Securities Industry Commentator by Bill Singer Esq

August 2, 2022

In a recent FINRA Arbitration Award, an arbitrator mounts Rocinante and grabs a lance. Even though we are merely Sancho Pancho (who went along for the ride), still, we get to smile at the spectacle of Don Quixote tilting at windmills. Equity, due process, and justice vanquish the heartless, amoral application of the law. In these plague days, that's a nice change of pace. Also, it's one hell of a wonderful FINRA Arbitration Award penned with eloquence.
Lee Cohen pled guilty in the United States District Court for the Eastern District of New York to conspiracy to commit securities fraud for his role in a scheme to manipulate the price and trading volume of HD View, 360, Inc. ("HDVW"). As part of his plea, Cohen admitted that he had  agreed to launder money that was purported to be the proceeds of similar securities fraud schemes. As alleged in part in the DOJ Release:

[C]ohen operated a self-described "boiler room" in the Philippines.  Cohen and his co-conspirators used the boiler room to defraud investors and potential investors in HDVW by inducing investors to buy HDVW shares at particular prices.  At the same time, Cohen coordinated with a co-conspirator who controlled the majority of HDVW's shares, then sold the shares for a profit.  During the scheme, over 1,000 investors purchased shares of HDVW and lost more than $1.2 million.
In 2021, Jeremy David  McAlpine, 29, and Zachary Michael Matar, 29, pled guilty in the United States District Court for the Central District of California to one count of securities fraud. McAlpine was sentenced to 36 months in prison, and Matar, to 30 months in prison. In a separate civil case brought by the SEC, Dropil Inc., McAlpine and Matar agreed to permanent injunctions barring further fraudulent conduct and prohibiting them from directly or indirectly participating in the offer, purchase, or sale of digital securities. As alleged in part in the DOJ Release:

In 2017, McAlpine and Matar founded Dropil Inc., a Belize-based company operating out of Fountain Valley. Dropil provided and managed investments in digital assets including a cryptocurrency called DROPs that McAlpine and Matar developed. McAlpine and Matar were also primarily responsible for the development of Dropil's digital asset trading program, an automated trading bot called "Dex," which could be used exclusively with DROPs.

McAlpine and Matar induced investors to purchase DROPs by making false claims about DROPs, the functionality and profitability of Dex, and the number of investors and volume of investment in DROPs that had purportedly already been achieved and that purportedly enhanced - through the operation of supply and demand - the value of DROPs. Dex was said to provide an "expertly managed portfolio balancing algorithm [that] manages risk," according to information published on Dropil's website. The DROP tokens were said to "ensure privacy while also offering added value and exclusivity." Dropil further promised that Dex's trading would generate profits that would be distributed as additional DROP tokens every 15 days.

Beginning in late 2017, McAlpine and Matar began an unregistered offer and sale of DROPS on Dropil's website. In January 2018, the defendants launched an initial coin offering (ICO) for the sale of DROPs, again through Dropil's website, which continued through March 2017. Neither McAlpine, Matar nor Dropil was registered with the Securities and Exchange Commission (SEC) as a broker or dealer.

To induce investors to purchase DROPs, McAlpine and Matar made a series of false statements to investors in a "White Paper" published on Dropil's website and on its Twitter account, promoting the cryptocurrency's supposed success. Among other false statements, the White Paper asserted that trading with Dex would produce average annual returns of between 24% and 63% depending on the "risk profile" selected by the investor.

In response to investigative subpoenas from the SEC, the defendants manufactured fake Dex profitability reports, giving the false appearance that Dex was operational and profitable. Defendants also fabricated an investor spreadsheet for the SEC that purported to show that Dropil had successfully raised $54 million from 34,000 investors both foreign and domestic. In fact, the ICO raised under $2 million from fewer than 2,500 investors. McAlpine also provided false sworn testimony to the SEC about the amount of money raised in the ICO, as well as about Dex and its purportedly profitable trading activity.

In total, the defendants obtained approximately $1,896,657 from 2,472 investors through the sale of approximately 629 million DROPs. McAlpine and Matar used the invested money as promised to fund disbursements to themselves and their associates.

