Securities Industry Commentator by Bill Singer Esq

There's Something Happening Here (at a FINRA Arbitration ) But What It Is Ain't Exactly Clear (BrokeAndBroker.com Blog)

Florida Attorney Pleads Guilty To Securities Fraud In Connection With Fraudulent Opinion Letter Scheme (DOJ Release)

Corsica Man Sentenced for Wire Fraud and Money Laundering in a Multi-Million Dollar Cattle Ponzi Scheme (DOJ Release)

Rochester Man Going To Prison And Ordered To Pay Millions In Restitution For His Role In Ponzi Scheme That Bilked Investors Out Of Millions Of Dollars (DOJ Release)

Two New Jersey, One New York Securities Claims Aggregators Arrested and Charged with $40M Fraud (DOJ Release)

SEC Obtains Emergency Relief in Case Charging Claims Aggregator and Principals with Multi-Million Dollar Fraud (SEC Release)

SEC Charges Michigan Investment Adviser with Fraud (SEC Release)

FINRA Fines and Suspends Rep for Willful Non-Disclosure of 9 Felonies on Form U4

In the Matter of Okechukwu Linton, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Excessive and Unsuitable Trades

In the Matter of Michael James May, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Excessive and Unsuitable Trades

In the Matter of Sebastian Wyczawski, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Excessive and Unsuitable Trades

In the Matter of Leonard Joseph Marzocco, Respondent (FINRA AWC)

Securities Registration Requirements and SEC Rule 144

Under the Securities Act of 1933 (the "Securities Act"), anyone seeking to sell a security must first register that security unless an exemption applies.  This registration requirement protects investors by promoting disclosure of information pertinent to informed investment decisions. 

A company registering new securities must complete a registration statement known as U.S. Securities and Exchange Commission ("SEC") Form S-1 before the securities can be listed on a national exchange and publicly traded.  SEC Form S-1 contains information pertinent to informed investment decisions, including, among other things, information on the company's business operations, the company's financial condition, and a description of the company's management.  In connection with SEC Form S-1, the company is required to file an opinion letter (the "Form S-1 Opinion Letter") from a licensed attorney attesting that the statements in the SEC Form S-1 are true and correct.  A company's SEC Form S-1 and the Form S-1 Opinion Letter are available to the public on the SEC's Electronic Data Gathering, Analysis, and Retrieval System ("EDGAR").

"Restricted securities" refers to securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer, with "affiliate" meaning a person who directly or indirectly controls, or is controlled by, or is under common control with, an issuer.  Affiliates can also include an executive officer or a director or large shareholder who is in a relationship of control with respect to the issuing company.  Restricted securities bear a legend indicating that the securities may not be resold in the marketplace unless they are registered with the SEC or are exempt from such registration requirements.

Securities Act Rule 144 ("Rule 144"), codified at 17 C.F.R. § 230.144, provides a registration exemption for restricted securities.  Specifically, it permits the public resale of restricted securities if a number of conditions are met, including conditions relating to how long the securities are held, the way in which they are sold, the public information available to investors about the securities, and the amount that can be sold at any one time.  Pursuant to Rule 144, however, even if these conditions are met, the sale of restricted securities to the public is still not permitted until a transfer agent removes the "restricted" legend from the security. 

The term "transfer agent" refers to a company that keeps track of individuals and entities that own the stocks and bonds of a given company that has publicly traded securities.  Among other things, transfer agents issue and cancel certificates to reflect changes in ownership, serve as the company's intermediary for payouts, exchanges, or mailings, and handle lost, destroyed or stolen certificates.  Transfer agents also, when appropriate, remove the "restricted" legend from securities. 

