Securities Industry Commentator by Bill Singer Esq

May 5, 2022

In "An Essay on Criticism," Alexander Pope famously wrote that "To err is human, to forgive divine." Erring is something that we all do with regularity accompanied by regret and followed by more errors. As the poet said, to err is human, and an indelible aspect of our humanity is our unending ability to make mistakes. As to the forgiveness of our errors, alas, that is left to Divine Providence; and, frankly, when it comes to our financial markets, it's more about the Dark Side. In a recent FINRA regulatory settlement, we are presented with full-blown humanity and very little divinity.
After a 13-day trial in the United States District Court for the Middle District of Florida, Michael J. DaCorta, 57, was found guilty of conspiracy to commit wire fraud and mail fraud, money laundering, and filing a false income tax return. As alleged in part in the DOJ Release:

[F]rom November 2011 through April 18, 2019, DaCorta ran an investment company named Oasis International Group, Ltd. ("OASIS"). DaCorta and his co-conspirators persuaded at least 700 victims to invest in OASIS through promissory notes and other means, causing victims' losses exceeding $80 million. DaCorta, who had effectively been banned from conducting foreign exchange trading ("FOREX") by agreement with the National Futures Association, induced victims to invest in OASIS by falsely representing to victim-investors that OASIS was reaping enormous profits by being a "market maker" and collecting "spread" on voluminous FOREX trades. DaCorta also pitched the opportunity as essentially risk free and OASIS as well-collateralized. In reality, OASIS was not making markets and had no true revenue. The "spread" earnings were being paid on each trade by OASIS back to OASIS to create the illusion of revenue, which was published to investors on fictious account statements and an online investor portal. The online investor portal showed the "spread" credits but concealed catastrophic underlying trading losses.

DaCorta and his conspirators used the balance of the victim-investors' funds to make Ponzi-style payments to perpetuate the scheme and to fund lavish lifestyles. For example, DaCorta used victim-investors' funds to purchase a Maserati and Range Rovers for his family members, a country club membership, multiple million-dollar homes in Florida, college tuition for family members, flights on private jets, and lavish trips to Europe and the Cayman Islands. DaCorta also underreported his income on his 2017 federal income tax return, claiming a negative income and receiving a tax refund.  

SEC Charges Nevada Resident with Offering Fraud (SEC Release)
In a Complaint filed in the United States District Court for the District of Nevada, the SEC charged Derek J. Slattery and his company Trade Smart Software RIC Corporation 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(a) and (c) thereunder. As alleged in part in the SEC Release:

[B]etween October 2018 and March 2020, Slattery and TradeSmart raised as much as $1.8 million from as many as 300 investors in the United States, Europe, Asia, and Australia through a fraudulent offering of securities in the form of "redeemable units" purportedly in a "fixed portfolio" consisting solely of Apple, Inc. stock options. The complaint alleges that Slattery falsely claimed that TradeSmart used specialized, proprietary software that he created to trade Apple options and generate guaranteed annual returns of 30% or more. As alleged in the complaint, Slattery and TradeSmart enticed investors by promising that investor proceeds would be used to trade Apple options. According to the complaint, however, no trading occurred in Apple options or any other securities on behalf of investors. Contrary to his representations, Slattery allegedly misappropriated investor funds and used them to pay living expenses, to pursue other "business" activities, and to make intermittent Ponzi-like payments to investors requesting withdrawals from their accounts.

Philadelphia Woman Sentenced to 109 Months in Prison for $100 Million Securities Fraud Scheme (DOJ Release)
Brenda Smith, 61, pled guilty in the United States District Court for the District of New Jersey to securities fraud, and she was sentenced to 109 months in prison plus three years of supervised release and ordered to pay $47.2 million in restitution. As alleged in part in the DOJ Release:

Smith managed and controlled Broad Reach Capital LP, a pooled investment fund/hedge fund that was established in February 2016 and was open to accredited investors with a minimum investment of $1 million.

