Securities Industry Commentator by Bill Singer Esq

FINRA Arbitrator Won't Rewrite Indemnification Clause (BrokeAndBroker.com Blog)

NatWest Markets Pleads Guilty to Fraud in U.S. Treasury Markets / Global Banking and Financial Services Firm to Pay $35 Million in Fine, Restitution, and Forfeiture (DOJ Release)

Nikola Corporation to Pay $125 Million to Resolve Fraud Charges / Company Also Agrees to Continue Cooperating with the SEC (SEC Release)

SEC Charges Additional Unregistered Brokers Who Sold Equialt Securities to Retail Investors (SEC Release)

Chicago Physician Charged With Insider Trading (DOJ Release)

SEC Charges Clinical Drug Trial Investigator with Insider Trading (SEC Release)

Russian National Extradited for Role in Hacking and Illegal Trading Scheme / Defendant among five charged in multi-million dollar scheme to trade based on inside information stolen from U.S. computer networks (DOJ Release)

SEC Charges Five Russians in $80 Million Hacking and Trading Scheme

United States Files Civil Action to Return $150 Million in Embezzled Funds to Sony; FBI Tracks Money to Bitcoin (DOJ Release)

SEC Charges Private Equity Fund Adviser with Fee and Expense Disclosure Failures (SEC Release)

Statement of Commissioner Elad L. Roisman (SEC Release)

[B]etween January 2008 and May 2014, NatWest traders in London and Stamford, Connecticut, independently engaged in schemes to defraud in connection with the purchase and sale of U.S. Treasury futures contracts. Separately, in 2018, two other traders employed at NatWest's Singapore branch engaged in a fraud scheme in connection with the purchase and sale of U.S. Treasury securities in the secondary (cash) market.

In each scheme, NatWest traders engaged in "spoofing" by placing orders with the intent to cancel those orders before execution, attempting to profit by deceiving other market participants by injecting false and misleading information regarding the existence of genuine supply and demand in the market. The spoof orders were designed to artificially push up or down the prevailing market price so that the NatWest traders could trade more profitably as a result of these schemes. In some instances, one of the NatWest traders took advantage of the close correlation between U.S. Treasury securities and U.S. Treasury futures contracts and engaged in cross-market manipulation by placing spoof orders in the futures market in order to profit from trading in the cash market.

The 2018 securities fraud scheme constituted a material breach of the Oct. 25, 2017 Non-Prosecution Agreement between the U.S. Attorney's Office for the District of Connecticut and NatWest's U.S. broker-dealer subsidiary, NatWest Markets Securities Inc. (formerly RBS Securities Inc.), and occurred while NatWest (formerly The Royal Bank of Scotland Plc) was on probation following its May 20, 2015 guilty plea and Jan. 5, 2017 sentencing for conspiring to manipulate the foreign currency exchange market.

A number of relevant considerations contributed to the department's criminal resolution with NatWest, including the nature and seriousness of the offense, NatWest's substantial prior history of other criminal conduct and civil and regulatory actions against it, its breach of a prior agreement, and the state of NatWest's compliance program. 

[B]efore Nikola had produced a single commercial product, Milton embarked on a public relations campaign aimed at inflating and maintaining Nikola's stock price. Milton's statements in tweets and media appearances falsely gave investors the impression that Nikola had reached certain product and technological milestones. The order finds that Milton misled investors about Nikola's technological advancements, in-house production capabilities, hydrogen production, truck reservations and orders, and financial outlook. The order also finds that Nikola further misled investors by misrepresenting or omitting material facts about the refueling time of its prototype vehicles, the status of its headquarters' hydrogen station, the anticipated cost and sources of electricity for its planned hydrogen production, and the economic risks and benefits associated with its contemplated partnership with a leading auto manufacturer.

[B]etween approximately August 2016 and February 2020, Marques and his company, Lifeline Innovations & Insurance Solutions LLC, sold approximately $7.9 million of securities of funds managed by Florida-based EquiAlt LLC to more than 50 retail investors located in California and Washington State. The complaint further alleges that Marques, through Lifeline Innovations, received approximately $824,000 in commissions from EquiAlt, even though neither Marques nor Lifeline Innovations was registered as a broker-dealer or associated with a registered broker-dealer. The SEC previously filed an enforcement action against EquiAlt, EquiAlt's CEO, EquiAlt's Managing Director, and entities they control, alleging that they fraudulently raised millions of dollars by making material misrepresentations to investors about EquiAlt's investment strategy, the financial condition of the investments, and the uses of investor proceeds. The SEC also previously charged five of EquiAlt's top sales agents with various registration violations.