A Rule 144 Seller's Representation Letter, or "Seller's Representation Letter," is a letter from an affiliate seller (that is, a seller in a relationship of control with the issuer, such as an executive officer, a director, or a large shareholder) of restricted securities to a transfer agent to establish certain facts underlying a legal opinion that the securities at issue can be sold publicly pursuant to Rule 144.  The issuer's consent to the removal of a legend typically comes in the form of an opinion letter from the issuing company's attorney, the Seller's Representation Letter, indicating that the securities at issue satisfy the conditions of Rule 144.  Seller's Representation Letters contain multiple attestations that are required by law prior to the restricted legend being removed.  The transfer agent relies on the Seller's Representation Letter in determining whether to remove the restricted legend from a security.

Over-the-Counter Securities and OTC Markets Group

Over-the-counter ("OTC") securities are securities that are traded between two counterparties outside of a formal securities exchange.  OTC Markets Group ("OTC Markets") is a securities market headquartered in New York, New York, that provides price and liquidity information for OTC securities.

OTC Markets requires issuers seeking to be listed on OTC Markets to hire a licensed attorney to review company records and submit a letter to OTC Markets (an "OTC Markets Attorney Letter") regarding whether information publicly disclosed by the issuer is in compliance with the condition in SEC Rule 144 governing the public information available to investors about the issuer.  OTC Markets relies on the OTC Markets Attorney Letter to determine whether an issuer's security may be listed on OTC Markets.  OTC Markets Attorney Letters are available to the public on the OTC Markets website. 

The Scheme to Defraud

From at least in or about 2011 through at least in or about September 2018, CRAFT and Rubin participated in a fraudulent scheme in which CRAFT falsely represented that he had undertaken certain legal work in connection with Seller's Representation Letters, OTC Markets Attorney Letters, and S-1 Opinion Letters, all of which enabled the relevant securities to be sold to the investing public. The false representations were in letters pertaining to over a dozen companies.

[B]eginning on or about January 2014 and continuing through February 2019, when Blom, with the intent to defraud, devised and intended to devise a scheme and artifice to defraud and to obtain money and property from others.  Blom's scheme and artifice to defraud was to unjustly enrich himself by obtaining funds fraudulently.

Blom operated a custom cattle-feeding business in the Corsica area.  As a part of his business, Blom solicited investors for groups of cattle.  He purchased groups of cattle from various livestock companies and those groups of cattle were raised on feedlots owned or used by Blom.  He raised the groups of cattle to maturity, and then sold them to processing plants.  After the groups of cattle were sold, Blom paid the profits to the investors in the groups.

However, Blom sold the same groups of cattle to multiple different investors.  Blom sent identical cattle purchase invoices to multiple investor groups, when each invoice should have been used for just one group of investors.  At the time, Blom knew that he did not have and could not purchase as many head of cattle as he represented to investors.  Sometimes Blom altered the cattle purchase invoices in an effort to conceal that he sold the same group of cattle to multiple different investors.  Because he sold the same groups of cattle to multiple different investor groups, the money generated from the sale of the cattle groups to a processing plant did not generate enough money to pay back all of the investors who invested in those cattle groups.

Blom falsely and fraudulently represented to investors that he would use their money to purchase groups of cattle and to care for those cattle.  Instead, he routinely used money from new investors to pay back old investors, often by check. 

On multiple occasions during the relevant time period, Blom mailed invoices and other investment-related documents to investors.  Several investors mailed their investment checks to him.

As part of Blom's scheme and artifice to defraud and to obtain money from others, Blom caused various wire communications to be sent.  This includes an investment check for $256,996.72 made on or about December 17, 2018.  This transaction involved an interstate wire transmission from Farmers State Bank in South Dakota, to First Dakota National Bank in South Dakota, through US Bank in Minnesota.

Blom also knowingly conducted multiple financial transactions that affected interstate commerce and that involved the proceeds of his fraud scheme, as described above.  Blom made payments to investors knowing that the financial transactions were designed in whole or in part to conceal or disguise the nature, location, source, ownership, or control of the proceeds of his fraud scheme.  Blom knew that the money involved in these financial transactions represented the proceeds of his fraud scheme. 

