The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

August 20, 2021

PIABA Wanted Live FINRA Arbitration (But Covid Had Other Plans) (BrokeAndBroker.com Blog)

Investment Professional Charged by SEC Sentenced to Three and a Half Years in Prison in Parallel Criminal Case (SEC Release)

Omar Amanat Sentenced To Prison For Multiple Fraud Schemes After Conviction At Trial During Which He Fabricated Evidence (DOJ Release)

SEC Obtains Judgments Against Bitconnect Promoters Michael Noble and Joshua Jeppesen and a Relief Defendant (SEC Release)

SEC Obtains Final Judgment Against Securities Lawyer and Microcap Agent and Bars Lawyer from Practicing or Appearing Before the SEC (SEC Release)

SEC Charges Technology Company and Two Individuals with Fraud (SEC Release)

Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Extend the Expiration Date of the Temporary Amendments set forth in SR-FINRA-2020-015 and SR-FINRA-2020-027 (SEC Release)

Florida Woman Convicted Of Damaging Her Former Employer's Computers After She Was Fired (DOJ Release)

SEC Orders Award to Whistleblower and Denies Award to Second Claimant
Order Determining Whistleblower Award Claim

The Unsecured Convertible Note, The FINRA CMA, The Pro Se Plaintiff, The Federal Complaint, and the Legal Clinic (BrokeAndBroker.com Blog)

http://www.brokeandbroker.com/6013/piaba-finra-arbitration-covid/
About four months ago in April 2021, the Public Investors Advocate Bar Association ("PIABA") was angered by FINRA's decision to extend the ongoing postponement of in-person arbitrations. Apparently, PIABA believed that FINRA's shut-down of live arbitrations was unfairly benefitting industry interests to the detriment of victimized public investors. As a general proposition, PIABA had a point; however, as to acknowledging the horrors of Covid, PIABA came off as tone deaf and reckless. Let's revisit the April 28, 2021 BrokeAndBroker.co Blog that reported about this issue, and let's consider the update.

As alleged in part in the SEC Release:

On August 18, 2021, Marcus Boggs, whom the SEC charged in August 2019 with stealing more than $1.7 million from at least three of his investment advisory clients, was sentenced in a parallel criminal case to 42 months in prison.

The criminal charges against Boggs stem, in part, from the same misconduct alleged in the SEC's complaint, which was filed in federal district court in Chicago, Illinois. The SEC's complaint alleges that Boggs, without his clients' knowledge or authorization, misappropriated his clients' money by selling securities in their advisory accounts and then transferring the proceeds to his personal credit card account. The complaint further alleges that from 2016 to 2018, Boggs made more than 200 illegal transfers from three advisory clients' accounts to his personal credit card account.

The SEC's litigation against Boggs is ongoing. On December 18, 2019, the district court entered a partial judgment against Boggs enjoining him from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and ordering him to pay disgorgement, prejudgment interest, and penalties in amounts to be determined by the court at a later date.

Omar Amanat Sentenced To Prison For Multiple Fraud Schemes After Conviction At Trial During Which He Fabricated Evidence (DOJ Release)
https://www.justice.gov/usao-sdny/pr/omar-amanat-sentenced-prison-multiple-fraud-schemes-after-conviction-trial-during-which
After a six week jur trial in the United States District Court for the Southern District of New York, 
Omar Amanat, 48, was found guilty of one count each of conspiracy to commit wire fraud, wire fraud, aiding and abetting an investment advisor fraud, and conspiracy to commit securities fraud. and he was sentenced to five years in prison plus three years of supervised release and ordered of pay a fine of $175,000. Co-Defendant former Kit digital's ("KITD's") Chairman of the Board of Directors/Chief Executive Officer Kaleil Isaza Tuzman was convicted at the same trail and awaits sentencing; and Irfan Amanat was convicted at a separate trial and awaits sentencing. As alleged in part in the DOJ Release:

The Scheme to Defraud Maiden Capital Investors

Stephen Maiden[1] was the managing member of Maiden Capital, a hedge fund that managed portfolios of securities.  Between in or about February 2009 and in or about June 2012, AMANAT, along with Maiden and others, devised and carried out a scheme to hide from Maiden Capital investors the fact that Maiden Capital's investments in Enable - an investment fund run by AMANAT's brother and codefendant, Irfan Amanat, for which AMANAT raised money (based, in part, on false and misleading representations) - had been lost.  To facilitate the scheme, Maiden, with the knowledge and approval of AMANAT, generated false client account statements that failed to disclose the Enable losses.  In addition, AMANAT wired hundreds of thousands of dollars to a Maiden Capital bank account to support Maiden Capital, including to allow Maiden to repay investors whose redemption requests could not be forestalled and thus to continue to keep secret from Maiden Capital investors the Enable losses for over three years. 

