Securities Industry Commentator by Bill Singer Esq

The Gensler SEC's Rulemaking Reach Exceeds Its Grasp (BrokeAndBroker.com Blog)

United States Supreme Court: SECURITIES AND EXCHANGE COMMISSION V. COCHRAN (Oral Argument)

United States Supreme Court: AXON ENTERPRISE, INC. V. FEDERAL TRADE COMMISSION (Oral Argument)

DOJ RELEASES

Michigan Man Sentenced to 3 1/2 Years in Prison for Role in 'SIM Swapping' that Led to Account Takeovers and $122,000 in Losses (DOJ Release)

Fraudster Pleads Guilty to Participating in an $800,000 Elder Fraud Scam / Anderson Posed as a Bail Bondsman and Courier to Retrieve Fraud Proceeds Directly from Victims (DOJ Release)

Colorado man who defrauded Montana family of nearly $400,000 in African gold investment scheme sentenced to 27 months in prison (DOJ Release)

California Man Extradited From Australia To Face Charges For Investment Scheme (DOJ Release)

U.S. Attorney Announces Historic $3.36 Billion Cryptocurrency Seizure And Conviction In Connection With Silk Road Dark Web Fraud / In November 2021, Law Enforcement Seized Over 50,676 Bitcoin Hidden in Devices in Defendant JAMES ZHONG's Home; ZHONG Has Now Pled Guilty to Unlawfully Obtaining that Bitcoin From the Silk Road Dark Web in 2012 (DOJ Release)

SEC RELEASES

SEC Granted Summary Judgment Against New Hampshire Issuer of Crypto Asset Securities for Registration Violations (SEC Release)

SEC Charges Creator of Global Crypto Ponzi Scheme and Three US Promoters in Connection with $295 Million Fraud / Trade Coin Club raised money from more than 100,000 investors worldwide (SEC Release)

SEC Obtains Fraud Injunction and Penny Stock Bar Against Microcap Stock Promoter (SEC Release)

SEC Denies Whistleblower Award to Two Claimants
Order Determining Whistleblower Award Claims

SEC Awards Joint $1.6 Million Whistleblower Award to Three Claimant And A $1.6 Million Whistleblower Award to Fourth Claimant
Order Determining Whistleblower Award Claims

SEC Denies Whistleblower Award to Claimant 
Order Determining Whistleblower Award Claims

SEC Denies Whistleblower Award to Claimant 
Order Determining Whistleblower Award Claims

SEC Denies Whistleblower Award to Claimant 
Order Determining Whistleblower Award Claims

SEC Denies Whistleblower Award to Claimant 
Order Determining Whistleblower Award Claims

CFTC RELEASES

FINRA RELEASES

FINRA Fines and Suspends Rep for Outside Accounts, PSTs, and OBA

In the Matter of Joel D. Plasco, Respondent (FINRA AWC)

QUESTION PRESENTED:

Whether a federal district court has jurisdiction to hear a suit in which the respondent in an ongoing Securities and Exchange Commission administrative proceeding seeks to enjoin that proceeding, based on an alleged constitutional defect in the statutory provisions that govern the removal of the administrative law judge who will conduct the proceeding.

LOWER COURT CASE NUMBER: 19-10396

ORAL Argument: 

https://www.supremecourt.gov/oral_arguments/audio/2022/21-1239

Transcript of Oral Argument:

https://www.supremecourt.gov/oral_arguments/argument_transcripts/2022/21-1239_bq7d.pdf

QUESTION PRESENTED:

After petitioner acquired an essentially insolvent competitor, it found itself subjected to the review of the Federal Trade Commission (FTC), rather than the Department of Justice (DOJ). While the DOJ route promises early access to judicial review, the FTC track is an altogether different matter. Petitioner faced a series of unreasonable demands from the FTC, and the prospect of "litigating" before administrative law judges insulated by unconstitutional double-for-cause removal restrictions and subject to review by an unaccountable Commission. Rather than resign itself to the ongoing unconstitutional injuries inflicted by the FTC's process, petitioner filed suit in district court seeking to enjoin the unconstitutional FTC proceedings. That lawsuit focused on constitutional issues collateral to the underlying antitrust issues, but the district court nonetheless dismissed it for want of jurisdiction based on implications drawn from a statutory grant of jurisdiction to review the FTC's cease-and-desist orders. A divided Ninth Circuit affirmed, with the majority acknowledging that dismissal "makes little sense," and the dissent contending that dismissal contradicted this Court's precedents.

