges Two Former KPMG Auditors for Improper Professional Conduct During Audit of Not-for-Profit College (SEC Release)
https://www.sec.gov/news/press-release/2021-32?utm_medium=email&utm_source=govdelivery
Without admitting or denying the findings in respective SEC Orders, former KPMG partner Christopher Stanley https://www.sec.gov/litigation/admin/2021/34-91185.pdf and former KPMG senior manager Jennifer Stewart https://www.sec.gov/litigation/admin/2021/34-91186.pdf each agreed to be suspended from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after three years and one year, respectively; and, further, each  agreed to not serve as the engagement manager, engagement partner, or engagement quality control reviewer in connection with any audit expected to be posted in the MSRB's Electronic Municipal Market Access system until they are reinstated by the SEC. As alleged in part in the SEC Release, Stanley and Stewart authorized the:

issuance of an unmodified audit opinion on the college's fiscal year 2015 financial statements, despite not having completed critical audit steps. As described in the orders, KPMG's work on the audit had stalled because the college's former controller had provided the audit team with inaccurate, incomplete, and contradictory information. On Nov. 30, 2015, the former controller and the college's president informed Stanley and Stewart that the college needed KPMG to issue the audit report before the end of the day. That afternoon, despite the existence of numerous outstanding open items and unanswered questions, Stanley and Stewart decided to issue the audit report. 

The SEC's orders find that Stanley and Stewart violated Generally Accepted Auditing Standards by, among other things, failing to obtain sufficient appropriate audit evidence, properly prepare audit documentation, properly examine journal entries, adequately assess audit risk, and exercise due professional care and professional skepticism.  The college's fiscal year 2015 audited financial statements, which were submitted to the Municipal Securities Rulemaking Board pursuant to the college's obligation to provide continuing disclosure to investors, fraudulently overstated the college's net assets by $33.8 million. 

https://www.justice.gov/usao-sdny/pr/former-ceo-publicly-traded-biopharmeutical-company-sentenced-accounting-fraud
After a four-week jury trial in November 2020 in the United States District Court for the Southern District of New York, former MiMedx Group, Inc. Chief Executive Officer Parker H. Petit was found guilty on one count of securities fraud, and William Taylor was convicted on one count of conspiracy to commit securities fraud, make false filings with the SEC, and mislead the conduct of audits. Petite, 81, was sentenced to one year in prison and ordered to pay a $1 million fine. Taylor awaits sentencing. As alleged  in part in the DOJ Release: 

MiMedx was headquartered in Marietta, Georgia, and its securities traded under the symbol "MDXG" on the NASDAQ.  MiMedx sold regenerative biologic products, such as skin grafts and amniotic fluid, both directly to end users, such as public and private hospitals, and to various stocking distributors, which, in turn, resold the product to end users. 

One of the most critical financial metrics disclosed in MiMedx's public filings with the Securities and Exchange Commission ("SEC"), and touted in MiMedx's accompanying press releases, was MiMedx's quarterly and annual sales revenue.  Under Generally Accepted Accounting Principles (GAAP) and SEC guidance, a company like MiMedx that engages in the sale of products through a distributor may recognize revenue upon transfer of the product to a distributor if certain requirements are satisfied, including that delivery has occurred or services have been rendered, the seller's price to the buyer is fixed or determinable, and collectability of payment is reasonably assured.  PETIT and Taylor, MiMedx's former chief operating officer, repeatedly demonstrated and touted their understanding of these rules governing revenue recognition.  They also publicly identified revenue as the principal metric reflecting MiMedx's growth, and touted MiMedx's consistent record of quarter-over-quarter revenue growth and meeting or exceeding revenue guidance in 17 consecutive quarters, from 2011 through year-end 2015.  By 2015, however, it became increasingly difficult for MiMedx to reach its revenue guidance due to decreased demand from certain distributors and the increasingly aggressive revenue targets that MiMedx had publicly announced. 

Confronted with the difficulties faced by MiMedx in meeting its quarterly and annual revenue guidance by legitimate means, PETIT and Taylor orchestrated a fraudulent scheme to falsely recognize revenue upon the shipment of MiMedx product to four stocking distributors, CPM, SLR, Stability Biologics ("Stability"), and First Medical, in the second through fourth quarters of 2015.  PETIT and Taylor caused MiMedx to report fraudulently inflated revenue figures to the investing public in order to ensure that the reported figures fell within MiMedx's publicly announced revenue guidance, and to fraudulently convey to the investing public that MiMedx was accomplishing consistent growth quarter after quarter, as PETIT and Taylor had falsely touted to the investing public.  The fraudulent scheme involved the following central features:

  • As to CPM, in the second quarter of 2015, PETIT and Taylor caused MiMedx fraudulently to recognize $1.4 million in revenue by (1) making a $200,000 sham "consulting" payment to CPM's owner to bribe CPM to buy MiMedx product and (2) secretly agreeing to send CPM approximately $1.1 million of product it did not want and did not intend to sell, while promising that CPM could return the product to MiMedx and swap it for different product in a subsequent quarter.  PETIT and Taylor entered into the sham "consulting" agreement to conceal that the payment was a bribe to purchase product, and CPM's owner performed no consulting work for the payment.  Neither PETIT nor Taylor disclosed to MiMedx's outside auditors the "consulting" payment or product swap. 