The Market Manipulation Scheme

Between in or about December 2008 and in or about September 2011, AMANAT, Tuzman, and Maiden engaged in efforts to artificially inflate the share price and trading volume of KITD shares.  During this time period, KITD shares traded on the OTC Bulletin Board and on the NASDAQ.  Maiden, at Tuzman and AMANAT's direction, purchased and sold shares of KITD through Maiden Capital, for the purpose of manipulating KITD's stock price and creating the illusion of greater volume in the trading for KITD shares. 

For instance, Maiden, with Tuzman's knowledge and approval, frequently engaged in match trading in which Maiden caused an account under Maiden's control to buy or sell KITD stock, and on the same day caused an account under Maiden's control to take the opposite position.  Tuzman also directed Maiden to make timely purchases of KITD stock in an effort to manipulate the price of KITD shares at certain critical times, including, for example, when KITD was seeking to raise additional capital and in the weeks before KITD's stock was uplisted to the NASDAQ.  At times, Maiden was responsible for nearly all of the day's trading activity in KITD stock.

Amanat's Fabrication of Evidence 

Evidence at trial also revealed that AMANAT produced to the Government and entered into evidence at trial emails that had been fabricated.  After two evidentiary hearings, the Court allowed the Government to present to the jury evidence of AMANAT's use of false and fabricated email evidence during the trial.  After the verdict, Judge Gardephe revoked AMANAT's bail and ordered him remanded into custody, citing numerous factors, including that "substantial evidence was introduced at trial that Mr. Amanat fabricated emails" showing "disdain for the court" and its procedures.
= = = = =
Footnote 1: Maiden pled guilty to various offenses for his role in the schemes and cooperated with the Government. 

SEC Obtains Judgments Against Bitconnect Promoters Michael Noble and Joshua Jeppesen and a Relief Defendant (SEC Release)
https://www.sec.gov/litigation/litreleases/2021/lr25177.htm
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged 
  • Michael Noble a/k/a Michael Crypto with violating the registration provisions of the federal securities laws;
  • Joshua Jeppesen with aiding and abetting BitConnect's unregistered offer and sale of securities; and
  • Relief Defendant Laura Mascola with unjust enrichment. 
Without admitting or denying the SEC's allegations, Noble consented to the entry of a judgment and Jeppesen consented to the entry of a final judgment pursuant to which Noble and Jeppesen each are permanently enjoined from violating the charged provisions and from offering, operating, or participating in certain marketing or sales programs and from participating directly or indirectly in a digital asset securities offering. The final judgments order the imposition of the following:
  • Jeppesen: $3,039,485 in disgorgement and prejudgment interest, 190 Bitcoin in disgorgement, a $150,000 penalty, and to turn over information and access to a Bitcoin wallet to satisfy his obligation to pay the 190 Bitcoin in disgorgement;
  • Noble: disgorgement, prejudgment interest and a civil penalty in an amount to be determined; and
  • Mascola: $576,358 in disgorgement and prejudgment interest.
As alleged in part in the SEC Release:

On August 13, 2021, the United States District Court for the Southern District of New York entered a judgment against Michael Noble (a.k.a. Michael Crypto) and a final judgment against Joshua Jeppesen for their involvement with BitConnect and the promotion of its "lending program." The court also entered a final judgment against Laura Mascola as a relief defendant. Pursuant to the judgments, the defendants and relief defendant have been ordered to collectively pay more than $3.5 million and 190 Bitcoin in disgorgement and prejudgment interest.

According to the SEC's complaint, filed on May 28, 2021, from approximately June 2017 to January 2018, Noble promoted BitConnect and marketed and sold securities in its "lending program."  The SEC's complaint alleges that Noble offered and sold the securities without registering the securities offering with the Commission, and without being registered as a broker-dealer with the Commission, as required by the federal securities laws.  The complaint further alleges that Jeppesen served as a liaison between BitConnect and promoters and represented BitConnect at conferences and promotional events, and that Mascola received certain proceeds from Jeppesen's BitConnect activities.

