Securities Industry Commentator by Bill Singer Esq

April 11, 2022








http://www.brokeandbroker.com/6387/price-ubs/
There are times when you read something and you think it says something. Then you re-read that same document and realize that you inferred quite a bit that was not stated or implied. Then your re-read that document, yet again, and realize that it doesn't actually say anything and, in truth, is pointless. All of which brings us to a 2021 FINRA Arbitration Award. Which brings us to a 2022 federal court opinion -- a second one, at that. Which brings us nowhere but at the end of the beginning of a circle.

Former Managing Partner Of Manhattan Investment Advisory Firm Sentenced To 12 Years For Defrauding Investors In An Over $120 Million Ponzi-Like Scheme (DOJ Release)
https://www.justice.gov/usao-sdny/pr/former-managing-partner-manhattan-investment-advisory-firm-sentenced-12-years
Former International Investment Group ("IIG") Managing Partner David Hu pled guilty in the United States District Court for the Southern District of New York to investment adviser fraud, securities fraud, and wire fraud offenses , and he was sentenced to 12 year in prison plus three years of supervised release. Co-conspirator Martin Silver pled guilty to investment adviser fraud, securities fraud, and wire fraud offenses in April 2021 and his sentencing is pending. As alleged in part in the DOJ Release:

Background of IIG

HU and co-conspirator MARTIN SILVER founded IIG in 1994.  HU was a managing partner and the chief investment officer of IIG.  IIG, an SEC-registered investment adviser, provided investment management and advisory services, including for three private funds that it operated: (1) the IIG Trade Opportunities Fund N.V. ("TOF"); (2) the IIG Global Trade Finance Fund, Ltd. ("GTFF"); and (3) the IIG Structured Trade Finance Fund, Ltd. ("STFF").  IIG also advised the Venezuela Recovery Fund ("VRF"), a fund that managed the remaining assets of a failed Venezuelan bank (VRF, together with TOF, GTFF, and STFF, the "IIG Funds").  In March 2018, IIG reported to the SEC that it had approximately $373 million in assets under management.

IIG advertised itself as specializing in global trade financing, particularly in providing trade finance loans to small and medium-sized businesses.  IIG's principal investment advisory strategy, including with respect to the IIG Funds, was investing in trade finance loans that it also originated.  Trade finance loans are used by small and medium-sized companies, typically exporters and importers, to facilitate international trade.  IIG's purported expertise was in trade finance loans to borrowers located in Central or South America, and in a variety of industries, with a stated focus on "soft commodities," such as coffee, agriculture, fishing, and other food products.  IIG's trade finance loans were purportedly secured by collateral, such as the underlying traded goods, assets held by the borrowers, or expected payments by third parties.

Investments in TOF, STFF, and GTFF were marketed by IIG to institutional investors, such as pension funds, hedge funds, and insurers.  In offering memoranda and communications with investors, IIG advertised strict risk controls, such as promises to use diligence to carefully select borrowers or issuers with trusted management and marketable assets, and portfolio concentration limits based on borrower, developing country, and industry.

IIG purported to value the trade finance loans in the IIG Funds on a regular basis.  IIG and, in turn, HU, received a performance fee with respect to the IIG Funds, as well as a management fee, which was calculated as a percentage of the assets under management held in the Funds.

The Scheme

From approximately 2007 to 2019, HU conspired to defraud investors in IIG-managed funds by: (i) overvaluing distressed loans held by the IIG Funds, (ii) falsifying paperwork to create a series of fake loans that were classified, fraudulently, as positively performing loans, and to otherwise hide losses, (iii) selling overvalued and fake loans to a collateralized loan obligation trust and new private funds established and advised by IIG, and (iv) using the proceeds from those fraudulent sales to generate liquidity required to pay off earlier investors in a Ponzi-like manner.

