Securities Industry Commentator by Bill Singer Esq

May 20, 2022

Congress has given the Securities and Exchange Commission substantial power to enforce the nation's securities laws. It often acts as both prosecutor and judge, and its decisions have broad consequences for personal liberty and property. But the Constitution constrains the SEC's powers by protecting individual rights and the prerogatives of the other branches of government. This case is about the nature and extent of those constraints in securities fraud cases in which the SEC seeks penalties.

SEC Charges Wells Fargo Advisors With Anti-Money Laundering Related Violations (SEC Release)
Without admitting or denying the findings in an SEC Order, Wells Fargo Advisors agreed to a Censure,  a Cease and Desist Order, and to pay $7 million to settle findings that it violated Section 17(a) of the Securities Exchange Act and Rule 17a-8. In November 2017, the SEC issued a settled order against Wells Fargo Advisors for failing to timely file at least 50 SARs. As alleged in part in the SEC Release:

[D]ue to Wells Fargo Advisors' deficient implementation and failure to test a new version of its internal anti-money laundering (AML) transaction monitoring and alert system adopted in January 2019, the system failed to reconcile the different country codes used to monitor foreign wire transfers. As a result, Wells Fargo Advisors did not timely file at least 25 SARs related to suspicious transactions in its customers' brokerage accounts involving wire transfers to or from foreign countries that it determined to be at a high or moderate risk for money laundering, terrorist financing, or other illegal money movements. The order also found that, beginning in April 2017, Wells Fargo Advisors failed to timely file at least nine additional SARs due to a failure to appropriately process wire transfer data into its AML transaction monitoring system in certain other situations.
Joseph Cimino pled guilty in the United States District Court for the Southern District of New York
to securities fraud and wire fraud; and he was sentenced to 18 months in prison. As alleged in part in the DOJ Release:

In or about 2016 to 2018, CIMINO raised approximately $615,000 from approximately 16 investors.  To attract investors, CIMINO falsely inflated the amount of capital that he had raised from prior investors, and fraudulently altered an investor list to include several individuals who, in fact, had not contributed any funds.  CIMINO also falsely inflated his company's sales.  For example, in July 2017, CIMINO claimed in an investor report that year-to-date sales totaled 3,410 cases of tequila, when the actual sales totaled only 350 cases.  Similarly, in October 2017, CIMINO falsely claimed that year-to-date sales totaled 6,035 cases, which was approximately five times the actual total.  CIMINO further claimed in October 2017 that his company would receive reimbursement for 800 cases of tequila supposedly destroyed at a Puerto Rican warehouse as a result of Hurricane Maria.  In reality, no inventory was destroyed in the hurricane, and the company lacked insurance.

CIMINO also misused a substantial portion of investor money that was intended to fund the operations of his tequila business for personal expenses, contrary to the company's operating agreement.  For example, CIMINO transferred investor money to his personal bank account in order to subsidize his food, entertainment, and other living expenses.

Brazilian National Pleads Guilty in Nationwide Fraud that Exploited App-Based Food Delivery Customers During Pandemic (DOJ Release)
Gustavo De Avila Moreira Farinha, Tatiane Pereira Arantes, Natalia Magalhaes Rocham, Leonardo Trulsen De Oliveira, and Thassya Da Silva Alves pled guilty in the United States District Court for the Southern District of California to their roles in a conspiracy . . . as to a conspiracy to achieve what kind of fraud, well, what can I tell you, as much as I would like to spin an enthralling tale, I'm just going to step back and let pertinent parts of the DOJ Release handle that role:

De Avila pleaded guilty before U.S. Magistrate Judge Jill Burkhardt to wire fraud conspiracy, money laundering and multiple aggravated identity theft charges.

In May 2021, five Brazilian nationals, including De Avila, were charged with engaging in a nationwide conspiracy to establish fraudulent driver accounts with multiple internet and app-based rideshare and food delivery companies, including by using identities stolen from the customers of those companies.

According to his plea agreement, De Avila admitted that between 2018 and May 2021, he and his co-conspirators, all of whom were Brazilian nationals living in the United States illegally, operated a scheme to defraud major app-based rideshare and food delivery companies.  In Spring 2020, with the COVID-19 pandemic in full swing, the conspirators shifted away from the rideshare companies, which saw a dramatic decrease in traffic, to food, grocery and other delivery companies, which saw a corresponding and significant increase in demand.  De Avila and his co-conspirators exploited the surge in demand by creating new driver accounts with stolen identities, collecting referral bonuses from the fraudulent accounts, and by using, renting, and selling the accounts to others on these platforms. 