In a Complaint filed in the United States District Court for the Eastern District of New York
https://www.sec.gov/litigation/complaints/2021/comp25175.pdf, the SEC charged attorney William Scott Lawler with engaging in schemes to fraudulently transfer control over the shares of two publicly-traded shell companies to a client. As alleged in the SEC Release:

[L]awler represented his client on the purchase of Broke Out Inc. (BRKO) and the predecessor to Immage Biotherapeutics Corp. (IMMG). Microcap agent Natalie Bannister allegedly participated in the BRKO scheme by assisting in the sale of BRKO to the client. The complaint alleged that, among other deceptive conduct, Lawler drafted false attorney-opinion letters, one of which Bannister submitted to a broker, to falsely represent that the stock of BRKO and IMMG could be immediately sold publicly once his client took control of the companies. Further, Bannister allegedly placed phony bids and offers for the BRKO stock at Lawler's direction in order to ensure a market for the stock.

Lawler and Bannister have consented to the entry of final judgments in the SEC's action. The judgments permanently enjoin Lawler and Bannister from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, and Section 10(b) Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the registration provisions of Section 5(a) and 5(c) of the Securities Act, and enjoin Lawler from violating the market manipulation provision of Section 9(a) of the Exchange Act. The judgments also bar Lawler and Bannister from participating in an offering of penny stock. Lawler is ordered to pay $386,790, consisting of $186,594 in disgorgement, $13,602 in prejudgment interest and a civil penalty of $186,594. Bannister is ordered to pay $21,781, consisting of $10,000 in disgorgement, $1,781 in prejudgment interest and a civil penalty of $10,000. Separately, the SEC instituted settled administrative proceedings against Lawler in which, without admitting or denying the findings, Lawler consented to an order barring him from appearing or practicing before the SEC.

SEC Charges Technology Company and Two Individuals with Fraud (SEC Release)
https://www.sec.gov/litigation/litreleases/2021/lr25176.htm
In a Complaint filed in the United States District Court for the District of Massachusetts https://www.sec.gov/litigation/complaints/2021/comp25176.pdf, the SEC charged Medsis International, Inc., its Chief Executive Officer Joshua Dax Cabrera, and Paul Hess with violating the anti-fraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act, and Rule 10b-5 thereunder; and with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act. Also,  Hess was charged with acting as an unregistered broker-dealer in violation of Section 15(a) of the Exchange Act. As alleged in part in the SEC Release:

[B]eginning in 2015 and continuing through at least 2020, Hess and Cabrera partnered to fraudulently raise more than $12.9 million from more than 150 U.S. and foreign investors by offering unregistered Medsis securities. The complaint alleges that while offering Medsis securities, Cabrera and Hess made multiple material misrepresentations and misleading statements about Medsis to investors concerning the existence and value of contracts with customers, existing and expected revenue, and business operations. The complaint also alleges that Cabrera and Hess misrepresented to investors their personal use of investor funds.

https://www.sec.gov/rules/sro/finra/2021/34-92685.pdf
FINRA proposed to extend the expiration of the temporary amendments enabling various Covid-related regulatory procedures from the August 31, 2021, expiration to December 31, 2021. As set forth in part in the SEC Release [Ed: footnotes omitted]:

In response to the COVID-19 global health crisis and the corresponding need to restrict in-person activities, FINRA filed proposed rule changes, SR-FINRA-2020-015 and SR-FINRA2020-027, which respectively provide temporary relief from some timing, method of service and other procedural requirements in FINRA rules and allow FINRA's Office of Hearing Officers ("OHO") and the National Adjudicatory Council ("NAC") to conduct hearings, on a temporary basis, by video conference, if warranted by the current COVID-19-related public health risks posed by an in-person hearing. In April 2021, FINRA filed a proposed rule change, SR-FINRA2021-006, to extend the expiration date of the temporary amendments in both SR-FINRA-2020- 015 and SR-FINRA-2020-027 from April 30, 2021, to August 31, 2021. 

While there are signs of improvement, much uncertainty remains for the coming months. The emergence of the Delta variant, dissimilar vaccination rates throughout the United States, and the uptick in transmissions in many locations indicate that COVID-19 remains an active and real public health concern. Based on its assessment of current COVID-19 conditions and the lack of a clear timeframe for a sustained and widespread abatement of COVID-19-related health concerns and corresponding restrictions, FINRA has determined that there is a continued need for temporary relief for several months beyond August 31, 2021. Accordingly, FINRA proposes to extend the expiration date of the temporary rule amendments in SR-FINRA-2020-015 and SRFINRA-2020-027 from August 31, 2021, to December 31, 2021.