In November 2020, Dr. Catenacci used material, non-public information about the trial results to make more than $134,000 in illegal profits from the purchase and sale of securities in the company, according to a criminal information filed Friday in U.S. District Court in Chicago.  Dr. Catenacci purchased more than 8,000 shares before the company announced positive results from the trial, and then sold those shares shortly after the announcement, the information states.  In the interim, the shares held by Dr. Catenacci tripled or quadrupled in value, the information states.

[C]atenacci, a Chicago, Illinois based medical school professor, entered into a consulting agreement with Five Prime to serve as a lead clinical investigator for the company's Bemarituzumab drug trial. Through this role, Catenacci allegedly learned material nonpublic information about the positive drug trial results for Bemarituzumab. According to the SEC, shortly after he allegedly learned of the positive results, Catenacci purchased 8,743 shares of Five Prime. After it publicly announced the positive drug trial results, Five Prime's share price increased over 300%. The next day, Catenacci allegedly sold all of his shares, realizing illicit gains of $134,142.

Vladislav Klyushin, also known as "Vladislav Kliushin," 41, of Moscow, Russia, was arrested in Sion, Switzerland on March 21, 2021 and was extradited to the United States on Dec. 18.  Charges were unsealed this morning in U.S. District Court in Massachusetts. Klyushin is charged with conspiring to obtain unauthorized access to computers, and to commit wire fraud and securities fraud, and with obtaining unauthorized access to computers, wire fraud and securities fraud. He will appear later this morning in federal court in Boston.

Ivan Ermakov, also known as "Ivan Yermakov," 35, and Nikolai Rumiantcev, also known as "Nikolay Rumyantsev," 33, both of Moscow, Russia, are charged in the District of Massachusetts with conspiring to obtain unauthorized access to computers, and to commit wire fraud and securities fraud and with obtaining unauthorized access to computers, wire fraud and securities fraud. Ermakov, a former officer in the Russian Main Intelligence Directorate (GRU), a military intelligence agency of the General Staff of the Armed Forces of the Russian Federation, was previously charged in July 2018 in federal court in Washington, D.C. for his alleged role in a hacking and influence effort related to the 2016 U.S. elections. In October 2018, Ermakov was also charged in federal court in Pittsburgh in connection with his alleged role in hacking and related disinformation operations targeting international anti-doping agencies, sporting federations, and anti-doping officials.

Mikhail Vladimirovich Irzak, also known as "Mikka Irzak," 43, and Igor Sergeevich Sladkov, 42, both of St. Petersburg, Russia, are also charged in the District of Massachusetts with conspiracy to obtain unauthorized access to computers, and to commit wire fraud and securities fraud, and with securities fraud.  

Ermakov, Rumiantcev, Irzak and Sladkov remain at large.  

. . .

According to the charging documents, Klyushin, Ermakov and Rumiantcev worked at M-13, an information technology company based in Moscow, where Klyushin served as the company's first deputy general director. M-13 purported to offer  penetration testing and "Advanced Persistent Threat (APT) emulation"-both services that seek exploitable vulnerabilities in a computer system, purportedly for defensive purposes. M-13's website indicated that the company's "IT solutions" were used by "the Administration of the President of the Russian Federation, the Government of the Russian Federation, federal ministries and departments, regional state executive bodies, commercial companies and public organizations." In addition to these services, Klyushin, Ermakov and Rumiantcev also allegedly offered investment management services through M-13 to investors in exchange for up to 60 percent of the profit

Between at least in or about January 2018 and September 2020, Klyushin, Ermakov, Irzak, Sladkov and Rumiantcev allegedly agreed to trade in the securities of publicly traded companies based on material non-public information ("MNPI") about the earnings of those companies, in advance of the public announcements of financial results. The MNPI was allegedly acquired through unauthorized intrusions into the computer networks of two U.S.-based filing agents (Filings Agents 1 and 2)-vendors that publicly traded companies used to make quarterly and annual filings through the U.S. Securities and Exchange Commission (SEC).

Armed with this information before it was disclosed to the public, Klyushin and his codefendants allegedly knew ahead of time, among other things, whether a company's financial performance would meet, exceed, or lag market expectations-and thus whether its share price would likely rise or fall following the public announcement of that performance-and they traded accordingly, in brokerage accounts held in their own names and in the names of others. It is alleged that Klyushin and his co-conspirators earned tens of millions of dollars in illegal profits.