De Avila and his co-conspirators also admitted that once they received payment from the rideshare and delivery companies, they laundered the money both to promote the conspiracy and to conceal the fact that the source of the funds were an elaborate fraudulent scheme.  While the fraudulent scheme targeted popular app-based rideshare and food delivery services, De Avila and his co-conspirators also stole and used the identities of close to 100 victims to create fraudulent driver accounts on the various platforms over the three-year conspiracy.
Jason Michael Schubert, 47, pled guilty in the United States District Court for theWestern District of Texas to one count of wire fraud and one count of engaging in a monetary transaction involving criminally derived property; and he was sentenced to 70 months in prison and ordered to pay $5,052,366.92 in restitution. As alleged in part in the DOJ Release, from 2012 until June 2019, Schubert:

devised a scheme to bilk hotel investors out of millions of dollars.  Schubert identified potential investors by conducting seminars on how to make money from investing in hotel properties, known as "Rich in Five" seminars, charging the participants substantial fees to attend.  Schubert then solicited money from the participants for investing in preexisting hotel properties that he would manage and operate while claiming that investors would profit with little effort on their part. 

However, many of the hotels were older and in substantial disrepair.  Although Schubert had no hotel management experience, he represented that investor funds would be used to renovate the hotels. Instead, he misappropriated the money by paying himself significant "management fees."  Schubert's fraudulent activities depleted investor funds, causing the hotel properties to go into foreclosure with a loss of over $5 million to investors.

In a Complaint filed in the United States District Court for the Western District of North Carolina, the SEC charged Wynn Charlebois and WC Private LLC with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act. As alleged in part in the SEC Release:

[S]ince 2019, Charlebois has defrauded at least 75 investors, mostly residents of the Charlotte area, using multiple bogus investment opportunities. Most recently, through WC Private, Charlebois offered investors opportunities to share in the profits earned by participating in the exercise of fictitious options contracts. In reality, Charlebois used investor funds to pay his family's debts and personal expenses, including his mortgage payments, vacations, and private school education for his children.
The United States District Court for the Southern District of New York entered Final Judgements on Consent against Sohrab "Sam" Sharma, Robert Farkas, and Raymond Trapani. As alleged in part in the SEC Release:

According to the SEC's amended complaint, filed April 20, 2018, Sharma, Farkas, and Trapani made numerous material misrepresentations in marketing the CTR tokens, including touting Centra's claimed partnerships with Visa, MasterCard, and The Bancorp, when in fact, Centra did not have any "partnership" or any relationship with these institutions. The amended complaint further alleges that Defendants created fictitious executive bios, made misrepresentations about the viability of the company's core financial services products, and manipulated trading in the CTR Tokens to generate interest in the company and prop up the price of the tokens.

In April 2018, the United States Attorney's Office for the Southern District of New York brought criminal charges against Sharma, Trapani and Farkas for their roles in the fraudulent Centra ICO in United States v. Sharma et al, 18-Cr. 340 (S.D.N.Y.) (LGS). Sharma, Trapani, and Farkas have each pleaded guilty and have been sentenced to a term of imprisonment.

On May 17, 2022, the U.S. District Court for the Southern District of New York entered final judgments on consent against Sharma, Trapani, and Farkas. The judgments enjoin each from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and the registration provisions of Section 5 of the Securities Act. The judgments also order: (1) disgorgement, including prejudgment interest of $37,701,966, $2,608,869, and $394,908 against Sharma, Trapani and Farkas respectively, each of which was deemed satisfied by the orders of forfeiture entered in the parallel criminal proceeding against each of them; (2) officer-and-director bars; and (3) permanent injunctions from conducting any offering of digital asset securities or other securities.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-94946; Whistleblower Award Proc. File No. 2022-56)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award to Claimant of about $16,000. The Commission ordered that CRS' recommendations be adopted. The Order notes that although Claimant did not initially provide his/her information on a Form TCR, the Commission considered that Claimant was not represented by legal counsel and upon learning of the TCR filing requirement, Claimant satisfied it within 30 days. The Order asserts that [Ed: footnote omitted]:

[C]laimant helped alert Commission staff to the ongoing fraud and his/her tip was a principal motivating factor in the decision to open the investigation. Claimant also provided continuing assistance by supplying critical documents and participating in at least one subsequent communication with Commission staff that advanced the investigation. 