. . .

[A]mong other things, the need for FINRA staff, with limited exceptions, to work remotely and restrict in-person activities - consistent with the recommendations of public health officials - have made it challenging to meet some procedural requirements and perform some functions required under FINRA rules. For example, working remotely makes it difficult to send and receive hard copy documents and conduct in-person oral arguments. The temporary amendments have addressed these concerns by easing logistical and other issues and providing FINRA with needed flexibility for its operations during the COVID-19 outbreak, allowing FINRA to continue critical adjudicatory and review processes in a reasonable and fair manner and meet its critical investor protection goals, while also following best practices with respect to the health and safety of its staff. 

FINRA staff, with limited exceptions, continue to work remotely to protect their health and safety. As indicated in its previous filings, FINRA has established a COVID-19 task force to develop a data-driven, staged plan for FINRA staff to safely return to working in FINRA office locations and resume other in-person activities. Based on its assessment of current COVID-19 conditions, FINRA does not believe the COVID-19-related health concerns necessitating this relief will meaningfully subside by August 31, 2021, and therefore proposes to extend the expiration date of the temporary rule amendments originally set forth in SR-FINRA-2020-015 from August 31, 2021, to December 31, 2021.

at Pages 2 - 4 of the SEC Release

Florida Woman Convicted Of Damaging Her Former Employer's Computers After She Was Fired (DOJ Release)
https://www.justice.gov/usao-sdny/pr/florida-woman-convicted-damaging-her-former-employer-s-computers-after-she-was-fired
After a jury trial in the United States District Court for the Southern District of New York, Medghyne Calonge was convicted of one count of intentionally damaging computers and one count of recklessly damaging computers. As alleged in part in the DOJ Release:

In January 2019, CALONGE was hired by Employer-1, a Manhattan-based online provider of professional services, to serve as the head of human resources in their St. Petersburg, Florida, office.  On June 28, 2019, CALONGE was terminated for failing to meet the minimum requirements of her job after, among other things, she improperly downgraded a colleague's access to a computer system following an argument with the colleague.   

While she was being terminated, and just before she was escorted from the building, CALONGE was observed by two employees of Employee-1 repeatedly hitting the delete key on her desktop computer.  Several hours later, CALONGE logged into a system ("System-1") used by Employer‑1 to receive and manage applications for employment with the company, which the company had invested two years and over $100,000 to build.  During the next two days, CALONGE rampaged through System-1, deleting over 17,000 job applications and resumes, and leaving messages with profanities inside the system.  Ultimately, CALONGE completely destroyed all of Employer-1's data in System-1.  Employer-1 subsequently spent over $100,000 to investigate and respond to the incident and to rebuild System-1.  To this day, Employer-1 has been unable to recover all of its data.  

Order Determining Whistleblower Award Claim ('34 Act Release No. 34-92708; Whistleblower Award Proc. File No. 2021-83)
https://www.sec.gov/rules/other/2021/34-92708.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award of a redacted percentage to Claimant 1, and recommending the denial of an Award to Claimant 4. The Commission ordered that CRS' recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:

Claimant 1 provided new information to the staff that caused the staff to open a new investigation, and Claimant 1 provided ongoing assistance to the staff during the course of its investigation. The charges brought by the staff were directly based on the information Claimant 1 provided.
. . .

[T]he investigation was opened before Claimant 4 provided his/her information. The information submitted by Claimant 4 also did not significantly contribute to the success of the Covered Action pursuant to Exchange Act Rule 21F-4(c)(2). Enforcement staff confirmed in a supplemental declaration, which we credit, that by the time Claimant 4 provided his/her information in Redacted Enforcement staff was already aware of the Additional Defendants, and the staff had already developed evidence supporting the allegations that would be added in the Amended Complaint. Accordingly, the information Claimant 4 provided did not significantly contribute to the Covered Action. 

http://www.brokeandbroker.com/6012/dewald-sdny-note/
We got someone buying an unsecured convertible note that is not a securities offering and is dependent upon a timely approval by FINRA of a pending Continuing Membership Application. An unsecured note is often worth the paper that it's written on, if that. FINRA hardly does anything timely. FINRA CMAs are notorious for ramblin', amblin', and taking far more time than anyone involved ever expected. On top of all of that, we got a pro se Plaintiff filing his Complaint in one of the nation's most sophisticated federal courts. What could possibly go wrong?

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