Securities Industry Commentator by Bill Singer Esq

April 26, 2021
140 Victims. Over $8 million in lost investments. What was being sold? Oh -- nanotechnology that turned dirt into gold. No . . . don't laugh. That's was the pitch. That was the fraud. The larger question was what, if any, due diligence did the victims perform before writing out their checks. Did anyone uncover the criminal histories of the guys pushing the deal?

In a Complaint filed in the United States District Court for the Southern District of New York, Andrew Franzone, the founder/former general partner of FF Fund I L.P. was charged with one count of securities fraud and one count of wire fraud. As alleged in part in the DOJ Release:

FRANZONE co-founded Farrell Franzone Investments LLC in 2010.  FRANZONE described Farrell Franzone as an opportunity for investors to invest, through the purchase of limited partnership ("LP") interests, in a hedge fund purporting to trade preferred securities and options and to maintain a highly liquid portfolio for its investors.  FRANZONE renamed the fund FF Fund I ("FF Fund") in 2014, and served as its general partner from that time until approximately September 2019. 

In connection with marketing the FF Fund to investors, FRANZONE touted FF Fund as a "multi-strategy investment program. . . focus[ed] on three unique asset classes: the preferred stock market, the option market, and the private investment portfolio."  When discussing FF Fund, FRANZONE assured investors that FF Fund was focused on trading in the preferred securities and options markets, which afforded its investors access to quarterly liquidity, and that FF Fund had a track record of consistent positive trading returns since its inception in August 2010. 

FRANZONE's representations about FF Fund's strategy, liquidity, and performance were largely fabricated.  Instead of engaging primarily in preferred securities and options trading that ensured the FF Fund's liquidity, FRANZONE instead diverted more than 80% of FF Fund's capital to high-risk, illiquid private investments, many of which were either worthless or significantly impaired.  FRANZONE also misappropriated FF Fund's assets to fund his own personal business interests, including the purchase of an airplane hangar, and lied to investors about FF Fund's performance and assets under management.

Through these and other fraudulent misrepresentations and omissions, FRANZONE induced over 100 investors to invest more than $40 million in FF Fund.  Despite showing investors positive trading returns as late as 2019, FF Fund was unable to fulfill redemption requests in early 2019 and is currently in the process of being liquidated.

In a Complaint filed in the United States District Court for the District of , the SEC charged Andrew T. Franzone, former owner of a race car team, and investment adviser FF Fund Management, LLC ("FFM") with violating the antifraud provisions of the federal securities laws. Franzone has been charged in a parallel criminal action. As alleged in part in the SEC Release:

[F]ranzone, the sole owner and principal of FFM, defrauded investors by making misrepresentations regarding the fund's strategy and investments, failing to eliminate or disclose conflicts of interest, misappropriating fund assets, and falsely representing the fund would be audited annually. According to the complaint, from August 2014 through Sept. 24, 2019, Franzone told potential and existing investors that his investment strategy for the fund was to maintain a highly liquid portfolio primarily focused on options and preferred stock trading. Franzone allegedly raised more than $38 million for the fund from approximately 90 investors through these representations.

In reality, as alleged in the complaint, Franzone diverted substantial fund assets to an entity he owned and invested the fund's remaining assets mainly in highly illiquid private companies and real estate ventures. The complaint also alleges that Franzone's management of the fund was subject to numerous conflicts that he did not eliminate or disclose, and that he misused fund assets. For example, Franzone took personal loans from the founders of at least two companies in which the fund invested, pledged fund assets to secure other loans for his own personal benefit, and misappropriated fund assets for personal uses, including the purchase of a garage to store his private race car collection. Finally, the complaint alleges that Franzone and FFM removed a critical safeguard for investors by failing to have the fund audited on an annual basis despite representations they would do so. The fund filed for bankruptcy under Chapter 11 in the Southern District of Florida on Sept. 24, 2019.
In an Indictment filed in the United States District Court for the Southern District of Florida, Larry Ramos Mendoza was charged with one count of conspiracy to commit wire fraud and five counts of wire fraud. As alleged in part in the DOJ Release:

[F]rom about December 2013 through June 2020, Ramos and his co-conspirators convinced victims to invest their money with Ramos's company, The W Trade Group ("TWT").  The indictment alleges that Ramos lured clients by misrepresenting that: the company's investment strategy was based on a commodities trading algorithm that he had developed, clients could earn investment returns as high as 19 percent, and investment losses were limited two percent. Once Ramos received the clients' money, he did not invest it as promised and, instead, used it for his own benefit, says the indictment.  It is alleged that to make the fraudulent scheme appear legitimate, Ramos created a TWT telephone application where clients could monitor the supposed progress of their investments. In fact, when clients logged into their accounts, they would see fake account statements generated by the application. When investors sought the return of their investment funds, Ramos used new investment money to pay earlier investors, according to the allegations.
Tammy Lynn Hawk, 47, pled guilty in the United States District Court for the Eastern District of Tennessee to one count each of wire fraud, aggravated identity theft, money laundering, and making a false tax return. Hawk was sentenced to 10 years in prison plus three years of supervised release, ordered to pay $658,838 in restitution and $71,062 in unpaid taxes. As alleged in part in the DOJ Release:

[H]awk was a well-established real estate agent in the Bristol, Tennessee area. Despite the success she enjoyed as a realtor, she ultimately used her knowledge, skills, and clientele to devise and operate a Ponzi-type scheme. Under her scheme, she would notify victim clients of large profits to be made with quick-flip properties, take cash from the victims, and ultimately repay earlier victims with funds she swindled from newer victims. Hawk defrauded at least 24 victims and, by the time her scheme was discovered, 12 victims remained unpaid and had lost over $500,000.

Hawk took extensive steps to hide and conceal her scheme as well, including false statements, sham real estate contracts, the use of electronic signing services, and forgery. Hawk also failed to disclose any of these matters in connection with a filed bankruptcy case. In addition to repaying earlier victims with funds she swindled, Hawk used proceeds from her offenses to fund her own lifestyle.

The CFTC awarded about $3 million to a whistleblower Claimant #1 but denied awards to Claimants #2 and #3.. THE CFTC's Order Determining Whistleblower Award Claims offers this interesting narrative about the calculation of the percentages for whistleblower awards:

[T]he determination of the appropriate percentage of a whistleblower award involves a highly individualized review of the facts and circumstances. Depending upon the facts and circumstances of each case, some factors may not be applicable or may deserve greater weight than others. The analytical framework in the Rules provides general principles without mandating a particular result . . . Not satisfying any one of the positive factors does not mean that the award percentage must be less than 30%, and the converse is true. Not having any one of the negative factors does not mean the award percentage must be greater than 10%. . . .

The SEC issued an Award of about $3.2 million to one whistleblower; and a separate award of over $100,000 to a second whistleblower. 

In the Order Determining Whistleblower Award Claim ('34 Act Rel. No. 91649; Whistleblower Award Proc. File NO. 2021-41), the SEC's Claims Review Staff ("CRS") recommended about a $3.2 million Award and the Order offers this insight into some of the attendant calculations that produced that sum [Ed: footnotes omitted]:

[B]ased on the facts and circumstances of this matter, we find that Claimant unreasonably delayed in reporting to the Commission. In particular, Claimant's information was submitted approximately four years from the date on which Claimant first noticed that Redacted Redacted , and 17 months from the date first understood that there could possibly be a securities law violation occurring. While Claimant may not have fully understood the significance of the misconduct, investors continued to suffer harm during the period of delay. The CRS also concluded that this criterion under Rule 21F-6(c)(1)(iii) should not be waived.

We find the *** % award determination to be appropriate. In coming to this determination, we considered that (i) Enforcement staff was unaware of the misconduct until Claimant submitted the tip, (ii) Claimant provided a "roadmap" for staff to focus on key issues, (iii) Claimant provided staff with subject matter expertise on a Redacted , which helped staff interpret and understand information received in document productions and testimony, (iv) Claimant's documents and assistance allowed the staff to conserve considerable resources, (v) the charges brought by the Commission were based in significant part on conduct that was the subject of the information provided by Claimant and (vi) Claimant unreasonably delayed reporting to the Commission while investors continued to be harmed.

In the Order Determining Whistleblower Award Claim ('34 Act Rel. No. 91650; Whistleblower Award Proc. File NO. 2021-41), the CRS recommended an Award of over $100,000, and the Order offers this insight into the attendant considerations [Ed: footnotes omitted]:

[W]e considered that (i) Claimant's tip assisted the Commission's investigation and was one of the underlying sources that formed the basis for the charges in the Covered Action; (ii) Claimant provided helpful assistance related to the Covered Action; (iii) there was substantial law enforcement interest in the information provided, as it related to detecting an ongoing fraud that was harming investors; and (iv) Claimant suffered personal and professional hardships.