 

The questions presented are:

1. Whether Congress impliedly stripped federal district courts of jurisdiction over

constitutional challenges to the Federal Trade Commission's structure, procedures, and existence by granting the courts of appeals jurisdiction to "affirm, enforce, modify, or set aside" the Commission's cease-and-desist orders.

2. Whether, on the merits, the structure of the Federal Trade Commission, including the dual-layer for-cause removal protections afforded its administrative law judges, is consistent with the Constitution.

LOWER COURT CASE NUMBER: 20-15662

ORAL Argument: 

https://www.supremecourt.gov/oral_arguments/audio/2022/21-86

Transcript of Oral Argument:

https://www.supremecourt.gov/oral_arguments/argument_transcripts/2022/21-86_4f15.pdf

Carlson participated in two separate conspiracies to use SIM swapping to gain unauthorized access to the email, financial and social media accounts of the victims to steal cryptocurrency. One scheme that did not result in any actual losses involved the takeover of a Coinbase account in order to steal $10,000 in cryptocurrency, and a second involved the takeover of a Facebook account that allowed Carlson and a co-conspirator to obtain cryptocurrency from two friends of the person whose account had been compromised.

As a result of a separate phishing scheme - in which Carlson sent emails purporting to be from a legitimate source to induce victims to reveal information, including personal identifying information and passwords - he was able to gain control of valuable Instagram accounts with large numbers of followers. Carlson told the victims who owned the Instagram accounts that he wanted to purchase advertising on their accounts, but he needed to first determine how valuable their accounts were for marketing purposes. Carlson convinced the victims to download his purported analytics software, which had a spoofed website name almost identical to a commonly used Instagram analytics software, and they were tricked into providing their Instagram usernames and passwords, which Carlson used to take over their Instagram accounts to monetize for his personal gain.

Carlson also obtained stolen Instagram accounts from others and then re-sold them to other victims for thousands of dollars. In another scheme, Carlson collected money for advertising on Instagram accounts he did not actually control.

[F]rom April 2020 to December 2020, Anderson conspired with others to persuade elderly victims to give them thousands of dollars under false pretenses.  Specifically, members of the conspiracy called elderly victims posing as a police officer, lawyer, or relative and convinced victims to send money for the purported legal expenses of a loved one, generally a grandchild, who had been incarcerated in connection with a car accident or traffic stop involving a crime.  

If victims provided cash as directed by conspirators, conspirators fabricated additional reasons for them to send more money, claiming the additional funds were necessary for their grandchild's legal expenses, bail costs, fines, or to pay damages.  Conspiracy members continued to call victims and demand additional funds, regularly obtaining tens of thousands of dollars from the retirement savings of victims.  Additionally, conspirators falsely told the victims that the money they sent would be returned to them at a later date.  To conceal the crime, the co-conspirators often told the victims that there had been a "gag order" placed on the case requiring secrecy and that the victim could not share the information with others. 

Anderson admitted that he and other conspirators posed as bail bondsmen or couriers and received cash directly from the victims, taking approximately seven percent of the proceeds as their payment and distributing the remaining fraud proceeds to other conspirators.  To conceal their identities, Anderson and the other conspirators used fake names and would not park directly in front of the victims' homes when retrieving cash from the victims.  When Anderson was recruited into the conspiracy in April 2020, he traveled to the Maryland area to perpetrate the scheme, collecting money from victims in Maryland, Virginia, Delaware, and other states.  As part of the conspiracy, Anderson recruited additional participants to join the conspiracy and assist in retrieving cash from the victims. Anderson directed the recruited conspirators to pay him a percentage of their earnings from the fraud scheme. 

For example, Anderson, posing as a bail bondsman, traveled to Sykesville, Maryland on December 4, 2020, and collected $29,000 in cash from Victim 3, who had received a call from a co-conspirator telling her that her nephew had been arrested and needed money for his bail.  The next day, Victim 3 received another call and was told that she needed to pay an additional $10,000 in cash for bail money.  Anderson again traveled to Victim 3's home to collect the cash and was arrested while attempting to retrieve the money.

