Securities Industry Commentator by Bill Singer Esq

To Err Is Human, To Forgive Is Not FINRA's Concern (BrokeAndBroker.com Blog)

FINRA Fines Wefunder $1.4 Million for Crowdfunding Rule Violations; StartEngine Capital Separately Fined $350,000 (FINRA Release)

The Essential Senior Investor Protection Tools: FINRA Rules 2165 and 4512 (FINRA Unscripted)

Former Bank Branch Manager Sentenced To Prison For Tech Support Fraud Scheme That Exploited The Elderly / Technical Support Scheme Deceived Victims Across the United States and Canada, Many of Whom are Elderly, into Paying for Phony Computer Repair Services (DOJ Release)

Santa Clarita Man Agrees to Plead Guilty to Securities Fraud for Bilking Investors Who Purchased Real Estate 'Coupon Bonds' (DOJ Release)

Saugus Woman Sentenced to 54 Months in Prison for Scheme to Defraud Elderly Uncle of Over $490,000 (DOJ Release)

Greenwich Resident Sentenced to 3 Years in Federal Prison for Defrauding Investors of Nearly $1.5 Million (DOJ Release)

Movie Producer Found Guilty in Film Financing Scheme (DOJ Release)

West Palm Beach Investment Fraudster Sentenced to 42 Months in Federal Prison After Losing Investor Millions in Wire Fraud Scheme (DOJ Release)

Idaho I.T. Professional Charged With Misappropriating Pre-Publication Investment Recommendations For Insider Trading Scheme / David Stone Electronically Accessed an Investment Advice Service's Unannounced Stock Picks and Used That Information to Generate Millions in Trading Profits and to Provide Inside Tips to Another (DOJ Release)

SEC Obtains Asset Freeze Against Idaho Residents in Trading Scheme (SEC Release)

SEC Obtains Final Judgment Against BTIG, LLC (SEC Release)

Prince George Man Pleads Guilty to Multimillion Dollar Fraud Scheme (DOJ Release)

The Curious Case of Donald Howard (BrokeAndBroker.com Blog)

In the Wefunder matter, FINRA found that from 2016 through 2021, across 39 separate offerings, Wefunder raised approximately $20 million more than permitted under crowdfunding raise limits. It did this by diverting the excess funds raised in the crowdfunding offering to a subsequent offering conducted under a different exemption from registration. FINRA found that by doing so, Wefunder exceeded the scope of its permitted activities as a funding portal.

FINRA further found that Wefunder failed to promptly direct the transmission of funds to issuers or investors as required; improperly sent emails to hundreds of thousands of investors recommending and soliciting investments being offered on its portal in violation of a rule that prohibits such solicitations; included misleading communications on its funding portal website; and, failed, in multiple respects, to maintain a reasonable supervisory system to supervise its business, including, for example, its process for tracking investments. The portal itself recognized as late as 2021 that its processes were flawed, with one officer chiding another in an internal email about his failure to delegate, as more fully described in the settlement.

As part of the settlement with Wefunder, the portal will be required to retain an independent consultant to make recommendations to improve its systems and procedures.

In the StartEngine matter, FINRA found that at various points between November 2016 and January 2018, StartEngine included issuer communications on its funding portal website that it knew or had reason to know were false or misleading; posted its own inaccurate counts of the number of investors in the offerings on its portal; and failed to reasonably supervise potentially misleading issuer-prepared content.

For example, one issuer, whose product was a home robot, exaggerated the robot's level of functionality in a demonstration video posted on the StartEngine website. The video depicted the robot independently performing tasks such as waking sleeping family members, teaching a child piano and art, projecting a recipe onto a cutting board, patrolling a home for intruders, adjusting a thermostat and playing peek-a-boo with a child. During the offering, StartEngine received information that caused it to know or had reason to know that these claims were exaggerated and misleading, but it failed to correct them. Although a disclaimer on the offering page noted that the robot was a work-in-progress, it was insufficient to remediate the misleading content.

In settling these matters, Wefunder and StartEngine accepted and consented to the entry of FINRA's findings without admitting or denying them.

