Securities Industry Commentator by Bill Singer Esq

These Foolish Things Remind Me of FINRA (BrokeAndBroker.com Blog)

Rhode Island Man Allegedly Swindled Victims Who Thought They Were Investing in Las Vegas Show Based on 'Magic Mike' Films (DOJ Release)

Second Managing Partner Of Investment Advisory Firm Pleads Guilty To Defrauding Clients And Investors In Over $100 Million Ponzi-Like Fraud Scheme (DOJ Release)

Mob Associate Sentenced to 4+ Years for Real Estate Fraud Scheme / The defendant stole down payments for homes from two different families (DOJ Release)

Mexican Businessman, His Wife and Two Others Indicted in Million Dollar Investment Fraud Scheme (DOJ Release)

Token Safe Harbor Proposal 2.0 (SEC Statement by Commissioner Hester M. Peirce)

Associated Person Cites Favoritism and Retaliation in FINRA Arbitration

In the Matter of the Arbitration Between Beverly Marie Ketel, Claimant, v. Citizens Securities, Inc., Respondent (FINRA Arbitration Award)

FINRA Fines and Suspends Rep Over Unauthorized Trades

In the Matter of Jared Matthew Reinstein, Respondent (FINRA  AWC)

FINRA Censure and Fines Firm Over Inaccurate Customer Reserve Calculations

In the Matter of CF Secured, LLC, Respondent (FINRA  AWC)

First Trades, First Dollars, and the NYSE Celebrates Moments (BrokeAndBroker.com Blog)

Federal Circuit Court Says Head Scratchin' Act Not Proof of Securities Fraud Scienter (BrokeAndBroker.com Blog)

          According to the indictment, Santilli managed and partly owned Aloris Entertainment, LLC, which acquired an interest - through securities called "Class A Units" - in Mike's Mobile Detailing, LLC, the company that operates the Magic Mike Live show in Las Vegas. Santilli raised funds from victims by soliciting investments in "Aloris Magic Mike LP," a different business that he falsely told investors owned the Class A Units. Santilli allegedly lied to investors, telling them that, in return for their investment, they would receive "shares" in Aloris Magic Mike LP that corresponded to a particular number of Class A Units and entitled them to a percentage of the profits from "Magic Mike Live." To bolster his false claims, the indictment states, Santilli used a doctored a legal document that made it appear that Aloris Magic Mike LP was a member (i.e., a shareholder) of Mike's Mobile Detailing.

          The indictment also states that Santilli misappropriated a significant portion of his victims' investments, including withdrawing more than $1 million at casinos across the United States. To raise more funds, Santilli falsely told his victims that new investment opportunities had arisen, resulting in Santilli selling shares in his businesses that corresponded to nearly double the number of Class A Units of Mike's Mobile Detailing that his company actually owned, the indictment alleges.

Background of IIG 

SILVER and a co-conspirator ("CC-1") founded IIG in 1994.  SILVER was a managing partner and the chief operating officer of IIG.  IIG, an SEC-registered investment adviser, provided investment management and advisory services, including for three private funds that it operated: (1) the IIG Trade Opportunities Fund N.V. ("TOF"), (2) the IIG Global Trade Finance Fund, Ltd. ("GTFF"), and (3) the IIG Structured Trade Finance Fund, Ltd. ("STFF").  IIG also advised the Venezuela Recovery Fund ("VRF"), a fund that managed the remaining assets of a failed Venezuelan bank (VRF, together with TOF, GTFF, and STFF, the "IIG Funds").  In March 2018, IIG reported to the SEC that it had approximately $373 million in assets under management.

IIG advertised itself as specializing in global trade financing, particularly in providing trade finance loans to small and medium-sized businesses.  IIG's principal investment advisory strategy, including with respect to the IIG Funds, was investing in trade finance loans that it also originated.  Trade finance loans are used by small and medium-sized companies, typically exporters and importers, to facilitate international trade.  IIG's purported expertise was in trade finance loans to borrowers located in Central or South America, and in a variety of industries, with a stated focus on "soft commodities," such as coffee, agriculture, fishing, and other food products.  IIG's trade finance loans were purportedly secured by collateral, such as the underlying traded goods, assets held by the borrowers, or expected payments by third parties.

Investments in TOF, STFF, and GTFF were marketed by IIG to institutional investors, such as pension funds, hedge funds, and insurers.  In offering memoranda and communications with investors, IIG advertised strict risk controls, such as promises to use diligence to carefully select borrowers or issuers with trusted management and marketable assets, and portfolio concentration limits based on borrower, developing country, and industry.

IIG purported to value the trade finance loans in the IIG Funds on a regular basis.  IIG and, in turn, SILVER, received a performance fee with respect to the IIG Funds, as well as a management fee, which was calculated as a percentage of the assets under management held in the Funds.

The Scheme

From approximately 2007 to 2019, SILVER conspired to defraud investors in IIG-managed funds by: (i) overvaluing distressed loans held by the IIG Funds, (ii) falsifying paperwork to create a series of fake loans that were classified, fraudulently, as positively performing loans, and to otherwise hide losses, (iii) selling overvalued and fake loans to a collateralized loan obligation trust and new private funds established and advised by IIG, and (iv) using the proceeds from those fraudulent sales to generate liquidity required to pay off earlier investors in a Ponzi-like manner.