  • As to SLR, in the third quarter of 2015, PETIT and Taylor caused MiMedx fraudulently to recognize $4.6 million in revenue by booking the revenue despite understanding that SLR would not make a timely payment for the product, and certainly would not do so within contractual terms.  To hide from MiMedx's auditors that the collectability of payment from SLR was questionable, during the fourth quarter 2015, PETIT arranged for his adult children to use a shell company to loan money to SLR (money that came from a trust fund established by PETIT for their benefit), with the understanding that the loan proceeds would be used in substantial part to pay down SLR's debt to MiMedx.  PETIT did not disclose the loan to MiMedx's outside auditors and made false and misleading statements to the auditors about SLR's ability to pay MiMedx.

  • As to Stability, in the third and fourth quarters of 2015, PETIT and Taylor caused MiMedx improperly to recognize $2.6 million of revenue, where they (1) failed to agree with Stability on the essential terms of the deal, including when payment was due; (2) reached a secret understanding that Stability could swap or return unwanted product in subsequent quarters; and (3) understood that Stability could not pay for the product in a timely fashion.  In fact, PETIT granted the right of return to Stability in a back-dated letter he hid from MiMedx's internal accountants and outside auditors.   
     
  • As to First Medical, in the fourth quarter of 2015, Taylor caused MiMedx improperly to recognize $2.2 million in revenue by making an undisclosed promise to First Medical that it could return any product that it could not sell and that MiMedx would not leave First Medical with any losses.  To carry out the scheme, Taylor sent two emails four seconds apart to First Medical.  The first was a "cover story" that purported to require payment within a fixed period, as required by MiMedx's accountants.  Taylor forwarded the first email to MiMedx's accounting department.  The second email, sent only four seconds after the first, memorialized the true terms of the deal, which involved an agreement to defer payment and take back product if it could not be sold.  Taylor hid the second email from MiMedx's internal accountants and outside auditors.  Taylor also arranged for a false audit "confirmation," which falsely represented that First Medical was required to pay within a fixed period and omitted the true terms of the deal, to be provided to MiMedx's outside auditors.
PETIT's and Taylor's fraudulent manipulation of MiMedx's revenue caused MiMedx to report materially inflated revenue in the second, third, and fourth quarters of 2015, and for the full year 2015.  In its 2015 10-K, MiMedx reported annual revenue that was fraudulently inflated by approximately $8.2 million.  Absent this fraudulent inflation of revenue, MiMedx would have missed both (1) its quarterly revenue guidance in the third and fourth quarters of 2015 and annual revenue guidance for 2015 and (2) analyst revenue consensus for the second through fourth quarters of 2015 and the full year 2015.  PETIT's offense caused approximately $35 million in losses to MiMedx shareholders.

https://www.justice.gov/usao-edny/press-release/file/1370156/download, Medifirst Solutions, Inc.'s Chief Executive Officer, Bruce Schoengood, was charged with securities fraud. As alleged in part in the DOJ Release:

[B]etween May 2016 and January 2019, Schoengood, together with others, engaged in a scheme to defraud MFST investors by manipulating the volume of MFST stock and concealing the sale of that stock by others.  Specifically, Schoengood entered into sham consulting agreements with a co-conspirator (Co-Conspirator 1) so that Co-Conspirator 1 would appear to be working for MFST.  Schoengood then transferred MFST stock to Co-Conspirator 1 and made false statements in public filings and related filings to enable the shares to be deposited and sold by Co-Conspirator 1, so that Co-Conspirator 1 and an investment relations firm could participate in the undisclosed promotion of MFST stock.  Schoengood also issued stock to co-conspirators so that they could sell their shares into the artificially created volume by Co-Conspirator 1 and the investment relations firm, then "kickback" portions of the proceeds to Schoengood.

https://www.cftc.gov/PressRoom/PressReleases/8364-21
In a Consent Order entered into in the United States District Court for the Southern District of New York https://www.cftc.gov/media/5671/enfroneibschutzconsentorder
021921/download, 
Ron Eibschutz was permanently banned from trading commodity interests and registering with the CFTC; enjoined from future violations of the Commodity Exchange Act ("CEA")and CFTC regulations, as charged; and orderred to pay a $75,000 civil monetary penalty. Eibschutz is the first enforcement action brought by the CFTC against an exchange (here, the New York Mercantile Exchange ("NYMEX") charging violations of the CEA and CFTC regulations' proscriptions against disclosures of material nonpublic information by exchange employees. As alleged in part in the CFTC Release:

The order finds that on numerous occasions between 2008 and 2010, Eibschutz solicited and received from NYMEX employees material nonpublic information about derivatives trading activity that the employees obtained through their special access as NYMEX employees. The disclosures included, among other things, the identities of counterparties to transactions in options for crude oil and natural gas futures, as well as trade details such as price and volume.