As a result of the scheme, Anderson and the other conspirators caused at least 49 victims to pay at least $842,670 through materially false pretenses, representation, and promises.  Of that amount, approximately $578,170 was not returned to the victims

[F]rom May 2019 until September 2020, Wescott falsely claimed he would receive payments from victims, which he would then transfer to Africa on behalf of victims for investments in overseas gold. The investment appeared enticing to victims because, among other reasons, it offered high rates of return in a short period of time. Because victims had difficulties in sending money overseas and to Africa, they were introduced to James. Instead of transferring the money overseas and to Africa for the intended purpose, James spent the money on items for himself and for other unauthorized purposes. When victims questioned where their money was located and demanded that their money be returned, James repeatedly claimed the money would be repaid soon, none of which was true. Wescott defrauded a family in Hill County of $391,280 in the scheme.

[F]rom April 2010 to August 2015, Guzman, through various entities he controlled, including G2 Asset Management and East Egg Private Equity, executed a scheme to defraud approximately 10 investors of at least $2 million, by falsely representing that he would use the investors' money to trade in options and other similar investments. Instead of investing the funds as promised, Guzman allegedly stole a substantial portion of the investors' money and used it to fund his personal lifestyle, including to make large credit card payments and cash withdrawals, and to pay for personal expenditures. As alleged in the indictment, Guzman suffered massive trading losses with the money that he did invest and used some of the victim's money to make Ponzi-style payments to investors. To conceal the trading losses and the fraudulent scheme, and to prevent his victims from redeeming their investments and complaining to authorities, the indictment alleges that Guzman lied to his victims about the status of their investments, and provided them with fake documents, including sham IRS forms and fraudulent account statements.

The SEC's complaint charges LBRY with conducting an unregistered offering and sale of crypto asset securities. The SEC seeks permanent injunctive relief, disgorgement plus prejudgment interest, and civil penalties. The SEC's complaint alleged that, from at least July 2016 to February 2021, LBRY, which provides a video sharing application, sold crypto asset securities called "LBRY Credits" to numerous investors, including investors based in the US. The complaint alleges that this was an offering and sale of securities under the federal securities laws, and that LBRY did not file a registration statement for the offering. The complaint further alleges that by failing to file a registration statement, LBRY denied prospective investors the information required for such an offering to the public. The SEC's filings with the court alleged that LBRY received approximately $12.2 million in proceeds in U.S. dollars and crypto assets from its sales of LBC. The Court found that LBRY violated the charged provisions and reserved the determination of relief for a later date.

Silk Road was an online "darknet" black market.  In operation from approximately 2011 until 2013, Silk Road was used by numerous drug dealers and other unlawful vendors to distribute massive quantities of illegal drugs and other illicit goods and services to many buyers and to launder all funds passing through it.  In 2015, following a groundbreaking prosecution by this Office, Silk Road's founder Ross Ulbricht was convicted by a unanimous jury and sentenced to life in prison. 

In September 2012, ZHONG executed a scheme to defraud Silk Road of its money and property by (a) creating a string of approximately nine Silk Road accounts (the "Fraud Accounts") in a manner designed to conceal his identity; (b) triggering over 140 transactions in rapid succession in order to trick Silk Road's withdrawal-processing system into releasing approximately 50,000 Bitcoin from its Bitcoin-based payment system into ZHONG's accounts; and (c) transferring this Bitcoin into a variety of separate addresses also under ZHONG's control, all in a manner designed to prevent detection, conceal his identity and ownership, and obfuscate the Bitcoin's source. 

While executing the September 2012 fraud, ZHONG did not list any item or service for sale on Silk Road, nor did he buy any item or service on Silk Road.  ZHONG registered the accounts by providing the bare minimum of information required by Silk Road to create the account; the Fraud Accounts were merely a conduit for ZHONG to defraud Silk Road of Bitcoin.