The scheme HU participated in involved, among other things:
  • Mismarking the value of multiple loans that had, in reality, defaulted (the "Defaulted Loans").  
  • Mismarking multiple loans that were distressed (the "Distressed Loans").  These Distressed Loans included, for example, loans for which the borrowers had missed multiple scheduled payments.  
  • Creating fictitious loans in order to hide the losses resulting from the Defaulted Loans, including from auditors reviewing TOF's financials, by removing the Defaulted Loans from the TOF portfolio and replacing them with tens of millions of dollars in fictitious loans to purported borrowers in foreign countries (the "Fake Loans"). 
  • Using a collateralized loan obligation trust (the "CLO Trust") to create liquidity through investments in fraudulent loans. 
  • Using the CLO Trust and Panamanian shell entities to cover up losses.  Specifically, HU caused the creation of shell entities domiciled in Panama ("Panamanian Shell Entities") that were controlled by an IIG nominee.  Then, HU caused the CLO Trust to enter into fake loan transactions with the Panamanian Shell Entities.  HU caused the creation of fake promissory notes and other paperwork to conceal the fraudulent nature of the loans to the Panamanian Shell Entities.  Finally, under the guise of the fake loan transactions with the Panamanian Shell Entities, the CLO Trust disbursed funds that HU diverted to TOF in order to pay off TOF's various debts and obligations.
  • Generating liquidity by selling fraudulent loans to two new private IIG managed funds: GTFF and STFF.  A foreign institutional investor provided $70 million as the seed investment for GTFF, and, later, $130 million as the seed investment for STFF. 
  • Inducing a retail mutual fund to invest in a fictitious $6 million loan.  Specifically,  in or about December 2012, IIG became an investment adviser to an open-ended mutual fund marketed to retail investors (the "Retail Fund"). As an investment adviser to the Retail Fund, IIG made investment recommendations, including recommendations that the Retail Fund invest in trade finance loans originated by IIG.  In or about February 2017, a borrower (the "Argentine Borrower") had failed to pay the principal on an approximately $6 million loan ("Loan-1") in which the Retail Fund had invested and which was nearing its maturity date.  In or about March 2017, HU caused approximately $6 million to be transferred into an account associated with the Argentine Borrower from the account of a different borrower ("Borrower-1"), and further directed the funds from Borrower-1's account to pay off the debt owed by the Argentine Borrower to the Retail Fund.  To replace the funds from Borrower-1's account that were used to make it appear as though the Argentine Borrower had repaid its debt to the Retail Fund, HU fraudulently induced the Retail Fund to invest in a new, fake $6 million loan to the Argentine Borrower (the "New Loan").  HU then directed that the proceeds from the fraudulently induced New Loan be transferred into Borrower-1's account, effectively reimbursing the account for the earlier $6 million transfer to the Retail Fund.  To further conceal the fraudulent nature of the New Loan, HU caused the creation of forged documents to make it appear as though the New Loan was a legitimate loan to the Argentine Borrower.

SEC Charges Four Individuals Involved in Investment Fraud Targeting Retirees (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25359.htm
In a Complaint filed in the United States District court for the Southern District of California
https://www.sec.gov/litigation/complaints/2022/comp25359.pdf, the SEC charged 
  • Julie Minuskin, Dennis DiRicco, Tom Casey, and Golden Genesis, Inc. with violating Sections 5(a) and (c) of the Securities Act; 
  • Joshua Stoll and Minuskin with violating Section 15(a) of the Securities Exchange Act;
  • Minuskin with violating Section 17(a)(2) of the Securities Act; 
  • Casey and Golden Genesis with violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and 
  • DiRicco with violating Sections 17(a)(1) and (3) of the Securities Act, and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder.
DiRicco consented to the entry of an order permanently enjoining him from further violations of Sections 5 and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and he consented to officer-and-director and penny stock bars. As alleged in part in the SEC Release:

The SEC's complaint alleges that Retire Happy LLC, a company owned by Minuskin, and her sales agent, Stoll, engaged in the unregistered offer and sale of securities - typically high-yield promissory notes issued by corporate borrowers. The complaint alleges that they targeted investors' retirement assets, vouching for the safety of the investments even though Minuskin knew that certain issuers of the notes were using new investor principal to pay returns due earlier investors. Per the complaint, neither Minuskin nor Stoll was licensed as a broker-dealer while selling securities to investors.

The complaint further alleges that Casey and DiRicco, the principals of Golden Genesis and Until Tomorrow Drivetrains, respectively, issuers of two of the notes sold by Retire Happy, conducted an unregistered and fraudulent offering of securities. More specifically, the complaint alleges that they misused and misappropriated investor funds to make Ponzi-like payments, where they used new investor monies to make interest payments due to prior investors. The complaint further alleges that Minuskin aided and abetted DiRicco and Casey in their fraudulent schemes.

https://www.sec.gov/litigation/litreleases/2022/lr25361.htm
In a Complaint filed in the United States District Court for the Eastern District of Kentucky
https://www.sec.gov/litigation/complaints/2022/comp25361.pdf, the SEC asserted claims under:
  • Section 17(a) of the Securities Act against Justin Wallace Herman, Anthony Michael Baker, Ian Horn, and Island Capital Inc; 
  • Section 10(b) and Rule 10b-5(a) and (c) of the Securities Exchange Act of 1934 ("Exchange Act") as to Herman, Baker, and Island Capital; and 
  • Section 9(a)(2) of the Exchange Act as to Herman and Island Capital. 
Without admitting or denying the allegations in the SEC's complaint, Horn consented to the entry of a final judgment, subject to court approval, which would permanently enjoin him from violating Sections 17(a)(2) and (3) of the Securities Act and would seek as relief $1,000 in disgorgement plus prejudgment interest and a $10,000 civil penalty. As alleged in part in the SEC Release:

[F]rom at least April 2017 through August 2017, the defendants each played a role in a scheme that enabled Herman and Island Capital to sell shares of penny stock issuer NxGen Brands, Inc. f/k/a Pyramidion Technology Group, Inc. ("PYTG") to unsuspecting investors. To create the appearance that PYTG had assets and business operations and was not merely a public shell company, Baker allegedly facilitated a sham acquisition by PYTG. For his part in the scheme, Horn allegedly provided PYTG's transfer agent with fraudulent Rule 144 opinion letters that enabled Herman and Island Capital to obtain unrestricted shares of PYTG. According to the complaint, Herman and Island Capital then engaged in manipulative trading to raise PYTG's share price and, with the assistance of paid boiler rooms, dumped their shares of PYTG at the inflated price, reaping profits of over $1 million, collectively.

https://www.sec.gov/litigation/litreleases/2022/lr25357.htm
The SEC filed in the United States District Court for the Southern District of Florida a Complaint against former 1 Global Capital, LLC (now bankrupt) Chief Financial Officer Eric A. Alexander
https://www.sec.gov/litigation/complaints/2022/comp25357-alexander.pdf and a Complaint against former Director of Business Development Scott A. Merkelson
https://www.sec.gov/litigation/complaints/2022/comp25357-merkelson.pdf. The two Complaints charge violations of federal antifraud provisions, and, without admitting or denying the SEC's allegations, Alexander and Merkelson each consented to a permanent injunction, a $100, 000 civil penalty, and and Officer/Director Bar. As alleged in part in the SEC Release:

[T]he SEC previously charged 1 Global, its owner, and others with operating an allegedly fraudulent scheme that raised $322 million from at least 3,600 investors. The SEC also previously charged ten of 1 Global's top sales agents, for various registration violations.

In separate complaints, the SEC alleges that 1 Global's former chief financial officer, Eric A. Alexander, and its former director of business development, Scott A. Merkelson, participated in 1 Global's fraud on retail investors. According to the complaints, Alexander, a certified public accountant, and Merkelson, a former licensed securities professional, manipulated 1 Global's management fee to artificially raise or lower investors' monthly rates of return and signed monthly investor account statements that they knew contained these false rates of return. Additionally, according to the complaints, the monthly account statements Alexander and Merkelson signed falsely represented that an independent auditor had endorsed 1 Global's method of calculating investor returns.

SEC Charges Third Participant in Market Manipulation Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25358.htm
In a Complaint filed in the United States District Court for the Northern District of Georgia
https://www.sec.gov/litigation/complaints/2022/comp25358.pdf, the SEC charged Anthony Salandra with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act  and Rule 10b-5 thereunder. Salandra agreed to cooperate with the Enforcement Division and consented to the entry of a judgment which, subject to court approval, will permanently enjoin him from violating federal securities antifraud provisions and require him to pay $132,560 disgorgement plus prejudgment interest and a civil penalty; and, further, he agreed to a penny stock bar and to be barred from the securities industry. Salandra pled guilty in a parallel criminal action. Previously, the SEC charged Barton Ross and Mark Melnick for their roles in this scheme. As alleged in part in the SEC Release:

[S]alandra, Ross and a third individual created false rumors about purported market-moving events, such as corporate mergers or acquisitions, involving publicly-traded companies. As alleged, the false rumors were then shared with Melnick and another individual who disseminated the false rumors through real-time financial news services, financial chat rooms, and message boards, causing the prices of the subject companies' securities to rise temporarily. Between October 2017 and January 2020, Salandra allegedly was involved in the creation of and traded around at least 92 false rumors, generating over $132,000 in illicit profits. The other scheme participants also traded around the false rumors, generating significant profits.

http://www.brokeandbroker.com/6386/finra-awc-david/
In today's blog we are left wondering. FINRA makes an exceptionally strong regulatory case against a former Morgan Stanley registered representative, who is charged with multiple violations. All in all, it's not a pretty picture that FINRA paints. It's the strength of FINRA's case that may raise an eyebrow or two when you learn that the rep was not barred from the industry. Of course a 20-month suspension isn't a light slap on the wrist. Still -- you read the allegations and see what you think.