[B]etween 2017 and June 2018, the defendant conspired with co-defendants Perry Santillo, Christopher Parris and others, to obtain money through an investment fraud commonly known as a Ponzi scheme. The scheme, which was conducted under the umbrella of a business entity called Lucian Development, involved the sale of fraudulent promissory notes that were issued under the names various entities that Santillo and Parris controlled, including Lucian Development. The issuers received money from new investors, and then redistributed that money to repay earlier investors, to pay the expenses of the scheme, and to finance the lifestyles of Santillo, Parris and others involved in the scheme. Piccarreto was initially unaware that the business was a Ponzi scheme when he began working for Lucian Development in March 2012. As he gained experience with investments and obtained a securities license, Piccarreto's responsibilities increased. By January 2017, the defendant realized that the Lucian Development business was, indeed, a Ponzi scheme after the company stopped paying promised returns to client investors whom he serviced. However, rather than severing his association with Lucian Development, Piccarreto continued to work for Santillo and Parris, knowingly lying to investors by falsely reassuring them that their investments were safe and secure, even though he knew this was not true, and encouraging investors to "reinvest" their fraudulent investments by signing new promissory notes. 

Between January 1, 2017, and June 19, 2018, Piccarreto was involved in defrauding approximately 400 investors out of approximately $18,081,556, which resulted in financial hardship to more than 25 of its investor victims. Piccarreto also admitted that, while working in Texas, he personally solicited and defrauded at least eight investors out of approximately $598,695. In addition, on his 2017 tax return, the defendant claimed a taxable income of $6,576.  In fact, Piccarreto's taxable income was approximately $538,548, which resulted in the defendant avoided paying income taxes to the IRS in the amount ohttps://www.sec.gov/news/press-release/2021-222f approximately $159,423.

Perry Santillo and Christopher Parris were previously convicted and are awaiting sentencing.

Read: "2 Pleas, 2 Federal Courts,1 Horrific Ponzi Scheme, And Lots Of Lousy Wall Street Regulation" (BrokeAndBroker.com Blog /  November 6, 2019)

http://www.brokeandbroker.com/4895/perry-santillo-ponzi/

[T]he three defendants were the principals of Alpha Plus Recovery, a claims aggregator firm based in Old Bridge, New Jersey. The Indictment further alleges that the defendants used Alpha Plus Recovery to make false and fraudulent claims, including claims made in the Eastern District of Pennsylvania, to the proceeds of securities fraud class action and SEC enforcement action settlements. The defendants falsely claimed that corporate clients of Alpha Plus Recovery had purchased shares of securities that were the subject of the lawsuits and enforcement actions. In reality, the clients, which were entities actually controlled by the defendants, had not purchased the subject securities. To substantiate the false claims, the defendants created fraudulent brokerage and other financial documents to provide to claims administrators. The defendants then allegedly transferred the fraudulently obtained funds into accounts they controlled. The Indictment alleges that between 2014 and 2021, the defendants received approximately $40 million from these false claims.

[J]oseph Cammarata, Erik Cohen, and David Punturieri, and two entities that they control, AlphaPlus Portfolio Recovery Corp. and Alpha Plus Recovery LLC (collectively AlphaPlus), stole at least $40 million from approximately 400 distribution funds, including more than $3 million from settlement funds arising from SEC enforcement actions. The complaint alleges that, starting in 2014, AlphaPlus engaged in a serial scheme to fraudulently obtain money by submitting false claims to settlement fund administrators - purporting to represent clients who had traded the securities that were the subjects of the underlying settlements. The complaint further alleges that defendants used false trading data and broker-dealer letterhead they misappropriated from other companies to "document" the purported trades and provide an air of legitimacy to their fake claims. According to the complaint, Cammarata, Cohen, and Punturieri funneled the fraudulently obtained distributions through a web of accounts they controlled and used the stolen money to pay for numerous personal expenses, such as jewelry, home renovations, luxury automobiles, watercraft, and real estate.