Man Sentenced to 21 Months in Prison for Stock Fraud Schemes (DOJ Release)
Ongkaruck Sripetch, 47, pled guilty in the United States District Court for the Southern District of California to violations of federal securities offering registration requirements; and he was sentenced to 21 months in prison. As alleged in part in the DOJ Release:

Sripetch, a resident of Los Angeles who used the aliases "King Richards" and "Shelby Saint-Claire," pleaded guilty in February. He admitted that he failed to comply with securities regulations requiring that stock offerings be registered with the Securities and Exchange Commission. He also admitted that his relevant conduct included conspiring with his co-defendants to pump-and-dump the stock of two companies: Ottawa, Canada-based VMS Rehab Systems, which claimed to sell "quality of life orthopedic seat cushions for the home healthcare sector," and Argus Worldwide, a company headquartered in Cheyenne, Wyoming, which purportedly focused on "digital/internet products and services, smart consumer electronic products and health industries." In reality, the companies did not live up to the defendants' claims.

Through these pump-and-dump schemes, Sripetch and his co-conspirators artificially inflated the price of these stocks and then sold the stocks to unwitting investors through the public securities markets., Crown Bridge Parnters, LLC and its managing members  Soheil Ahdoot and Sepas Ahdoot agreed to be permanently enjoined from further violations of the registration provisions of the Securities Exchange Act, to pay $8,390,601.27 in disgorgement/interest and $810,307 in a civil penalty; and to a five-year penny stock bar. Further, Crown Bridge agreed to surrender all conversion rights in its currently held convertible notes, surrender all unexercised warrants that it acquired in connection with convertible notes, and cancel any shares it holds that were acquired by converting notes or exercising related warrants. Finally, Crown Bridge and the Ahdoots consented to the entry of an SEC Order imposing a five-year collateral bar to be obtained in a follow-on administrative proceeding. As alleged in part in the SEC Release:

[B]etween January 2016 and December 2020, Crown Bridge purchased about 250 convertible notes from 150 microcap issuers, and converted the notes into 35 billion newly issued shares of stock at a large discount from the market price. It then allegedly sold the newly issued shares into the market at a significant profit. As alleged, neither Crown Bridge nor the Ahdoots were registered as dealers with the SEC or associated with a registered dealer, as their activities required them to do.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95408; Whistleblower Award Proc. File No. 2022-69)
The SEC's Claims Review Staff ("CRS") issued Preliminary Determinations recommending  Whistleblower Awards in the aggregate of about $500,000 to Claimant 1 and Claimant 2. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

[C]laimant 1 provided information that served as important evidence of a fraud and supported the Commission's findings in the Covered Action. Claimant 1 and/or his/her counsel met with Enforcement staff on multiple occasions. With regard to Claimant 2, we considered that Claimant 2 provided information that identified a fraudulent transaction and provided unique documentation that served as the basis for some of the Commission's findings in the Covered Action.

In the Matter of DF Growth REIT II, LLC (SEC Order / Admin. Proc. Rul. Rel. No. 6860; Admin. Proc. File No. 3-20801)
To try and get the prologue out of the way, and quickly, let's summarize things by saying that the above-cited DF Growth REIT was in the midst of a Reg A offering and the SEC temporarily suspended the underlying exemption; thereafter, the Division of Enforcement moved for summary disposition on June, 3, 2022, which DF Growth opposed. In July 2022, DF Growth argued that the suspension was "moot" and should be vacated. The SEC Order asserts in part that:

The Division alleges that DF Growth REIT II failed to comply with requirements of Regulation A by (1) engaging in a delayed offering, in violation of Rule 251(d), and (2) raising its maximum offering amount from $50 million to $75 million through filing an offering circular supplement rather than through a new offering statement or amendment, in violation of Rule 253(b). It further alleges that Respondent's offering statements and solicitation materials contained untrue or misleading statements of material facts relating to (1) the separation of "REIT II" from "REIT I," DiversyFund's previously-existing real estate investment fund, (2) the minimum cash amount needed for its business and the significant risk of loss to REIT II investors if REIT II were unable to raise sufficient capital in its Regulation A offering, and (3) the fees that investors would be charged. 

