Securities Industry Commentator by Bill Singer Esq

May 13, 2021

In the Matter of the Claims for an Award (SEC Whistleblower Order)
Paul Maucha and Melisa Shapiro were charged in an Indictment with one count of conspiracy to commit wire fraud, three counts of wire fraud and two counts of engaging in monetary transactions in criminally derived property. As alleged in part in the DOJ Release, Maucha and Shapiro:

conspired to engage in a scheme through a shell company they controlled, American Eagle Services Group (AESG), to make numerous misrepresentations about AESG, its assets and its access to money and capital.

As alleged in the indictment, Maucha and Shapiro enriched themselves by falsely promising to provide victims with financing, surety bonds and investing opportunities through AESG and AESG related entities in exchange for advance fees. Maucha and Shapiro falsely claimed that AESG could make multimillion-dollar loans to victims and would convince the victims to pay a refundable "commitment fee" or "due diligence deposit" before the loans would be made. Because Maucha and Shapiro themselves spent the fees paid by the victims, they did not have the funds to issue refunds when they failed to fund the promised loans.

In addition, Maucha and Shapiro induced victims to give AESG money for placement in a high-yield investment program and then misappropriated large portions of the victims' investments. Maucha and Shapiro also borrowed funds from at least one victim based on false representations about how the funds would be used and AESG's ability to repay. Maucha and Shapiro concealed their scheme by lulling victims with false assurances about their promised financial services, AESG's access to capital, and AESG's ability to provide refunds.
Mark Lisser pled guilty in the United States District Court for the Eastern District of New York
to securities fraud conspiracy. As alleged in part in the DOJ Release:

Between October 2018 and January 2019, Lisser was a partner in Knightsbridge Private Partners LLC (Knightsbridge), which operated a series of websites and call centers used to solicit investments in purported pre-IPO shares of companies (the Pre-IPO Companies).  Employees of Knightsbridge, including Lisser, solicited these investments by falsely telling investors and potential investors that Knightsbridge owned the shares it was selling, that Knightsbridge was on the capitalization table of the pre-IPO Companies, and that Knightsbridge and its employees did not earn any commissions or fees until after the shares were issued to the public and the investors made money.  In reality, as Lisser knew, Knightsbridge did not directly own any pre-IPO shares in the Pre-IPO Companies, and was not on the capitalization table of any of the Pre-IPO Companies.  Lisser also knew that he and other Knightsbridge employees earned money, including commissions, from the investments at the time they were made.  As a result of this scheme, Lisser misappropriated more than $700,000 in investors' funds to make payments to companies controlled by Knightsbridge employees, pay salaries and sales commissions, pay his personal credit card bill, and make payments on a mortgage.
Matthew O. Clason pled guilty in the United States District Court for the District of Connecticut to one count of wire fraud. As alleged in part in the DOJ Release:

[C]lason was an investment advisor and a registered representative of Lincoln Financial Advisors Corporation, and then LPL Financial LLC.  Beginning in approximately 2015, Clason provided investment services to a 73-year-old Connecticut resident ("the victim").  The victim had at least five investments accounts with Clason and, in January 2018, Clason and the victim opened a joint bank account.  From 2018 to August 2020, Clason transferred more than $668,000 from the victim's investment accounts into the joint bank account and, without the victim's knowledge or authorization, withdrew more than $621,000 in cash from the bank account for his personal use. Clason also transferred $5,000 directly from the joint bank account to his personal bank account, and made two transfers from the joint bank account to pay his personal credit card.

Swampscott Financial Advisor Pleads Guilty to Stealing Former Client's Retirement Assets (DOJ Release)
Felix Gorovodsky pled guilty in the United States District Court for the District of Massachusetts to one count of bank fraud; and pursuant to the plea, he has agreed (subject to court approval) to a sentence of 33 months in prison plus two years of supervised release and restitution of at least $318,000. As alleged in part in the DOJ Release:

Gorovodsky served as a financial advisor for the victim. In or about July 2019, the victim terminated that advisor relationship and revoked the power of attorney she had previously granted him. Approximately nine months later, Gorovodsky accessed and liquidated the victim's bank account, transferring more than $250,000 into his own bank account. Gorovodsky then used the victim's stolen retirement funds for personal expenses, including paying off more than $100,000 in federal student loans. As part of the scheme, Gorovodsky forged the victim's signature on a purported "gift letter," which he sent to the bank in an attempt to legitimize the fraudulent transfer.

Franklin, Tennessee Couple Charged With Defrauding Elderly Widow Of $1.7 Million / Allegations Include Draining the Accounts of Elderly Dementia Patient (DOJ Release)
In a Complaint filed in the United States District Court for the Middle District of Tennessee, Karl Hampton, 63, was charged with wire fraud and money laundering, and his wife, Deborah Hampton, 59, was charged with money laundering. As alleged in part in the DOJ Release:

[K]arl Hampton met an elderly widow while he was working as an exterminator for a Belle Meade-based pest control company and provided extermination services for her home from approximately January 2016 through May 2019.

