Securities Industry Commentator by Bill Singer Esq

May 9, 2022
Your broker-dealer just fired you. You're angry because they sandbagged you and it was a set-up, or so you say. All of which prompts you to dial a lawyer, pay a hefty retainer, and, maybe in a year (if you're lucky), you'll find yourself before a FINRA Arbitration Panel asking for damages for "wrongful termination." Your former employer says that you and your lawyer are morons because you're a terminable-at-will employee, and, duh, you can't wrongfully terminate someone who's an at-will employee. In response, your lawyer points out to the FINRA arbitrators that we're all sitting in an arbitration hearing room because the former employee was forced by the former employer and industry rules to arbitrate his employment disputes: There's nothing at-will about any employment subject to mandatory arbitration. Read today's blog to see how such a case fared.

In a Complaint filed in the United States District Court for the Central District of California, the SEC charged TKO Farms, Inc., Agravitae, Inc., Kenneth Dewayne Owen, Reynaldo Aguilar, James Brian Blaylock, Ross Gregory Erskine, and the Estate of Gilbert Allan Penhollow with violations of the registration provisions of Section 5 of the Securities Act and the broker-dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act. Additionally, TKO Farms, Agravitae, and Owen were further charged with violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. As alleged in part in the SEC Release:

[B]etween May 2017 and March 2021, TKO Farms and Agravitae raised nearly $20 million from investors through offerings of their securities. The SEC alleges that Owen, who had a history of criminal convictions, regulatory actions, government liens, and a bankruptcy, possessed undisclosed de facto control over both companies and, acting on the two companies' behalf, directly or indirectly recruited and engaged Aguilar, Blaylock, Erskine, and Penhollow, none of whom were registered as a broker or dealer, to solicit investors for the securities offerings. As further alleged, defendants TKO Farms, Agravitae, and Owen misrepresented Owen's history and control over the two companies and the use of investor funds.
Following a jury trial in the United States District Court for the Sourthern District of Illinois, Dr. Mingqing Xiao, 60, was convicted by a federal jury on making and subscribing false income tax returns and failing to report a Foreign Bank Account ("FBAR"); however, the Court dismissed two wire fraud count and the jury found him not guilty of a false statement charge (the dismissed/not-guilty charges were related to alleged fraud in connection with a grant Xiao obtained from the National Science Foundation). In part the DOJ Release alleges that:

Dr. Xiao, a mathematics professor and researcher at Southern Illinois University-Carbondale, was convicted of three counts of Making a False or Fraudulent Statement to the Internal Revenue Service (IRS) on his tax returns and one count of Failure to File a report of a Foreign Bank Account (FBAR). Evidence presented at the trial established that Xiao opened a foreign bank account at Ping An Bank in China in 2016 and received monthly deposits into the account from Shenzhenalo University in Shenzhen, China, from 2016 to 2020. Some of the funds were linked to additional sources in China. By 2020, Xiao had accumulated more than $100,000 in the Chinese account.

U.S. taxpayers are required to report the existence of any foreign bank account on their federal income tax returns. In addition, individuals with funds in foreign accounts totaling more than $10,000 at any time during a given year are required to file an FBAR with the Treasury Department.

Salt Lake City Estate Planning Attorney Sentenced to 97 Months in Prison and Ordered to Pay over $12.7 Million Dollars to 26 Victims (DOJ Release)
Attorney Calvin Curtis, 61, pled guilty in the United States District Court for the District of Utah to wire fraud, and he was sentenced to 97 months in prison plus three years of supervised release and ordered to pay $12,779,496 in restitution to the 26 victims of his crimes. Curtis had embezzled over $12 million dollars from his former clients, who are elderly, incapacitated, or disabled individuals. As alleged in part in the DOJ Release:

[C]urtis admitted that he is an attorney who specialized in special needs trusts and that beginning in January 2008, he began a fraudulent scheme to defraud a client known as "G.M." out of money. Curtis admitted that due to his role, he had access to millions of dollars in two different trust accounts belonging to victim G.M., and that he transferred at least $9,500,000 intended for the care of G.M. into his own accounts, and then used this money for his own personal use. Curtis admitted that he also created fake financial statements and submitted these to the court ordered conservator of G.M. to conceal the fraud.
In pleading guilty to the wire fraud charge, Curtis admitted that on January 25, 2018, that he caused a wire communication from a Schwab Investment Account to his own Wells Fargo account, resulting in a transfer of $1,485,000. Curtis admitted that he used the money for his own personal benefit to make mortgage payments on his combined home and office located on South Temple Street in Salt Lake City, Utah; to support a lavish lifestyle with frequent travel; to purchase tickets to basketball and football games; to give lavish gifts to others; and to support the operations of his law firm.  

In pleading guilty to the money laundering count, Curtis admitted that he fraudulently caused $135,000 to be transferred online from G.M. to his own Wells Fargo account, and that he used these funds to wire $95,000 to The Fechtel Company for the remodel of his home in Tampa, Florida. Curtis admitted that he knew these transactions were illegal at the time they occurred, and that the money was not used for the benefit of G.M.