From February 2016 through August 2019, Smith orchestrated a scheme in which she made misrepresentations to investors and promised that she would invest their funds in particular trading strategies that Broad Reach Capital was allegedly optimally situated to execute. Smith referred to these strategies as dividend capture, VIX Convergence, and opportunistic trading. 

Smith misrepresented the success and performance of Broad Reach Capital to investors and prospective investors. She touted Broad Reach Capital as a trade-focused investment fund that was highly liquid and employed a robust risk management program. Smith distributed written materials about Broad Reach Capital to investors and prospective investors that included purported historical performance information, such as claimed annual returns of over 33 percent in 2017 and positive monthly returns in 2018. In fact, the total cash and securities in the Broad Reach Capital bank and brokerage accounts decreased from approximately December 2016 through June 2019. For example, the written materials claimed that Broad Reach Capital had a 1.76 percent return in February 2018 when in reality, Broad Reach Capital's brokerage accounts lost approximately 50 percent of their value.

To lull investors and induce them to continue investing, Smith provided monthly account statements to investors that falsely showed that their investments were safe and earning significant returns. Smith also falsely represented that she was personally invested in Broad Reach Capital and provided a fictitious account statement to at least one investor.

Over the course of the scheme, Smith collected more than $100 million of cash into Broad Reach Capital from approximately 40 investors. At its peak, however, the value of cash and securities in the Broad Reach Capital bank and brokerage accounts did not exceed approximately $32 million. Instead of investing the money as she promised, Smith transferred tens of millions of dollars out of Broad Reach Capital to entities she controlled for purposes inconsistent with the trading strategies, including more than approximately $10 million for mineral mining operations and approximately $2 million for American Express credit card bills.  When investors requested redemption of their investments, Smith diverted other investors' funds to pay the requested redemption amounts.
Ali Rameh Bazzi, 27, pled guilty in the United States District Court for the Eastern District of Michigan to one count of wire fraud and one count of money laundering, and was sentenced to 33 months in prison and ordered to pay $441,231 in restitution. As alleged in part in the DOJ Release:

[A]li Rameh Bazzi held himself out to the public as an investment manager who used a unique trading model to generate high rates of return for investors. Between March of 2018 and March of 2020, Bazzi, operating through a supposed investment management company that he formed, obtained approximately $540,000 from nearly thirty investors. Bazzi told these investors that he would be investing their funds in commodities and foreign exchange markets and would generate substantial profits for his clients. To corroborate those claims, he provided his investors with individualized account statements at regular intervals, which purported to show trading activity and the growth in the value of their investments.

In fact, according to court documents, Bazzi diverted the great bulk of the money he obtained to his own personal uses and expenses. The account statements were fictitious, as were Bazzi's many other representations to his investors about how and where their funds would be invested. Because of Bazzi's misrepresentations, most of his victims were left with no return on their investments.

Bazzi spent investor funds leasing exotic sports cars, acquiring jewelry, and funding the day-to-day living expenses of a comfortable lifestyle. Of the approximately $540,000 that Bazzi obtained over the course of the scheme, Bazzi returned approximately $99,000 to investors. The reminder of the funds -- some $441,231 -- Bazzi illegally converted to his own use. 

FINRA Fines Wefunder $1.4 Million for Crowdfunding Rule Violations; StartEngine Capital Separately Fined $350,000 (FINRA Release)
As alleged in part in the FINRA Release:

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.

Bill Singer's Comment: Never have been a fan of crowdfunding. In theory it was a wonderful idea; however, in practice, not so much. Most of my interactions with various crowdfunding sites revealed little more than a pay-per-view scheme designed to obtain an upfront fee from a client in exchange for what amounted to little more than a posting on a crowdfunding site. All too often, the only "bites" proved to be scam artists seeking their own fees with dubious promises of introductions that never materialized. I compliment FINRA on the two settlements because in these Covid times that are further exacerbated by inflation and rising rates, many wannabe entrepreneurs will be rebuffed by more traditional sources of seed capital and may inevitably be drawn to crowdfunding. If you luck out and find a reputable source, that's wonderful. On the other hand, be careful.