Beginning in approximately January 2018, when the elderly woman was 85 years old,  and continuing until about June 2020, Karl Hampton devised and executed a scheme to defraud the woman and various financial institutions and credit and loan-issuing institutions by deceiving the woman into believing that he was her son or godson and that he would care for her personally and financially.  He then used his influence over her to convince her to sign over her Power of Attorney (POA) and to name him in her Revocable Living Trust (RLT) and in her will.  Karl Hampton methodically drained the woman's bank accounts, took out a $500,000 line of credit in her name using her securities as collateral, and amassed huge charges on her credit cards for his own personal expenses, all under the false pretenses that he had a valid POA, that he was entitled to her money and property, and that he was acting for her benefit and in her interest.

In April 2019, Karl Hampton accompanied the woman to an attorney's office, where she signed a POA, a RLT and a will, each of which purported to give Karl Hampton considerable control over her assets.  The POA appointed Karl Hampton as the Agent and Deborah Hampton as the successor agent.  The RLT and the will specified that Karl Hampton and Deborah Hampton would be beneficiaries when the woman died.  In May 2019, shortly after inducing the woman to sign the POA, Karl Hampton quit his job and thereafter continued to drain the woman's bank accounts to fund his lavish lifestyle.

On June 8, 2019, the woman fell and fractured her hip and was transported to Williamson County Medical Center (WCMC) and then to NHC of Cool Springs (NHC), which was an assisted living facility, for recovery following hip surgery.  During her hospital visit and transfer to NHC, the woman was diagnosed with dementia.  Staff at NHC also noted that the woman was malnourished when she arrived, and staff discussed with Karl Hampton that she suffered from dementia.  Upon the woman's admission to WCMC and on the application to place her at NHC, Karl Hampton listed himself as her "son," her trustee, POA, and emergency contact. On other occasions, Karl Hampton called a financial institution, allegedly on the woman's behalf, and represented that he was her "personal assistant" and another time falsely represented that she was his "mother." 

In December 2019, Karl Hampton took out a $500,000 line of credit in the woman's name at SunTrust, using her security accounts at SunTrust as collateral.   Karl Hampton then wrote checks to himself, purchased cashier's checks, took out cash withdrawals, and transferred money out of the woman's bank account and into a bank account in the name of Falcon Company, which he set up and controlled.

In January 2020, Karl Hampton used $170,000 of the money from the line of credit to purchase an ownership interest in his own name in a pest control business located in Franklin. Also, in January 2020 Karl Hampton rented an apartment in Murfreesboro, Tennessee, in the woman's name. By this time, the woman had been living at NHC for almost six months.

During the course of the scheme, Karl Hampton took a total of approximately $1,240,438.06 from the woman's accounts, and frequently purchased luxury items and often spent between $1,000 and $1,500 per day on lottery tickets.  In February 2019, Karl Hampton and Deborah Hampton purchased a luxury Lexus SUV, using $21,000 of the criminal proceeds.  In January 2020, the Hamptons spent $21,452 on a 4.3-karat diamond ring, also using proceeds of the fraud.

Karl Hampton also liquidated two investment accounts of the woman's deceased sister in the amount of $246,645 and used the money for his own benefit. 

In an Indictment filed in the United States District Court for the Southern District of New York, Elliott Smerling was charged in three counts, with wire fraud, bank fraud, and aggravated identity theft.  As alleged in part in the DOJ Release:

From at least in or about December 2020 through at least in or about February 2021, ELLIOT SMERLING, the defendant, solicited and obtained on behalf of the general partner ("General Partnership-1") of a private equity fund ("Private Equity Fund-1"), a loan of approximately $95 million from a commercial bank headquartered in California ("Victim Bank-1"), which was secured by purported capital commitments made by the limited partnership of investors in Private Equity Fund-1 ("Limited Partnership-1").  SMERLING obtained the approximately $95 million loan on the basis of falsified documents and material misrepresentations, including:  (1) a forged audit letter, purportedly prepared by an international network of accounting, audit, tax, and professional services firms ("Audit Firm-1"), attesting to the audited financial statements of Limited Partnership-1; (2) forged subscription agreements that falsely represented that the investment fund of a private university based in New York, New York ("University Endowment Fund-1"), and the chief investment officer of that fund ("Chief Investment Officer-1") had committed $45 million to fund Limited Partnership-1, and that the investment management division of a banking and financial services firm headquartered in New York, New York ("Investment Manager-1"), and the chief executive officer of Investment Manager-1 had committed $40 million to fund Limited Partnership-1; and (3) falsified bank records purporting to attest to a $4.5 million wire transfer from University Endowment Fund-1 to Limited Partnership-1. 