CFTC Charges Oregon and Illinois Residents and Florida Company in $44 Million Misappropriation in Ongoing Digital Asset and Commodity Futures Fraud Court Issues Restraining Order that Freezes Assets, Preserves Documents and Appoints Receiver(CFTC Release) a Complaint filed in the United States District Court for the Northern District of Illinois, the CFTC charged Sam Ikkurty a/k/a Sreenivas I Rao (Ikkurty), Ravishankar Avadhanam, and Jafia LLC with fraudulently soliciting at least $44 million for participation interests in a so-called income fund invested in digital assets and other instruments; and further charges the Defendants with operating an illegal commodity pool and failing to register as a Commodity Pool Operator. Named as Relief Defendants are Ikkurty Capital LLC d/b/a Rose City Income Fund, Rose City Income Fund II LP (Rose City) and Seneca Ventures LLC. The Court entered an Ex Parte Statutory Restraining Order freezing assets controlled by the Defendants, preserving records, and appointing a Temporary Receiver.
As alleged in part in the CFTC Release:

[S]ince at least January 2021, the defendants have used a website, YouTube videos, and other means to solicit more than $44 million from at least 170 participants to purchase, hold and trade digital assets, commodities, derivatives, swaps and commodity futures contracts. The complaint further alleges that instead of investing the pooled participant funds as represented, the defendants misappropriated participant funds by distributing them to other participants, in a manner akin to a Ponzi scheme. The complaint also alleges that the defendants transferred some participant funds to other accounts under their control and for their benefit. The defendants also transferred millions of dollars to an off-shore entity that, in turn, may have transferred funds to a foreign cryptocurrency exchange. None of these funds were returned to the pool.
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, William T. Hobdy, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that William T. Hobdy was first registered with Hold Brothers Capital LLC on September 2020 but was discharged on October 16, 2020. In accordance with the terms of the AWC, FINRA imposed upon William T. Hobdy a $5,000 fine and a 30-calendar-day suspension from associating with any FINRA member in all capacities.  As alleged in part in the AWC:

At the time of his association with Hold Brothers, Hobdy controlled seven businesses that were active and in good standing with the New Mexico Secretary of State and constituted business activities beyond the scope of Hobdy's employment with Hold Brothers. These OBAs were created to pursue different business ventures outside of the securities industry, such as the management of short-term vacation rentals and music. However, at no point during his registration through Hold Brothers between September 9, 2020 through October 16, 2020 did Hobdy provide written disclosure of these OBAs to the firm. 

Therefore, Hobdy violated FINRA Rules 3270 and 2010. 

Bill Singer's Comment: Oh for godsakes -- seriously? In the middle of the Covid pandemic, FINRA imposes a $5,000 fine and a 30 day suspension on some schlub who was registered with a member firm for a tad over one month? Making matters worse, the AWC doesn't allege that Hobdy solicited any investors or even sold a dollar's worth of any deal. To quote the AWC, the cited "OBAs were created to pursue different business ventures . . ." Yeah, sure, I appreciate that the alleged misconduct was that he did not provide written disclosure of the OBAs to his employer, but, c'mon, the firm fired the guy. Given the context and the alleged conduct, just what did that $5,000 fine accomplish and how will we all sleep better knowing that Hobdy took a 30-day sit-down?  I don't see any lawyer signing off on the AWC, so it could be a case of FINRA putting the instruments of torture on the table and cowing someone into agreeing to whatever was demanded.
At first blush, a recent FINRA AWC seems to be piling it on against a former Morgan Stanley rep over some silliness involving unapproved emails about a private placement offered by the firm. It's not like the rep was pushing an outside deal involving a algorithm-based meme-stock trading program funded by a crypto-mining platform powered by municipal waste. Yeah, I know, where can you get into that hot deal, right? But, getting back to the seemingly beleaguered rep, as it turns out, FINRA was justified in fining and suspending him; and Morgan Stanley may have been on similarly firm ground when it discharged the employee. What could go so horribly wrong? Read today's blog.
In "The Love Song of J. Alfred Prufrock," T.S. Eliot laments: "I have measured out my life with coffee spoons." In a recent federal lawsuit involving a $15 million claim against Edward Jones, a District Court laments that the Plaintiff failed to measure out his Complaint in numbered paragraphs or different counts. Alas, the Court lacks the lilting prose of the poet.