Sharkey and his associate, Antonio Ambrosio, convinced their victims to provide Sharkey with the down payment funds in advance of the dates set for the real estate closings, with the promise that Sharkey would provide full financing for the purchases. Rather than finance the deals, Sharkey and Ambrosio simply stole the down payment money supplied by the victims and made excuses when the deals did not close. As part of the scam, Sharkey and Ambrosio even defrauded Ambrosio's own brother-in-law out of $208,000. After receiving this money, Sharkey immediately cut checks to ARMM Investments, LLC, a company owned by George Borgesi. Borgesi and Sharkey were both convicted in United States v. Merlino, et al., 99 CR 363, an early 2000s RICO case in which the Philadelphia La Cosa Nostra was named as the enterprise. Borgesi was named as a capo of the Philadelphia LCN in that Indictment, and Sharkey was identified as a bookmaker for the mob. 

After Sharkey and Ambrosio stole the down payment from Ambrosio's brother-in-law, they proceeded to lure a second victim to use Sharkey to finance his mortgage, and the victim wired Sharkey $100,000, which Sharkey promptly converted to his own use. The deal for this property fell through, but Sharkey and Ambrosio induced the victim to send the seller an extra $25,000 to hold the deal open, claiming Sharkey would get the deal done. The victim sent the seller the $25,000, but Sharkey had already disposed of the earlier $100,000 and the deal never closed.

Finally, in the real estate fraud perpetrated on the seller victim, Sharkey promised the victim that Sharkey would sell the house belonging to the estate of the victim's deceased parents and, after going to a closing the victim knew nothing about, Sharkey deposited all of the proceeds of the sale into his own bank account, stealing over $52,000 from the victim in the process.

[F]rome December 2015 to January 2019, the defendants conspired to promote a  "turn-key" business venture to Mexican nationals, consisting of a chain of Mexican food restaurants throughout Texas called "Las Quesadillas."  Olguin and Hernandez marketed the operation to potential buyers and were paid between $20,000 and $25,000 for each contract they secured.  Kramer and Pastor charged buyers a set fee ranging from $105,000 to $250,000, and promised to perform all tasks necessary for establishing a fully functional restaurant, including: finding and renting a suitable location, obtaining all permits, providing assistance in obtaining visas for buyers, completing construction, training employees, and handling all legal fees and incorporation issues. 

The indictment alleges that the defendants took funds from buyers and failed to provide the promised services. Instead, they used the funds for personal gain or to provide partial payments to previous customers who were demanding their money back.  In addition to partial refunds, Kramer would also offer stakes in other businesses as an alternative to repayment.  If buyers refused, the indictment alleges that Kramer and Pastor would threaten to sue them for breach of contract. The indictment alleges that the defendants perpetrated their scheme on at least eight different victims resulting in a total loss of more than $1 million.

Earlier today, I released on GitHub an updated version of the token safe harbor proposal that I originally suggested in February 2020. The safe harbor seeks to provide network developers with a three-year grace period within which, under certain conditions, they can facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws. The updated version reflects constructive feedback provided by the crypto community, securities lawyers, and members of the public. I am grateful for the thoughtful engagement and believe it demonstrates the need for regulatory clarity in this space. There is, however, more work to be done, which is why I, as a believer in the value of drawing on decentralized knowledge, posted the safe harbor on GitHub.

Three significant changes mark the updated version. First, to enhance token purchaser protections, the safe harbor proposal now requires semi-annual updates to the plan of development disclosure and a block explorer. Second, in response to concerns about the lack of clarity at what happens at the end of the three-year grace period, the safe harbor proposal now includes an exit report requirement. The exit report would include either an analysis by outside counsel explaining why the network is decentralized or functional, or an announcement that the tokens will be registered under the Securities Exchange Act of 1934. Third, the exit report requirement provides guidance on what outside counsel's analysis should address when explaining why the network is decentralized. The guidance is not a bright-line test, but rather attempts to strike a balance between providing a manageable number of useful guideposts while maintaining sufficient flexibility for the facts and circumstances of each network to be considered in the analysis.

On September 4, 2018, Respondent sold two securities with a principal value of $1,929.10 in a customer's account without obtaining the customer's authorization. Respondent effected the transactions to generate sufficient cash in the customer's account to cover a required minimum distribution. Shortly thereafter, the customer complained to the firm. With the customer's authorization, the firm repurchased the shares of one of the securities Respondent sold, and effected another sale to generate cash. In addition, the firm refunded all fees and commissions to the customer and compensated the customer for all losses. On January 7, 2019, the firm issued a letter of caution to Respondent regarding his conduct and fined him. 

Approximately three weeks later, on January 30, 2019, Respondent purchased two securities with a principal value of $1,500.55 in a second customer's account without obtaining the customer's authorization. Shortly thereafter, the customer complained to the firm and the firm reversed the transactions. 

Between April 2018 and January 2019, CF Secured failed to accurately calculate its required customer reserve on three separate occasions, resulting in nine hindsight deficiencies ranging from approximately $4 million to $29.8 million and totaling approximately $126 million. The firm's failure to accurately calculate its customer reserve obligations caused the firm to maintain inaccurate books and records and to make two FOCUS filings inaccurately reporting its customer reserve. As a result of the foregoing, CF Secured violated Sections 15(c) and 17(a) of the Securities Exchange Act of 1934, Exchange Act Rules 15c3-3, 17a-3 and 17a-5, and FINRA Rules 4511 and 2010. 

CF Secured also failed to establish and maintain a supervisory system, including written procedures (WSPs), reasonably designed to ensure its compliance with customer reserve requirements, in violation of FINRA Rules 3110 and 2010.

• Securities Industry Commentator
• Bill Singer