ZHONG funded the Fraud Accounts with an initial deposit of between 200 and 2,000 Bitcoin.  After the initial deposit, ZHONG then quickly executed a series of withdrawals.  Through his scheme to defraud, ZHONG was able to withdraw many times more Bitcoin out of Silk Road than he had deposited in the first instance.  As an example, on September 19, 2012, ZHONG deposited 500 Bitcoin into a Silk Road wallet.  Less than five seconds after making the initial deposit, ZHONG executed five withdrawals of 500 Bitcoin in rapid succession - i.e., within the same second - resulting in a net gain of 2,000 Bitcoin.  As another example, a different Fraud Account made a single deposit and over 50 Bitcoin withdrawals before the account ceased its activity.  ZHONG moved this Bitcoin out of Silk Road and, in a matter of days, consolidated them into two high-value amounts.

Nearly five years after ZHONG's fraud, in August 2017, solely by virtue of ZHONG's possession of the 50,000 Bitcoin that he unlawfully obtained from Silk Road, ZHONG received a matching amount of a related cryptocurrency - 50,000 Bitcoin Cash ("BCH Crime Proceeds") - on top of the 50,000 Bitcoin.  In August 2017, in a hard fork coin split, Bitcoin split into two cryptocurrencies, traditional Bitcoin and Bitcoin Cash ("BCH").  When this split occurred, any Bitcoin address that had a Bitcoin balance (as ZHONG's addresses did) now had the exact same balance on both the Bitcoin blockchain and on the Bitcoin Cash blockchain.  As of August 2017, ZHONG thus possessed 50,000 BCH in addition to the 50,000 Bitcoin that ZHONG unlawfully obtained from Silk Road.  ZHONG thereafter exchanged through an overseas cryptocurrency exchange all of the BCH Crime Proceeds for additional Bitcoin, amounting to approximately 3,500 Bitcoin of additional crime proceeds.  Collectively, by the last quarter of 2017, ZHONG thus possessed approximately 53,500 Bitcoin of total crime proceeds (the "Crime Proceeds"). 

The Government's Seizure of Forfeitable Property

On November 9, 2021, pursuant to a judicially authorized premises search warrant (the "Search"), IRS-CI agents recovered approximately 50,491.06251844 Bitcoin of the Crime Proceeds from ZHONG's Gainesville, Georgia, house.  Specifically, law enforcement located 50,491.06251844 Bitcoin of the approximately 53,500 Bitcoin Crime Proceeds (a) in an underground floor safe; and (b) on a single-board computer that was submerged under blankets in a popcorn tin stored in a bathroom closet.  In addition, law enforcement recovered $661,900 in cash, 25 Casascius coins (physical bitcoin) with an approximate value of 174 Bitcoin, 11.1160005300044 additional Bitcoin, and four one-ounce silver-colored bars, three one-ounce gold-colored bars, four 10-ounce silver-colored bars, and one gold-colored coin. 

Beginning in or around March 2022, ZHONG began voluntarily surrendering to the Government additional Bitcoin that ZHONG had access to and had not dissipated.  In total, ZHONG voluntarily surrendered 1,004.14621836 additional Bitcoin. 

Forfeiture Actions

In connection with ZHONG's guilty plea, on November 4, 2022, Judge Gardephe entered a Consent Preliminary Order of Forfeiture as to Specific Property and Substitute Assets/Money Judgment forfeiting ZHONG's interest in the following property:

• ZHONG's 80% interest in RE&D Investments, LLC, a Memphis-based company with substantial real estate holdings;
• $661,900 in United States currency seized from ZHONG's home on November 9, 2021;
• Metal items, consisting of four one-ounce silver-colored bars, three one-ounce gold-colored bars, four 10-ounce silver-colored bars, and one gold-colored coin, all seized from ZHONG's home on November 9, 2021;
• 11.1160005300044 Bitcoin seized from ZHONG's home on November 9, 2021;
• 25 Casascius coins (physical Bitcoin) with an approximate value of 174 Bitcoin, collectively, seized from ZHONG's home on November 9, 2021;
• 23.7112850 Bitcoin provided by ZHONG on April 27, 2022;
• 115.02532155 Bitcoin provided by ZHONG on April 28, 2022; and
• 4.57427222 Bitcoin provided by ZHONG on June 8, 2022.

Today, in United States v. Ross Ulbricht, S1 14 Cr. 68 (LGS), the Government filed a motion for entry of an Amended Preliminary Order of Forfeiture, seeking to forfeit approximately 51,351.89785803 Bitcoin traceable to Silk Road, valued at approximately $3,388,817,011.90 at the time of seizure, as follows:

• 50,491.06251844 Bitcoin seized from ZHONG's home on November 9, 2021;
• 825.38833159 Bitcoin provided by ZHONG on March 25, 2022; and
• 35.4470080 Bitcoin provided by ZHONG on May 25, 2022.