On or around December 1, 2020, SMERLING contacted an employee of Victim Bank-1 concerning SMERLING's interest in acquiring an approximately $95 million loan for SMERLING's $500 million private equity fund, Limited Partnership-1.  The loan sought by SMERLING would substitute for an existing line of credit SMERLING had secured from a multinational financial services company ("Commercial Bank-1"), where Limited Partnership-1 purported to have an existing line of credit with an outstanding loan balance equal to the amount sought by SMERLING from Victim Bank-1.  The employee of Victim Bank-1 referred SMERLING to a director in the Global Fund Banking Group at Victim Bank-1 ("Witness-1").

Thereafter, in or around December 2020, Witness-1 requested from SMERLING materials concerning Limited Partnership-1 and General Partnership-1 in order to evaluate SMERLING's loan request.  In response, SMERLING sent Victim Bank-1 materially false materials, the veracity of which Victim Bank-1 relied upon in ultimately deciding to make the loan sought by SMERLING, including:     

i.          An audit letter (the "Audit Letter"), purportedly prepared by Audit Firm-1, attesting to the sound finances of Limited Partnership-1.

ii.         Subscription agreements purportedly signed by investors in the fund, including an agreement reflecting a purported commitment of $45 million by University Endowment Fund-1 and the purported signature of Chief Investment Officer-1 ("Subscription Agreement-1"), and an agreement reflecting a purported commitment of $40 million by Investment Manager-1 and the purported signature of the chief executive officer of Investment Manager-1 ("Subscription Agreement-2").  

iii.        A table (the "Capital Commitment Table") listing $500 million in paid and unpaid capital commitments purportedly made to Limited Partnership-1 as of December 13, 2019, including a purported $45 million commitment by University Endowment Fund-1, consisting of a "call amount" of $4.5 million and an "unpaid commitment" of $40.5 million as of that date, as well as a purported $40 million commitment by Investment Manager-1, consisting of a "call amount" of $4 million and an "unpaid commitment" of $36 million as of that date. 

Following receipt of the materials, employees of Victim Bank-1, including at least one employee based in Victim Bank-1's office in New York, New York, reviewed the materials as part of Victim Bank-1's diligence process.

On or around January 7, 2021, Witness-1 wrote an email to the chief financial officer of Private Equity Fund-1, with a copy to SMERLING, in which Witness-1, in substance and in part, advised that Victim Bank-1 was in the process of finalizing its approvals for the loan.  Witness-1 requested bank statements "evidencing receipt of the most recent capital call."  On the same date, SMERLING replied with an email to which he attached a December 2019 bank statement (the "Bank Statement") for an account purportedly held in the name of Limited Partnership-1 at Commercial Bank-1's Americas headquarters in New York, New York.  The statement reflected wires into the account with a combined value of $50 million, including a purported wire of $4.5 million from University Endowment Fund-1 and a purported wire of $4 million from Investment Manager-1.

The materials that SMERLING submitted to Victim-Bank-1 were materially false.  For example, the Audit Letter was not prepared by Audit Firm-1.  Chief Investment Officer-1 of the University Endowment Fund-1 has no knowledge of ELLIOT SMERLING, Limited Partnership-1, or General Partnership-1, and the signature appearing on the Subscription Agreement-1 is not that of Chief Investment Officer-1.  University Endowment Fund-1 has found no indication that it made the $4.5 million wire transfer reflected in the Bank Statement or made any other investment or capital commitment to ELLIOT SMERLING, the defendant, Limited Partnership-1, or General Partnership-1.

Similarly, Investment Manager-1 has found no indication that Investment Manager-1 in fact made the $4 million wire transfer reflected in the Bank Statement or made any other investment or capital commitment to ELLIOT SMERLING, the defendant, Limited Partnership-1, or General Partnership-1.
In an Indictment filed in the United States District Court for the District of Colorado, Reva Joyce Stachniw and Ron Throgmartin were charged with one count of conspiracy to commit wire fraud and bank fraud, five counts of wire fraud, and one count of conspiracy to engage in money transactions in property derived from specified unlawful activity. As alleged in part in the DOJ Release, Stachniw and Throgmartin were charged with running a Ponzi scheme with:

a third co-conspirator, Mark Ray, from late 2017 until early 2019. Ray was previously charged by criminal information for his role in the Ponzi scheme in the Central District of Illinois in February 2020.

