Securities Industry Commentator by Bill Singer Esq

SEC Charges Charlotte, North Carolina Investment Adviser and Its President for Not Providing Records to Examiners (SEC Release)

CFTC Orders Event-Based Binary Options Markets Operator to Pay $1.4 Million Penalty (CFTC Release)

San Diego Real Estate Agent Sentenced for Multi-Million-Dollar Ponzi Schemes (DOJ Release)

[SEC] staff requested books and records from Bóveda and Witherspoon as part of an investment adviser examination in September 2019. Bóveda and Witherspoon have not produced the requested books and records, as required by law. The complaint further alleges that Bóveda is improperly registered with the Commission as an Internet investment adviser because it does not meet the applicable registration requirements, and does not otherwise appear to be qualified for registration with the Commission. The SEC also claims that, since January 2020, Bóveda and Witherspoon have had custody of client funds, but have failed to comply with requirements to safeguard those assets. Finally, the SEC asserts that Bóveda and Witherspoon made material misstatements and omissions in Bóveda's Forms ADV filed with the Commission between 2014 and 2021.

[B]eginning in approximately June 2020, Polymarket had been operating an illegal unregistered or non-designated facility for event-based binary options online trading contracts, known as "event markets." According to the order, through its  website, Polymarket offered the public the opportunity to "bet on your beliefs" by buying and selling binary options contracts related to an event taking place in the future that are susceptible to a "yes" or "no" resolution, such as: "Will $ETH (Ethereum) be above $2,500 on July 22?"; "Will the 7-day average COVID-19 case count in the U.S. be less than 15,000 for the day of July 22"; "Will Trump win the 2020 presidential election?".  The order further finds that Polymarket has offered more than 900 separate event markets since its inception, while deploying smart contracts hosted on a blockchain to operate the markets. Polymarket creates, defines, hosts, and resolves the trading and execution of contracts for the event-based binary option markets offered on its website. 

According to the order, such event market contracts, each of which is composed of a pair of binary options, constitute swaps under the CFTC's jurisdiction, and therefore can only be offered on a registered exchange in accordance with the CEA and CFTC regulations.

As stated in the order, the CFTC recognizes Polymarket's substantial cooperation with the Division of Enforcement's investigation of this matter in the form of a reduced civil monetary penalty.

As part of the government benefits fraud scheme, Avergoon used shell companies, including "Imagination Construction Company," to create fictitious and backdated invoices for services like carpet installation, repairs to the Chabad of Poway's HVAC system, and replacing damaged books and other supplies-even though Avergoon had never performed these services.  In some cases, Avergoon would give Goldstein several fake bids from different shell companies, so that Rabbi Goldstein could trick the grant program administrators into believing he had complied with their competitive bidding requirements.  Avergoon and Goldstein pretended that the government grant funds would be used for facilities upgrades, security systems, and community programs.  But in reality, the money often went straight to Goldstein's and Avergoon's pockets; other times they used portions of it to pay contractors who had in fact charged much lower prices than reflected on Avergoon's phony paperwork.

Apart from his fraudulent partnership with Rabbi Goldstein, Avergoon also admitted to participating in separate real estate Ponzi schemes from 2010 to 2016, in which he cheated retirement investors out of a total of $12 million. Avergoon was a San Diego-based real estate agent, and he used his industry knowledge and reputation to target trusting victims who would invest in what they thought was the purchase of rental property. 

Avergoon promised monthly dividends that would be paid from rental income.  He created written investment materials like prospectus and projected income and expenses calculations, designed to give investors the false impression that their money would be safely tucked away in passive-income retirement investments.  But in truth, instead of using investors' money to buy rental properties as he promised, Avergoon spent the money himself and just pretended that he had purchased the apartment buildings and office space he advertised.  In true Ponzi fashion, for a time, Avergoon made the promised dividend payments-but rather than using rent income, he funded those payments using new investor money.

Avergoon deceived more than a dozen unwitting investors, convincing them to part with at least $5 million.  When an investor would ask to cash out, he encouraged them to re-invest, and at one point he pretended to "roll over" their retirement investments to purchase a multi-million-dollar commercial building. In reality, he bought that building with a loan, not with investor money, and again diverted their money to his own personal use.  He created fake partnership agreements, false purchase documents and deeds, and other fictitious records, and forged the signatures of his investors to conceal the fraud-then laundered the proceeds in order to disguise the true source and ownership of the money.

Avergoon did not stop there.  He convinced investors to part with another $5 million or more by pretending to use their money to fund short-term, low-risk loans supposedly secured by the borrowers' high-end San Diego homes.  But in reality, there were no "borrowers"-Avergoon used his real estate connections to identify homes he could pose as collateral, and he simply doctored up fake loan agreements and forged the borrowers' signatures.  In some cases, the individuals he claimed were the borrowers did not even own the homes that were purportedly used as collateral.  Avergoon made fake loan agreements, Deeds of Trust, mortgage Notes, and other official-looking documents, and he even created fake notary stamps and San Diego County Recorder's Office markings to make the paperwork appear legitimate.  Once again, Avergoon used new investor money to make occasional payments to his victims, to make it appear that the "loans" were performing.  But in truth, he diverted the money to his own use and the "investments" were worthless.

• Securities Industry Commentator
• Bill Singer