According to the charging documents, Klyushin and his coconspirators obtained unauthorized access to the computer networks of Filing Agents 1 and 2. They allegedly deployed malicious infrastructure capable of harvesting employees' usernames and passwords and used stolen usernames and passwords to misrepresent themselves as employees in order to obtain access to the filing agents' computer networks. To conceal the origin of their activities, the coconspirators allegedly leased proxy (or intermediary) computer networks outside of Russia and subscribed to email addresses and payment systems used in furtherance of the attacks in others' names. Once inside the filing agent networks, it is alleged that they viewed and downloaded MNPI, including quarterly and annual earnings reports that had not yet been filed with the SEC or disclosed to the general public, of hundreds of companies that are publicly traded on U.S. national securities exchanges, including the NASDAQ and the NYSE. The coconspirators allegedly traded in the securities of those companies while in possession of MNPI concerning their financial performance, including by purchasing securities of companies that were about to disclose positive financial results, and selling short securities of companies that were about to disclose negative financial results.  It is further alleged that the coconspirators distributed their trading across accounts they opened at banks and brokerages in several countries, including Cyprus, Denmark, Portugal, Russia and the United States, and misled brokerage firms about the nature of their trading activities.

For example, according to court documents, during a single two-week period between Oct. 22, 2018 and Nov. 6, 2018, Ermakov or another coconspirator gained unauthorized access into Filing Agent 2's computer network using IP addresses hosted at a data center located in Boston, and viewed or downloaded the non-public earnings-related files of several companies, including Capstead Mortgage Corp., Tesla, Inc., SS&C Technologies, and Nevro Corp.  Thereafter-days  before the companies' financial results were filed with the SEC and publicly disclosed-Klyushin and other co-conspirators allegedly placed profitable trades in the shares of those companies, buying shares of companies that were about to disclose positive financial results and selling short shares of companies that were about to disclose negative financial results.  For example, on or about Oct. 24, 2018, before one company publicly disclosed positive quarterly earnings results, Klyushin or another coconspirator allegedly purchased its securities in Klyushin's brokerage account at a Russia-based brokerage firm. That same day, Klyushin allegedly sent a message to M-13 investors, Individuals 1 and 2, stating "Pay attention to shares of [the company] now and tomorrow after 16:30 and on how much they go up".

[R]ei Ishii, an employee of Sony Life Insurance Company Ltd. ("Sony Life") in Tokyo, allegedly diverted the $154 million when the company attempted to transfer funds between its financial accounts. Ishii allegedly did this by falsifying transaction instructions, which caused the funds to be transferred to an account that Ishii controlled at a bank in La Jolla, California. Ishii then quickly converted the funds to Bitcoin cryptocurrency, the complaint said.

Based on evidence uncovered during the FBI's investigation, a seizure warrant was authorized in June 2021 by a U.S. Magistrate Judge in the Southern District of California.  As alleged in the supporting affidavit, law enforcement was able to trace Bitcoin transfers and identify that approximately 3,879.16 Bitcoins, representing the proceeds of the funds stolen from a subsidiary of Sony Life, had been transferred to a specific Bitcoin address and then to an offline cryptocurrency cold wallet.

The FBI, with significant assistance from Sony and Citibank, continued to investigate in cooperation with Japan's National Police Agency, the Tokyo Metropolitan Police Department, Tokyo District Public Prosecutors Office, and JPEC (Japan Prosecutors unit on Emerging Crimes). As a result of this coordinated effort, investigators obtained the "private key" - the rough equivalent of a password - needed to access the Bitcoin address. All the Bitcoins traceable to the theft have been recovered and fully preserved. Ishii has been criminally charged in Japan.

[G]lobal failed to offset certain portfolio company fees against management fees charged to clients, as it was required to do under the offering and governing documents. As a result, clients overpaid millions in additional management fees. The SEC's order also found that Global provided investors with inconsistent statements about how Global would calculate management fees. In addition, the SEC's order found that these violations were caused by deficiencies in Global's compliance program.

Today, I sent a letter to President Biden, informing him that I intend to resign my position by the end of January. Serving the American people as a Commissioner and an Acting Chairman of this agency has been the greatest privilege of my professional life. It has been the utmost honor to work alongside my extraordinary SEC colleagues, who care deeply about investors and our markets. Over the next several weeks, I remain committed to working with my fellow Commissioners and the SEC's incredible staff to further our mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.

• Securities Industry Commentator
• Bill Singer