The Wefunder AWC 

https://www.finra.org/sites/default/files/2022-05/Wefunder-2021071940801.pdf

The StartEngine AWC 

https://www.finra.org/sites/default/files/2022-05/StartEngine-matter.pdf

Every year, millions of seniors become victims of financial exploitation, resulting in billions of dollars in losses. That's just one reason why the protection of these investors is a top priority for FINRA. 

On this episode, we hear from FINRA's Office of General Counsel's Jeanette Wingler and Jim Wrona about how FINRA Rules 4512 and 2165, the first uniform national senior investor protection standards, can help broker-dealer firms and representatives protect their senior and other vulnerable adult customers. 

From approximately November 2017 through June 2019, HAQUE was a member of a criminal fraud ring (the "Fraud Ring") based in the United States and India that committed a technical support fraud scheme that exploited score of victims located across the United States and Canada, including in the Southern District of New York.  The Fraud Ring's primary objective was to trick victims into believing that their computers were infected with malware, in order to deceive them into paying hundreds or thousands of dollars for phony computer repair services. 

The scheme generally worked as follows.  First, the Fraud Ring caused pop-up windows to appear on victims' computers.  The pop-up windows claimed, falsely, that a virus had infected the victim's computer.  The pop-up window directed the victim to call a particular telephone number to obtain technical support.  In at least some instances, the pop-up window threatened victims that, if they restarted or shut down their computer, it could "cause serious damage to the system," including "complete data loss."  In an attempt to give the false appearance of legitimacy, in some instances the pop-up window included, without authorization, the corporate logo of a well-known, legitimate technology company.  In fact, no virus had infected victims' computers, and the technical support phone numbers were not associated with the legitimate technology company.  Rather, these representations were false and were designed to trick victims into paying the Fraud Ring to "fix" a problem that did not exist.  And while the purported "virus" was a hoax, the pop-up window itself did cause various victims' computers to completely "freeze," thereby preventing these victims from accessing the data and files in their computer-which caused some victims to call the phone number listed on the pop-up window.  In exchange for victims' payment of several hundred or thousand dollars (depending on the precise "service" victims purchased), the purported technician remotely accessed the victim's computer and ran an anti-virus tool, which is free and available on the Internet.  The Fraud Ring also re-victimized various victims, after they had made payments to purportedly "fix" their tech problems.

The Fraud Ring operated through at least 15 fraudulent entities.  In November 2017, HAQUE registered one of these fraudulent entities in New York State.  HAQUE's entity defrauded more than approximately 100 victims as part of this scheme.  As part of his involvement in the fraud, HAQUE opened U.S. bank accounts to receive funds from victims, deposited victim checks, received a victim complaint, and repeatedly provided a co-conspirator in India ("CC-1") with authentication codes so that CC-1 could wire funds out of these bank accounts.  HAQUE, a former bank branch manager in New York City, also tried to use his banking experience to further the scheme, including by advising CC-1 that it was "[n]ot a good idea to deposit" certain checks, some of which would risk the involvement of "the Feds."  Moreover, on occasion, HAQUE also assisted another co-conspirator ("CC-2"), who had registered a different fraudulent entity that was part of the Fraud Ring, as well.  In total, as he admitted in his plea agreement, HAQUE is responsible for losses exceeding $600,000.

Skinner used social media platforms such as Facebook and YouTube to promote himself, falsely claiming to be an experienced and successful real estate investor with more than $200 million in deals under his belt, according to court documents.

After Empire West experienced financial troubles - Skinner was unable to pay his staff and investors - he established Simple Growth in 2018 and falsely told investors who purchased Simple Growth coupon bonds "that their money would be used to purchase real estate that [Skinner] and Empire West would develop and resell at a profit," according to the plea agreement.

Skinner admitted that he did not intend to purchase, develop or resell real estate, and that he instead used investor funds to pay older investors, his employees and himself.

Skinner "used investor funds from those entities and accounts to pay for personal trips, his mortgage, his utility bills, cosmetic surgery, and alimony payments to his ex-wife," he acknowledged in the plea agreement.

Simple Growth raised approximately $1,744,946 from more than 20 investors - none of whom received any of their money back.