[M]untin worked for an SEC-registered investment adviser and also managed certain investments for his clients outside of that adviser through his own company, Executive Asset Management, Inc. According to the complaint, Executive Asset Management was previously registered as an investment adviser with the state of Michigan. As alleged, between March 2016 and February 2020, Muntin solicited one of his elderly advisory clients to write checks totaling $305,750 to Executive Asset Management for purported investments in securities. However, according to the complaint, Muntin did not invest the client's money in securities, but spent it for his own benefit, including to pay his mortgage, real estate taxes, health insurance, boat and car loans, and credit card bills. The complaint further alleges that Muntin also overcharged the client for at least $9,000 in assets under management fees.

Respondent understands that this settlement includes a finding that he willfully misrepresented a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this misrepresentation makes him subject to a statutory disqualification with respect to association with a member. 

On or about February 24, 2021, Respondent learned that he was charged with nine felonies. 

Subsequently, on a Form U4 filed othe firm, Respondent falsely responded "no" to Disclosure Question 14A(1), which n June 24, 2021 for the purpose of registering with FINRA through an association with asked, inter alia, the following question: "Have you ever . . . . (b) been charged with any felony?" (emphasis in original). As a result, Respondent filed inaccurate and misleading information with FINRA.

Between .June 2017 and May 2018, while he was registered through Joseph Stone, May engaged in excessive and unsuitable trading, including the use of margin, in the account of Customer 1. During the relevant period, May recommended that Customer I place 21 trades in his account, and Customer 1 accepted. May's recommendations. Although Customer l's account had an average month-end equity of approximately $25,331, May recommended trades with a total principal value of more than $265,044, which resulted in an annualized turnover rate of more than 10. Collectively, the trades that May recommended caused Customer 1 to pay $10,349 in commissions, trading costs and margin interest, which resulted in an annualized cost-to-equity ratio in excess of 40 percent-meaning that Customer 1's account would have had to grow by more than 40 percent annually just to break even.  

Between June 2016 and January 2017, while he was registered through Joseph Stone, Wyczawski engaged in excessive and unsuitable trading, including the use of margin, in. the account of Customer I During the. relevant period, Wyczawski recommended that Customer I place 20 trades in his account, and Customer I accepted Wyczawski's recommendations. Although Customer l's account had an average mouth-end equity of approximately S51,340, Wyczawski recommended trades with a total principal value of more than $52f1,759, which resulted in an annualized turnover rate of more than 17. Collectively, the trades that Wyczawski recommended caused Customer 1 to pay $10,397 in commissions, trading costs and margin interest, which resulted in an annualized costto-equity ratio in excess of 34 percent--meaning that Customer l's account would have had to grow by inure than 34 percent annually just to break even. 

Between September 2016 and September 2017, while he was registered through Joseph Stone, Wyczawski engaged in excessive and unsuitable trading, including the use of margin, in the account of Customer 2. During the relevant period, Wyczawski recommended that Customer 2 place 45 trades in his account, and Customer 2 accepted Wyczawski's recommendations. Althoueh Customer 2's account had an average monthend equity of approximately 514,831, Nkryczawski recommended trades with a total pruicipal value of ITIOre than $300,524, which resulted in an annualized turnover rate of more than 17, Collectively, the trades that W.),czawski recommended caused Customer 2 to pay 51.1,247 in commissions, trading costs and margin interest, which resulted in an annualized cost-to-equity .ratio in excess of 63 percent-meaning that Customer 2's account would have bad to grow by more than 65 percent annually just to break even. 

Between June and December 2019, Marzocco excessively and unsuitably traded the account of Customer A. During this period, Marzocco recommended more than 160 options transactions to Customer A, primarily involving call options with short-term expiration dates. Customer A relied on Marzocco's advice and accepted his recommendations. Marzocco's recommended trades caused Customer A to pay $27,078 in commissions and other trading costs in approximately six months, even though the account's average equity was only approximately $40,000. Collectively, those trades resulted in Customer A's account having an annualized cost-to-equity ratio of more than 112 percent-meaning Customer A's investments would have had to grow by more than 112 percent annually just to break even. 

• Securities Industry Commentator
• Bill Singer