Respondent states that it terminated the offering on June 17, 2022, and that its decision to terminate on that date was pursuant to the representation on the cover of its Offering Circular3 that the offering would end on the earliest of three dates: (1) when it had raised $50 million; (2) two years after the offering began; or (3) "the date we decide to end it." Thus, it argues, the proceeding is moot and should be dismissed and the temporary suspension vacated.

In reply, the Division notes that Respondent has not challenged any of what the Division characterizes as undisputed facts. Further, the Division alleges that DiversyFund has now established REIT III, 4 which is to be funded through the Crowdfunding exemption, and funds raised by the REIT II offering transferred to REIT III. The Division notes that the current temporary suspension has eliminated any ongoing financial harm that ending the offering would provide and suggests that Respondent is merely trying to avoid the "Bad Actor" disqualification that would prevent it from continuing to raise capital through a different affiliate. See 17 C.F.R. § 227.503(a)(7) (disqualifying from a Crowdfunding exemption any affiliate of an issuer involved in a Regulation A offering subject to a suspension order within the previous five years).

Ummm . . . uhhhh . . . okay, lemme see here and, geez, lemme take a crack at this -- REIT II resorted to a "delayed" offering rather than a "new" offering. But then a REIT III emerged and will be "funded through the Crowdfunding exemption." All of which summons up that New Testament line about putting new wine in old bottles (which should have been old wineskins but that's another clarification for another day). For reasons that I don't fully comprehend but don't necessarily disagree with given my profound ignorance, SEC Administrative Law Judge Carol Fox Foelak states in part that:

In addition to the regulation prohibiting withdrawal in these circumstances, which, is some form, has been part of the Commission's regulations since 1956,5 the Commission has long held that the subject of an ongoing Rule 258 suspension proceeding does not have a right to withdraw a Regulation A offering; requests to withdraw by such a respondent are committed to the agency's discretion. Aetna Oil Dev. Co., Securities Act Release No. 4398, 1961 SEC LEXIS 770, at *2, *11 (July 20, 1961); Mut. Emps. Trademart, Inc., Securities Act Release No. 4252, 1960 SEC LEXIS 897, at *2, *5 (July 14, 1960); see also Teletest Corp., Securities Act Release No. 6717, 1987 SEC LEXIS 4539, at *3-4 (June 4, 1987) ("‘careful and honest preparation' of a Regulation A filing "is ‘an absolute prerequisite' for the exercise of our discretion in permitting the withdrawal of a deficient filing after the issuance of a temporary suspension order"); cf. Hart Oil Corp., Securities Act Release No. 4147, 1959 SEC LEXIS 33, at *11 (Oct. 9, 1959) ("[T]here is no absolute right to terminate Regulation A suspension proceedings by filing amendments, and [the Commission] do[es] not consider it appropriate freely to accept amendments to Regulation A filings after the issuance of a temporary suspension order."). The Commission has said that "it would be inappropriate to allow such withdrawal prior to a determination of the facts" in a proceeding to determine whether to make permanent a temporary suspension order: "Serious questions regarding the adequacy of the notification and offering circular and the truthfulness of the representations therein have been raised which can be resolved only upon the basis of a record. To allow withdrawal in the face of such charges would encourage careless or fraudulent filings which would be withdrawn when deficiencies are discovered by [agency] staff." Mut. Emps. Trademart, Inc., 1960 SEC LEXIS 897, at *5-6. 

In sum, a respondent cannot simply withdraw a Regulation A offering subject to a suspension and then create a new one. Rule 152(d)(2)(iv) is not an end run around Commission withdrawal regulations and enforcement against bad actors. 6
= = = = =
Footnote 5: The original wording of the regulation concerning withdrawal while under a temporary suspension order addressed circumstances akin to those alleged to be present here, providing that "[t]he withdrawal of a notification after the entry of an order pursuant to this section shall not operate to make an exemption hereunder available for any securities for which no exemption would be available in the absence of such withdrawal." 17 C.F.R. § 230.261(e) (1956); Regulation A; General Exemptions, 21 Fed. Reg. 5739, 5742 (Aug. 1, 1956). This provision was rescinded because the requirement that the Commission consent to withdrawal made it unnecessary. Miscellaneous Amendments, 23 Fed. Reg. 4454, 4455 (June 20, 1958).