[B]raga created and controlled Trade Coin Club, a multi-level marketing program that operated from 2016 through 2018 and promised profits from the trading activities of a purported crypto asset trading bot. The SEC alleges that Braga and Paradise lured investors with false representations that the bot made "millions of microtransactions" every second, and that investors would receive minimum returns of 0.35 percent daily. However, instead of deploying investor funds for the purported trading bot, Braga allegedly siphoned off investor funds for his own benefit and to pay a network of worldwide Trade Coin Club promoters, including Paradise, Taylor, and Tetreault.

The SEC further alleges that Trade Coin Club operated as a Ponzi scheme and that investor withdrawals came entirely from deposits made by investors, not from any crypto asset trading activity by a bot or otherwise. The complaint further alleges that Braga personally received at least 8,396 bitcoin of the amounts invested (worth $55 million at the time), Paradise received 238 bitcoin (worth more than $1.4 million at the time), Taylor received 735 bitcoin (worth more than $2.6 million at the time), and Tetreault received 158 bitcoin (worth more than $625,000 at the time).

[F]rom at least October 2019 through January 2021, Costello and Ferraro engaged in a stock promotion scheme in which Ferraro recommended and promoted to his Twitter followers and the public at least five microcap stocks that Costello owned, without disclosing that he and Costello intended to sell shares of those stocks as their prices rose, or that Costello would pay Ferraro a portion of his profits from some of those sales. Costello shared approximately $32,000 of his profits with Ferraro, and Ferraro profited approximately $41,000 from his own trading in this scheme. The SEC's complaint also alleges that Ferraro separately conducted his own stock promotion scheme respecting two additional microcap stocks, generating profits of approximately $68,000.

Because Claimant 1 obtained his/her information as a result of his/her association with the Company-which was retained to perform compliance functions-Claimant 1 must therefore satisfy at least one of Rule 21F-4(b)(4)(v)'s exceptions to receive an award. Claimant 1, however, has not done this. 

. . .

We therefore conclude that Claimant 2 did not provide information that caused Staff to commence an examination, open or reopen an investigation, inquire concerning different conduct as part of a current examination or investigation that then resulted in the Commission bringing the Redacted Action, or significantly contribute to the success of the Redacted Action. . . .

Claimant 4 requested reconsideration of the Preliminary Determinations asserting that (1) the information submitted by Claimants 1, 2, and 3 was not original information because it was based on information Claimant 4 submitted to Redacted ("Research Publication"), and (2) that the CRS overlooked several contributions made by Claimant 4 to the staff's investigation, as well as hardships Claimant 4 suffered, when determining the award percentage.

. . .

Contrary to Claimant 4's assertions in his/her reconsideration request, Claimants 1, 2, and 3 submitted original information in their Form TCR, which included information about *** Redacted . Claimants 1, 2, and 3's tip was submitted to the Commission before the Redacted Research Publication report and therefore, could not have been based on information contained in that report. . .

. . .

Furthermore, the additional contributions and hardships discussed in Claimant 4's request for reconsideration do not warrant a change in the award allocation. Most of the contributions cited by Claimant 4 concerned allegations that were not charged by the Commission. . . .

The record also does not show that Claimant's information caused the staff to inquire into different conduct or significantly contributed to the ongoing Investigation. The staff declaration confirms that information in Claimant's TCR was already known to the staff, and Claimant's later conversations with the staff regarding Claimant's TCR, where Claimant provided additional documents, also did not yield any information not already known to the staff through its own investigation. Claimant also reported on the substance of a meeting Claimant had with an individual connected to the Defendants; however, Claimant's information about that meeting did not advance the Investigation or contribute to the success of the Covered Action as the staff was either already aware of the information or it was not relevant to the Investigation.