Carbone was the caretaker for her uncle for over a decade from 2007 to 2018. Carbone systematically defrauded her uncle of $493,279, by using her uncle's name and Social Security number to withdraw the funds from his bank accounts. To conceal the scheme, Carbone intercepted her uncle's mail, removed his bank statements and then delivered him fake statements reflecting inflated balances. Once the scheme was uncovered, Carbone refused to return the funds and made various threats against her uncle and other family members.

[K]lein controlled several different entities, including Visual Group LLC; O.S. Management, LLC; KF Pecksland LLC; Four Pines Holdings, LLC; and Payton Lane NH, Inc.  In 2018, Klein made false representations to a victim investor, including that the victim's funds would be invested in distressed debt, when Klein knew that all of the investment funds would not be used for the stated purposes.  Based on these false representations, the victim investor wrote a check in the amount of $200,000 to Visual Group LLC for the purpose of making a purported investment in distressed debt.  Klein caused the check to be transported from New York to Connecticut and deposited into a bank account in the name of Visual Group LLC.  Klein subsequently solicited and received approximately $50,000 in additional funds from the victim investor.

The investigation further revealed that, from approximately July 2016 through at least June 2019, Klein defrauded three additional victim investors of a total of more than $1.2 million by making multiple false statements and misrepresentations.

Klein knew that all of the funds solicited from the victim investors would not be used for his stated purposes, and instead would be utilized by Klein for personal and other expenditures.

[J]ason Van Eman held himself out as a film producer and financier, offering to fund independent motion pictures, Broadway shows, music festivals, and other productions.  Van Eman promised the victims (producers and others seeking financing), that his partner (a co-conspirator named Benjamin McConley) would match any cash that the victims contributed to their projects.  Then, with the combined starting capital (which made the projects more attractive to investors), McConley would apply for and secure financing from financial institutions.

Based on these lies, victims sent over $60 million to accounts controlled by the fraudsters.  Contrary to what Van Eman promised victims, his partner never matched their cash contributions or applied for financing.  Instead, Van Eman and his co-conspirators stole the victims' money by transferring it to their personal and corporate bank accounts, often within days of deposit.  To make the scam more believable, Van Eman and McConley recruited Benjamin Rafael, a bank employee, whose role was to assure victims that their cash contributions had been matched and that their money was secure - neither of which was true.

Van Eman, McConley, and Rafael used the stolen money to purchase luxury automobiles, personal watercraft, real estate, jewelry, home furnishings, designer clothes, hotel accommodations, and private and commercial air travel.  Van Eman used some of the stolen cash to fund movies in which he was cast.

Renaldi was the founder and CEO of The Sanctum Group of Companies, Inc., Sanctum Publishing and Marketing, Ltd., and Sanctum Media Group, Inc. (the "Sanctum companies").  Renaldi and others used the Sanctum companies to solicit funds from victim investors.  To induce people to invest, Renaldi lied to them, promising to use their money to build a profitable business and guaranteeing a solid return on their investment.  In addition, Renaldi failed to tell investors that he had a history of violating federal securities laws and that he used most of their money to pay for his personal expenses, make cash withdrawals, pay prior investors, and pay undisclosed commissions and fees.  From about 2011 to 2015, Renaldi defrauded approximately 14 Sanctum company investors out of almost $1.5 million.

Renaldi also was associated with Magnum Health Management, Magnum Media Management, and Magnum Media Mining (the "Magnum companies").  Renaldi admitted that he represented himself to the public as the Magnum companies' CEO, owner and operator.  When soliciting funds for the Magnum companies, Renaldi falsely told investors that he would use their money as working capital and to build diabetes clinics.  Instead, Renaldi used almost all the money for his personal use and benefit.  From about 2017 to 2019, Renaldi defrauded approximately 14 Magnum company investors out of more than $1.6 million. 

From 2020 up to his arrest in 2022, DAVID STONE exploited market-moving stock recommendations made by an investment recommendation service ("Advisor-1") before those recommendations were released to paying subscribers. STONE, an information technology ("I.T.") professional, accessed Advisor-1's computing system without authorization and viewed information relating to Advisor-1's recommendations before they were announced to Advisor-1's paying subscribers.

Advisor-1's stock recommendations typically, but not always, lead to higher closing prices for the recommended stock as compared to the prior day's closing price. By trading on those recommendations before they were announced, STONE was able to obtain significant profits unavailable to other market participants. In fact, since in or about November 2020, brokerage accounts associated with STONE traded ahead of Advisor-1 recommendations on more than a dozen occasions for approximately $3 million in gross gains.