Footnote 6: The existence of bad actor disqualifications for issuers and their affiliates subject to the suspension of a Regulation A exemption distinguishes this matter from a Securities Exchange Act of 1934 Section 12(j) proceeding, where, in limited circumstances, the proceeding can be effectively terminated by the respondent by the filing of a Form 15.

Just to clarify: There is no absolute right to terminate a Regulation A suspension proceedings by filing amendments, which, even if filed, the SEC won't likely accept after it has issued a temporary suspension order. Okay, sure -- I'm pretty sure that I grasp the point but don't ask me to explain it to you. Let the Force be with you. Apparently, the DF Growth REIT II proceeding is NOT moot and the temporary suspension remains in place. Respondent has until August 15th to file a substantive response to Enforcement's Motion for Summary Disposition., the named as Defendants: Vladimir Okhotnikov; Jane Doe a/k/a Lola Ferrari; Mikhail Sergeev; Sergey Maslakov; Samuel D. Ellis, Mark F. Hamlin, Sarah L. Thiessen; Carlos L. Martinez; Ronald R. Deering; Cheri Beth Bowen; and Alisha R. Shepperd. 
  Without admitting or denying the allegations, two of the defendants, Ellis and Theissen, agreed to settle the charges and to be permanently enjoined from future violations of the charged provisions and certain other activity. Additionally, Ellis agreed to pay disgorgement and civil penalties, and Theissen will be required to pay disgorgement and civil penalties as determined by the court. As alleged in part in the SEC Release:

[I]n January 2020, Vladimir Okhotnikov, Jane Doe a/k/a Lola Ferrari, Mikhail Sergeev, and Sergey Maslakov launched, a website that allowed millions of retail investors to enter into transactions via smart contracts that operated on the Ethereum, Tron, and Binance blockchains. However, Forsage allegedly has operated as a pyramid scheme for more than two years, in which investors earned profits by recruiting others into the scheme.  Forsage also allegedly used assets from new investors to pay earlier investors in a typical Ponzi structure.

Despite cease-and-desist actions against Forsage for operating as a fraud in September 2020 by the Securities and Exchange Commission of the Philippines and in March 2021 by the Montana Commissioner of Securities and Insurance, the defendants allegedly continued to promote the scheme while denying the claims in several YouTube videos and by other means.
  In a FINRA Arbitration Statement of Claim filed in December 2020, associated person Claimant Dixon asserted breach of contract, defamation, and violation of FINRA Rule 2020 in connection with the termination of her employment by FINRA member firm Respondent LPL. LPL generally denied the allegations, asserted affirmative defenses, and filed a Counterclaim asserting Claimant had failed to repay two promissory notes. At the hearing, Respondent LPL requested: $447,805.00 in compensatory damages; $12,327.27 in attorneys' fees; $62,552.45 in interest through May 24, 2022; and $6,150.00 in costs. 
  The FINRA Arbitration Panel found LPL liable and ordered it to pay to Dixon $80,000 in compensatory damages plus interest. The Panel found Dixon liable and ordered her to pay to LPL $372,805 in compensatory damages plus interest on the Promissory Note; and $75,000 in compensatory damages plus interest on the Term Commitment Note. As to the requested expungement, the Panel recommended that the "Reason for Termination" be deleted and that reference to two Occurrence Numbers be expunged.
If you are a FINRA Small Firm you don't need me to tell you how dire things have become in 2022. Year after year, the numbers of small firms have dwindled to the point where there are now more FINRA employees than FINRA member firms. In response to that changing landscape, the FINRA Large Firms have consolidated their grip on FINRA and continue to socially engineer their small competitors out of business. Each year, candidates for one of the three FINRA Small Firm seats seek your vote and promise to speak out and speak up on your behalf.  Once elected, however, your purported champions become complacent -- some might even say compliant. I have known Stephen Kohn for many years. Stephen has owned his own small firm. He has been in our biz for decades. Stephen sees the crisis that is upon us, and he knows that it's now or never.  He will take his seat at the FINRA Board, but he will not be told to sit down and shut up. VOTE FOR STEPHEN KOHN!