In an Indictment filed in the United States District Court for the Southern District of Florida, Luiz Capuci, the Chief Executive Officer of Mining Capital Coin ("MCC"), was indicted for conspiracy to commit wire fraud, conspiracy to commit securities fraud, and conspiracy to commit international money laundering. As alleged in part in the DOJ Release, Capuci:

misled investors about MCC's cryptocurrency mining and investment program, under which investors could invest in MCC by purchasing "Mining Packages." Under this program, Capuci and his co-conspirators touted MCC's purported international network of cryptocurrency mining machines as being able to generate substantial profits and guaranteed returns by using investors' money to mine new cryptocurrency. Capuci also touted MCC's own cryptocurrency, Capital Coin, as a purported decentralized autonomous organization that was "stabilized by revenue from the biggest cryptocurrency mining operation in the world." As alleged in the indictment, however, Capuci operated a fraudulent investment scheme and did not use investors' funds to mine new cryptocurrency, as promised, but instead diverted the funds to cryptocurrency wallets under his control.  
. . .
The indictment further alleges that Capuci touted and fraudulently marketed MCC's purported "Trading Bots" as an additional investment mechanism for investors to invest in the cryptocurrency market. Capuci claimed that MCC joined with "top software developers in Asia, Russia, and the U.S.A. to create an improved version of Trading Bot[s] that [were] tested with new technology never seen before." Capuci further represented that MCC's Trading Bots operated in "very high frequency, being able to do thousands of trades per second," and that each of MCC's Trading Bots would generate daily returns for investors. As he did with the Mining Packages, however, Capuci allegedly operated an investment fraud scheme with the Trading Bots and was not, as he promised, using MCC Trading Bots to generate income for investors, but instead was diverting the funds to himself and co-conspirators.  
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Capuci is also alleged to have recruited promoters and affiliates to promote MCC and its various investment programs through a multi-level marketing scheme, commonly known as a pyramid scheme. For successfully luring investors to invest, Capuci promised MCC's network of promoters and affiliates a range of gifts, from Apple watches and iPads to luxury vehicles such as a Lamborghini, Porsche, and even Capuci's personal Ferrari. Capuci further concealed the location and control of the fraud proceeds obtained from investors by laundering the funds internationally through various foreign-based cryptocurrency exchanges., the SEC charged charges the MCC International Corp. d/b/a "Mining Capital Coint Corp.," CPTLCOIN Corp., Bitchain Exchanges, Luiz Carlos Capuci, Jr., a/k/a "Junior Caputti," and Emerson Sousa Pires with violating the registration and anti-fraud provisions of the Securities Act, the Securities Exchange Act (Exchange Act); and further charged Capuci and Pires with control person liability on behalf of MCC under the Exchange Act. As alleged in part in the SEC Release:

[S]ince at least January 2018, MCC, Capuci, and Pires sold mining packages to 65,535 investors worldwide and promised daily returns of 1 percent, paid weekly, for a period of up to 52 weeks. MCC also allegedly represented that the weekly profits were a result of "profit sharing" and that MCC earned profits from its operations involving cryptocurrency mining, trading stocks and foreign exchange, and trading cryptocurrency on digital asset trading platforms through the use of arbitrage trading and semi-automatic robotic trading. The complaint also alleges that, in its early days, MCC investors were promised returns in Bitcoin, but later, defendants required investors to withdraw their investments in tokens called Capital Coin (CPTL), which was MCC's own token. In addition, the complaint alleges that MCC investors were required to redeem their CPTL on Bitchain, a fake crypto asset trading platform Capuci created and managed. However, when investors tried to liquidate their CPTL on Bitchain before their one-year memberships expired, they encountered purported errors that stymied their efforts and were required to either buy another mining package or forfeit their investments.

SEC Obtains Judgment Requiring Disbarred Attorney to Pay Nearly $1 Million for Violating His Suspension from Appearing or Practicing as an Attorney Before the Commission (SEC Release)
As alleged in part in the SEC Release:

On April 29, 2022, the Securities and Exchange Commission obtained a judgment against Shawn Hackman, who was previously disbarred by the State of Nevada and suspended by the SEC, ordering him to comply with the SEC's suspension order and to pay nearly $1 million in disgorgement and prejudgment interest for money he earned in violation of the suspension order.

In 2002, the Commission barred Hackman from appearing or practicing before the Commission as an attorney. On June 30, 2021, the SEC filed an application, pursuant to Section 21(e)(1) of the Securities Exchange Act of 1934, alleging that Hackman violated the suspension by (1) drafting and providing legal advice on SEC filings made by scores of companies, and (2) directly communicating with SEC staff on substantive legal issues concerning SEC filings. The application sought an order requiring Hackman to comply with his suspension and disgorgement of money earned in violation of the suspension.

The Court's April 29 judgment found that Hackman violated his SEC suspension by practicing as an attorney before the Commission while employed as a purported paralegal by Nevada attorneys Elaine A. Dowling, Esq. and Harold P. Gewerter, Esq. It also ordered Hackman to comply with the SEC suspension order and to make the nearly $1 million payment noted above.