In addition to his own trading, STONE supplied trading tips to at least one other person ("Tipee-1"). Between on or about January 20, 2021 up to and including on or about March 17, 2022, on approximately 45 different days, STONE sent emails to Tipee-1 providing stock names and/or ticker symbols ahead of Advisor-1 announcements of stock recommendations to its paying subscribers. Since in or about January 2021, a brokerage account associated with Tipee-1 traded ahead of Advisor-1 recommendations on more than a dozen occasions. As a result of that trading, Tipee-1 profited more than approximately $2.7 million.

Before providing tips to Tipee-1, STONE provided Tipee-1 with "guidelines" for avoiding detection and for donating some of the trading profits to a church. Specifically, on or about January 16, 2021, STONE sent an email to Tipee-1 that included the following:

I'm ok with sharing the weekly trades with you. I have used it so far to generate a significant amount of money and I'm sure you will be able to as well. There is a small possibility that what we are doing could be considered insider trading. [Advisor-1] uses only public information about to make its recommendations and even the recommendations are behind a paywall so it is a stretch to call it insider trading but it certainly behaves like it because it almost guarantees favorable price moves at a certain time.

So with that in mind these are the guidelines I am following:

. . . .

* Purchase a [Service-1] subscription from [Advisor-1] . . . and open some long term position of some of the recommendation that appeal to you

* Do other trades besides just what I tell you. If all your trades are up 5x and you never make a loosing trade it may call attention of regulators. . . .

* Pay your taxes. These trades are short term capital gains and are taxed at your regular income tax rate. You may get a significant tax bill come April 15 2022.

* Pay your tithe. This extra income has been a subject of regular prayer for me. I anticipate I will not need to keep my regular job for long when we are on the mission field. I have opened a donor advised fund which make it easy to contribute large sums of money or stocks directly and then schedule donations to be made to my church and any other charity I choose. It makes it easier to make anonymous donations as well which I feel is important.

. . . .

With these guidelines in place I can email the recommendations as soon as I know. I feel [a particular email provider] will be a more secure form of communication if it works for you. 

On May 19, 2021, the SEC charged BTIG with violating Rule 200(g) of Regulation SHO when it mismarked more than 90 sale orders from a hedge fund customer-representing total sales of more than $250 million-as "long" and "short exempt" when those orders should have been marked as "short" from December 2016 through July 2017. According to the complaint, as a registered broker-dealer, BTIG had independent gatekeeper responsibilities to ensure that the trades it executed were correctly marked. The SEC alleged that BTIG ignored facts indicating that the hedge fund's representations that it owned the securities it was selling, and that it would deliver them by the settlement date, were false. In addition, the SEC alleged that because BTIG failed to borrow or locate the shares before effecting what were, in reality, short sales, BTIG also violated Rule 203(b)(1) of Regulation SHO.

[F]rom 2012 to 2020, Robert W. Guidry, 54, conspired with Christopher W. Elko, 51, Petersburg, to enrich themselves by, among other methods, falsely purporting to sell ownership interests in businesses where the conspirators worked, obtaining fraudulent loans and other forms of credit from individual lenders and financial institutions, and embezzling money from their employer. As part of the conspiracy, Guidry solicited and induced individuals to lend him money under false pretenses, claiming that the loans would be used for investment purposes-when, in fact, Guidry actually used the money to pay for personal expenses or to repay other lenders.

The conspirators also obtained loans and lines of credit from various financial institutions, relying on misrepresentations and deliberate omissions about Guidry's personal financial status, such as the value of his assets and the amount of his liabilities. To repay the individual lenders and financial institutions they had fraudulently borrowed money from, and to pay their own personal expenses, the conspirators concocted a scheme to defraud their employer by misappropriating money through various frauds. For instance, the conspirators diverted customer payments owed to their employer to a bank account controlled by the conspirators, and fabricated payables to their employers' vendors and others, depositing the payments into bank accounts they controlled.

In total, the conspirators' actions caused a total loss of more than $8.8 million to investors, banks, and their former employer.

• Securities Industry Commentator
• Bill Singer