According to the indictment, Stachniw, Throgmartin, and other co-conspirators solicited hundreds of millions of dollars from victim-investors throughout the United States. Most often, the conspirators fraudulently represented to victim-investors that their investments were backed by short-term investments in cattle. They also used false and fraudulent pretenses to solicit money from victim-investors for the conspirators' Colorado-based marijuana business, Universal Herbs LLC. Other victim-investors gave the conspirators money based on false promises that investment money would be used for legitimate business activity related to cattle or marijuana, without having the investment money linked to specific investment opportunities.

In all three variations of the conspirators' investment fraud scheme, victim-investors were promised returns of approximately 10% to 20% over periods as short as several weeks. At no point did Stachniw, Throgmartin, or Ray tell victim-investors that they were primarily using their money to repay other investors in a Ponzi-style investment scheme, or to enrich themselves. Stachniw and Throgmartin allegedly received millions of dollars from the scheme, despite putting little to none of their own money into it.
Without admitting or denying the findings in an SEC Order, GWFS Equities Inc. was found to have violated Section 17(a) of the Securities Exchange Act and Rule 17a-8 thereunder; and agreed to the imposition of a Censure, an order to cease and desist from future violations, and a $1.5 million penalty. The Order noted the:

significant cooperation by GWFS with the SEC's investigation and subsequent remedial efforts were taken into account in the determination to accept the company's settlement offer. The remedial efforts included adding dedicated anti-money laundering (AML) staff and systems, replacing key personnel, clarifying delegation of responsibility for filing SARs, and implementing new SAR-related policies, procedures, standards, and training.

In part the SEC Release alleges that:

[F] September 2015 through October 2018, GWFS was aware of increasing attempts by external bad actors to gain access to the retirement accounts of individual plan participants. The order further finds that GWFS was aware that the bad actors attempted or gained access by, among other things, using improperly obtained personal identifying information of the plan participants, and that the bad actors frequently were in possession of electronic login information such as user names, email addresses, and passwords.

Broker-dealers are required to file SARs for certain transactions suspected to involve fraudulent activity or a lack of an apparent business purpose. The guidance for preparing SARs from the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) states that in order to be effective tools for law enforcement and fulfill their intended purpose, SAR narratives should include "the five essential elements of information - who? what? when? where? and why? - of the suspicious activity being reported." The order finds that GWFS failed to file approximately 130 SARs, including in cases when it had detected external bad actors gaining, or attempting to gain, access to the retirement accounts of participants in the employer-sponsored retirement plans it serviced. Further, for nearly 300 SARs that GWFS did file, the order finds that GWFS did not include the "five essential elements" of information it knew and was required to report about the suspicious activity and suspicious actors, including cyber-related data such as URL addresses and IP addresses.

In the Matter of the Claims for an Award (SEC Order Determining Whistleblower Award Claims; '34 Act Rel. No. 91854; Whistleblower Award Proc. File No. 2021-46 / May 12, 2021) An SEC Order awarded $3.6 million to Claimant 1 and denied an award to Claimant 2. As asserted in part in the SEC Order [Ed: footnoes omitted]:

The CRS issued Preliminary Determinations4 recommending that (1) Claimant 1 receive an award of ***% of the monetary sanctions collected in the Covered Action; and (2) the award claim of Claimant 2 in the Covered Action be denied. The CRS recommended that Claimant 2's award claim be denied on the grounds that Claimant 2 did not provide information that led to the successful enforcement of the Covered Action within the meaning of Section 21F(b)(1) of the Exchange Act and Rules 21F-3(a)(3) and 21F-4(c) thereunder. Enforcement staff responsible for the Covered Action did not rely upon the information provided by Claimant 2, nor did they have any communications with Claimant 2 before or during the investigation.
We got one pie. We got two hungry whistleblowers eager to cut into that pie. But they have to wait. The SEC's Claims Review Staff ("CRS") needs to issue the all important Preliminary Determination. Oh my . . . CRS recommended that Claimant 1 be awarded $18 million and Claimant 2, $4 million. And now we got a battle over how the SEC sliced the pie!
When we were kids, we were warned that we would drown if we went back into the water so much as a minute before the magical "one hour." Then there was that story about how swallowed gum stayed in your stomach for seven years. Not six years. Not eight years. But seven. And, of course, someone knew someone who knew a kid who had a brother who swallowed gum on a dare and it didn't come out for . . . you got it . . . seven years. In a recent federal case, we got seven years between a FINRA regulatory settlement and a federal court's opinion that what was agreed to all those years ago is going to stay on the books. Which proved a hard wad of gum for the respondents to swallow.
As readers of the Blog know, I am a critic of inarticulate legal writing -- be that a pleading, motion papers, awards, opinions, orders, or any number of press releases. In a recent ruling on a motion before the District of Connecticut, Senior District Judge Charles S. Haight, Jr. shows how it should be done -- he pens an enchanting, entertaining, comprehensive, and superbly edited opinion.