In 2021, the Commission issued orders denying Dowling and Gewerter the privilege of appearing or practicing as attorneys before the Commission, finding that they engaged in improper professional conduct by allowing and enabling Hackman to appear and practice before the SEC in violation of his suspension (and his Nevada disbarment) while they employed him as a purported paralegal.
Without admitting or denying the findings in an, NVIDIA Corporation agreed to a cease-and-desist order and to pay a $5.5 million penalty. As alleged in part in the SEC Release:

[D]uring consecutive quarters in NVIDIA's fiscal year 2018, the company failed to disclose that cryptomining was a significant element of its material revenue growth from the sale of its graphics processing units (GPUs) designed and marketed for gaming. Cryptomining is the process of obtaining crypto rewards in exchange for verifying crypto transactions on distributed ledgers. As demand for and interest in crypto rose in 2017, NVIDIA customers increasingly used its gaming GPUs for cryptomining.

In two of its Forms 10-Q for its fiscal year 2018, NVIDIA reported material growth in revenue within its gaming business. NVIDIA had information, however, that this increase in gaming sales was driven in significant part by cryptomining. Despite this, NVIDIA did not disclose in its Forms 10-Q, as it was required to do, these significant earnings and cash flow fluctuations related to a volatile business for investors to ascertain the likelihood that past performance was indicative of future performance. The SEC's order also finds that NVIDIA's omissions of material information about the growth of its gaming business were misleading given that NVIDIA did make statements about how other parts of the company's business were driven by demand for crypto, creating the impression that the company's gaming business was not significantly affected by cryptomining.

United States Settles Suit Against VoIP Service Providers for Facilitating Millions of Illegal Telemarketing Calls about COVID-19(DOJ Release)
Voice over Internet Protocol ("VoIP") service providers, VoIP Terminator Inc. and BLMarketing Inc., and their owner, Muhammed Usman Khan, entered into a Consent Decree in the United States District Court for the Middle District of Florida resolving Federal Trade Commission allegations that they facilitated tens of millions of illegal telemarketing calls, including  calls  to numbers listed in the "Do Not Call" Registry and robocalls that displayed "spoofed" or fake caller ID numbers. As alleged in part in the DOJ Release:

[F]lorida-based VoIP Terminator, Virginia-based BLMarketing and Pakistan resident and citizen Khan violated the FTC Act and the FTC's Telemarketing Sales Rule (TSR). The defendants violated the TSR by assisting and facilitating the transmission of illegal calls for their customers, continuing to do so even after learning that their services were being used to initiate calls to numbers on the Do Not Call Registry and to place spoofed robocalls. The complaint alleges that the illegal calls transmitted by defendants included recorded messages about air duct cleaning services that purportedly filtered out COVID-19, preying on consumers' fears of the virus, as well as messages involving credit card interest rate reduction and tech support scams.

The stipulated order bars the defendants from similar misconduct in the future, requires them to screen and monitor customers, terminate customers if they are engaged in improper telemarketing activity and imposes a $3.2 million civil penalty, payment of which is suspended due to defendants' inability to pay. This is the FTC's third case against VoIP services providers.

In the Matter of the Arbitration Between Janice J. Compton, Claimant, v. Merrill Lynch Pierce Fenner & Smith Inc. and Thomas Joseph Buck, Respondents (FINRA Arbitration Award 20-02468)
  In a FINRA Arbitration Statement of Claim filed in July 2020, public customer Claimant Compton asserted violation of Indiana's Corrupt Business Influence Act - Operating An Enterprise Through A Pattern Of Racketeering; violation of Indiana Corrupt Business Influence Act - Use Of Racketeering Proceeds to Operate an Enterprise; violation of the Racketeer Influenced and Corrupt Organization Act - Operating An Enterprise Through A Pattern Of Racketeering; Civil Recovery Under Indiana's Crime Victim Statute; breach of fiduciary duty; fraud; and negligent supervision and ratification. The FINRA Arbitration Award characterizes the causes of action as relating to "overtrading of long-term securities and overcharging of commissions by Respondent Buck in Claimant's MLPFS accounts, and the alleged lack of supervision by Respondent MLPFS."  Respondents generally denied the allegations and asserted affirmative defenses. In December 2021, Claimant Compton dismissed with prejudice her claims against Respondent Merrill Lynch. The Panel found remaining Respondent Buck liable to and ordered him to pay to Claimant Compton:
  • $770,269 in compensatory damages
  • $5,812,948 in "well-managed damages"
    • As explained in the Award: "which represents 80% of the overall loss value of the accounts requested by Claimant, at the rate of 8% per annum from March 25, 2018, through and including March 25, 2022. The total interest awarded is $1,860,144.00. Please note that the Panel is not awarding the well-managed damages amount of $5,812,948.80. It is only basing its interest calculations on the amount of well-managed damages."
  • $2,310,806 in treble damages
  • $2,585,232 in attorneys fees
  • $375 in filing fees