SEC Awards More Than $9.2 Million to Whistleblower for Successful Related Actions, Including Agreement With DOJ (SEC Release)
https://www.sec.gov/news/press-release/2021-31?utm_medium=email&utm_source=govdelivery
As set forth in Order Determining Whistleblower Award Claims ('34 Release No. 91183; Whistleblower Award Proc. File No. 2021-28 / February 23, 2021)
https://www.sec.gov/rules/other/2021/34-91183.pdf, the SEC awarded over $9.2 million to a whistleblower. As asserted in part in the SEC Release, the whistleblower had:

provided information that led to successful related actions by the U.S. Department of Justice, one of which was a non-prosecution agreement (NPA) or deferred prosecution agreement (DPA). The whistleblower previously received an award for contributions to an SEC enforcement action based on the same information that supported the award for the related actions, a prerequisite for eligibility for a related-action award.

The whistleblower provided significant information about an ongoing fraud to the SEC that enabled a large amount of money to be returned to investors harmed by the fraud. The SEC in turn provided that information to the DOJ. The whistleblower also provided significant assistance by traveling at the whistleblower's own expense to be interviewed by DOJ.

The award announced today marks the first SEC whistleblower award announcement based on a NPA or DPA with DOJ since amendments to the SEC's whistleblower program rules became effective on Dec. 7, 2020. Among other things, those amendments deem a DOJ NPA or DPA entered into after July 21, 2010, to be an administrative action that may be a "related action" that is eligible for a whistleblower award from the SEC.

Atomic Trading (Speech by SEC Commissioner Hester M. Peirce / February 22, 2021)
https://www.sec.gov/news/speech/peirce-atomic-trading-2021-02-22?utm_medium=email&utm_source=govdelivery
I was wondering when SEC Commissioner Peirce would weigh in on the Reddit-fueled trading frenzy that has recently taken over Wall Street. My wait was not long. As always, Commissioner Peirce wades into the fray in fearless fashion, as exemplified by this extract [Ed: footnotes omitted[

So what do all of these principles for regulators in the digital era mean for how we will respond to the events of the last several weeks?  Some of the sentiment driving the meme stock events seemed to have been rooted in a suspicion that the markets are not for everyone, but that their purpose is to serve only wealthy individuals and institutions.  Some participants seem to have viewed these price rallies and attendant short and gamma squeezes as a way to serve Wall Street a poisonous meal of its own making.  Popular antipathy toward Wall Street fueled by bailouts in the financial crisis of 2007-2009 is still raw, aggravated by ongoing government policies that are viewed as disproportionately benefiting large asset holders now in exchange for an inflationary tab in the future that will hit working Americans hardest. 

As securities regulators, we cannot address those concerns directly, but we do need to look for ways to ensure that the markets are working for everyone.  Technology is already being used to draw new investors into the markets and to bring capital to companies and entrepreneurs for whom capital raising has until now been difficult.  Increased participation in our markets is beneficial for the markets themselves because, as one commentator explained, "[i]t creates a number of atomized agents providing hopefully unique stimuli and insights to create a more effective and efficient market." We need to be open to technological improvements that make the markets work better and encourage and equip more people to participate in them.  Some commentators have criticized broker-dealers for making investing too easy, or even worse, too much fun, and fun does not necessarily sit well with securities regulators either. Of course, an appealing user interface is no substitute for ensuring that investors have access to the information that they need to invest wisely in light of their objectives and circumstances, but the same technology that makes investing fun can be used to educate and inform.  Indeed, as one commentary on the GameStop events suggested, regulators should be using these same technologies to reach and teach retail investors.

We also could be more proactive in embracing technology to address some of the other concerns that the events of the past month brought to light.  While the market machinery worked extremely well under the weight of record trading and high volatility even in the work-from-home COVID world, additional integration of technology into all aspects of the post-trade process might make the system work even better. . . 

Behind the Process: How an  Enforcement Action Becomes an Enforcement Action (FINRA Unscripted)
https://finra-unscripted.simplecast.com/episodes/behind-the-process-how-an-enforcement-action-becomes-an-enforcement-action?share=true
FINRA's Executive Vice President/Head of FINRA Enforcement Jessica Hopper takes listeners through the regulator's disciplinary process from the opening of an investigation, through the Rule 8210 demands and interviews, and into the settlement phase or the onset of a formal Complaint. Unlike many FINRA releases and podcasts, this one works and is a very welcome primer.  Nice job!