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. 

After pleading guilty to pled guilty to one count of conspiracy to commit wire fraud as charged in an Information filed in the United States District Court for the Southern District of New York, Ariful Haque, 36, was sentenced to one year and one day in prison plus three years of supervised release, and ordered to pay a forfeiture of $38,886.32 and restitution of $470,672.16. Co-Defendant Romana Leyva was previously sentenced to 100 months in prison plus three years of supervised release, and ordered to pay a forfeiture of $4,679,586.93, and restitution of $2,707,882.91. As alleged in part in the DOJ Release:

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.
Matthew Skinner pled guilty in the United States District Court for the Central District of California to an Information charging him with one count of securities fraud. As alleged in part in the DOJ Release:

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.
After a jury trial in the United States District Court for the District of Massachusetts, Jayne Carbone, 54, was convicted on four counts of wire fraud and four counts of aggravated identity theft, and she  was sentenced to 54 months in prison plus three years of supervised release and ordered to pay $493,279 in restitution and forfeiture. As alleged in part in the DOJ Release:

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.

Greenwich Resident Sentenced to 3 Years in Federal Prison for Defrauding Investors of Nearly $1.5 Million (DOJ Release)
Samuel Klein, 66, pled guilty in the United States District Court for the District of Connecticut to one count of interstate transportation of property taken by fraud and one count of money laundering; and he was sentenced to 36 months in prison plus three years of supervised release and ordered to pay restitution in the amount of $1,497,797.52. As alleged in part in the DOJ Release:

[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.
After a six-week jury trial in the United States District Court for the Southern District of Florida, Jason Van Eman was convicted of conspiracy, wire fraud, and money laundering. Previously, Co-Conspirator Benjamin McConley pled guilty and was sentenced to 13 years in prison.  Co-Conspirator Benjamin Rafael pled guilty abd was sentenced to 42 months for the film financing scheme and for concealing his criminal history on applications for COVID-19 relief. As alleged in part in the DOJ Release:

[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.
Salvatore Renaldi, 54, pled guilty to one count of wire fraud and has been sentenced to 42 months in prison. As alleged in part in the DOJ Release:

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. 


In a Complaint filed in the United States District Court for the Southern District of New York, David Stone was charged with one count of securities fraud. As alleged in part in the DOJ Release:

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., the SEC charged David Lee Stone and John Robson with violating the antifraud provisions of the federal securities laws. A parallel criminal action was filed against Stone. As alleged in part in the SEC Release:

[S]ince at least November 2020, David Lee Stone has used deceptive means to obtain pre-release access to stock picks by at least two subscription stock picking services offered by The Motley Fool. According to the complaint, beginning in January 2021, Stone began sharing those picks with his friend John Robson, typically a day or two prior to their release. The SEC alleges that Stone and Robson then purchased aggressive positions in the securities of the selected issuers, the prices of the issuers' stocks would typically rise after The Motley Fool announced its picks, and Stone and Robson would then cash out of their positions, often within minutes after The Motley Fool announcement. The SEC contends that Stone has made illicit profits of more than $3.9 million, and Robson has made illicit profits of nearly $3 million. The SEC's complaint names as relief defendants two of Stone's family members and two of Robson's friends whose brokerage accounts placed similar trades and generated approximately $5 million by trading ahead of The Motley Fool stock picks.

The Curious Case of Donald Howard ( Blog) /
In 2020, the SEC swore in a Complaint filed in a United States District Court that Donald Lee Howard was 65. In 2021, the SEC alleged in a administrative order that Howard was 76. Ummm . . . someone wanna explain to me (and, while you're at it, to the SEC) how a human being aged 11 years in one year. Sort of a Benjamin Button in reverse.