Claimant's argument that Other Agency staff should be contacted because the Covered Action and the Other Agency actions are "deeply intertwined" is misplaced. As stated above, the initial question we examine is whether Claimant provided original information to the Commission that led to a successful Commission enforcement action.7 Commission staff are best-placed to determine Claimant's contributions to the Investigation and the Covered Action, and Claimant offers no plausible basis for why we should think otherwise. Based on the record, including the sworn declaration from Enforcement staff, which we credit, Claimant's information did not lead to the success of the Covered Action. We decline Claimant's invitation to gather additional information from Other Agency staff on the basis of Claimant's speculation that Other Agency staff may have more information about Claimant's contributions to the Commission Investigation and the Covered Action than Commission staff themselves. 

Claimant does not qualify for a whistleblower award on two independent grounds. First, Claimant did not submit Claimant's whistleblower application within the required ninety-day deadline. The requirement that claimants file whistleblower award claims within ninety days of the posting of a Notice of Covered Action ("NoCA"), set forth in Exchange Act Rule 21F-10, serves important programmatic functions. Here, Claimant's application was approximately seven months late. This ground alone renders Claimant ineligible for an award. Further, Claimant did not contest the CRS's recommended denial on this ground and accordingly forfeits Claimant's opportunity to contest on this ground.

Claimant also does not qualify for an award on the ground that Claimant's information did not lead to the successful enforcement of the Covered Action. Enforcement staff confirms that the investigation that led to the Covered Action (the "Investigation") was opened based upon the staff's own investigative steps and not based on any information from Claimant. The staff also confirms that the staff did not receive any information provided by Claimant prior to opening the Investigation. Accordingly, Claimant's information did not cause the staff to open the Investigation.

Here, Claimant's whistleblower application was submitted more than three months after the ninety-day filing period had closed. Claimant argues that the Commission should use its authority under Exchange Act Rule 21F-8(a) to waive the ninety-day filing requirement. Rule 21F-8(a) provides that "the Commission may, in its sole discretion, waive any of these procedures upon a showing of extraordinary circumstances." We have explained that the "extraordinary circumstances" exception is "narrowly construed" and requires an untimely claimant to show that "the reason for the failure to timely file was beyond the claimant's control." Further, we have identified "attorney misconduct or serious illness" that prevented a timely filing as two examples of the "demanding showing" that an applicant must make before we will consider exercising our discretionary authority to excuse an untimely filing. 

As an initial matter, Claimant first provided information to the staff in Redacted over four months after the staff opened the investigation that led to the Covered Action (the "Investigation") and more than one month after the Commission filed its complaint. Accordingly, Claimant cannot be credited with causing the staff to open an investigation. 

Second, the record does not demonstrate that Claimant significantly contributed to the success of the Covered Action or caused the staff to inquire into different conduct that was later the subject of a successful Commission enforcement action. Enforcement staff have confirmed, in a sworn supplemental declaration, which we credit, that Claimant's information did not advance the Investigation: Claimant's information related to the Individual who was not charged in the Covered Action. And the staff confirmed that it first became aware of the Individual in approximately Redacted about four months before Claimant provided information, and the Redacted staff was aware of the Individual's involvement with Redacted (the "Firm") the following month, approximately three months before Claimant submitted his information. The staff confirmed that Claimant's information was not a motivating factor in the decision to interview the Individual and that Claimant's information was either already known to the staff or did not advance the Investigation or contribute to the charges in the Covered Action.  The staff also confirmed that Claimant's information did not assist the staff during settlement discussions with any of the Defendants.

In April 2019, Plasco loaned $200,000 to a company for one month and expected to receive a 100 percent return at maturity. The loan was a security. After the company defaulted on the loan, the parties entered into a settlement agreement, pursuant to which Plasco received shares of a thinly-traded stock of a different company that he sold in a private transaction for $75,000. Plasco did not provide Dalmore Group with written notice or obtain the firm's written approval prior to participating in these private securities transactions. Therefore, Plasco violated FINRA Rules 3280 and 2010.

. . .

Between February 2020 and July 2020, Plasco opened outside brokerage accounts at three firms without the prior written consent of Dalmore Group. One of the firms held the account through which he effected the second private securities transaction described above. Therefore, Plasco violated FINRA Rules 3210 and 2010. 

. . .

From 2016 until his departure from the firm in November 2020, Plasco served as a senior executive with and, in some instances, received compensation from six related businesses in the aviation industry. Plasco did not provide Dalmore Group with prior written notice of five of the six businesses and therefore violated FINRA Rules 3270 and 2010.

• Securities Industry Commentator
• Bill Singer