While there is virtually no end to offering fraud actions – schemes in which investors are sought to purchase securities based typically on false performance and safety issues – those tied to hot ticket items such as marijuana or crypto currency seem to be most lucrative. Consider, for example, the Commission’s latest case in this area, SEC v. Ackerman, Civil Action No. 1:12-CR-1181 (S.D.N.Y. Filed Feb. 11, 2020). There over $30 million was raised in a few weeks from a for a crypto currency trading scheme with a so-called proprietary software trading program. Unfortunately for investors who rushed to put in their capital, it was a fraud, according to the complaint.

Defendant Michael Ackerman, a former registered representative, formed the Q3 Trading Club with two business partners in July 2017. One of those partners was a member of a private Facebook group called Physicians Dads Group. A post on the group web page by that member explained that he was part of a club in which members pooled their funds to trade crypto currencies. Members of the Facebook group could request or be invited to participate. For those who joined the trading profits would be split, 50% with new members and 50% with the three founders. All investment capital was forwarded to an offshore digital trading platform.

A second offering began about one year later. It centered on an entity known as Q3 1. Over a 60 day period in late 2018 about $33 million was raised from over 150 investors using a PPM. That offering document told investors that their funds would be invested in a successful crypto trading program that was based on the use of a proprietary algorithmically driven software program. Profits would be split in the same manner as the club described above.

Mr. Ackerman, who directed the trading program, made a series of misrepresentations in connection with the offering. Key to attracting new investors was the success of the program. While trader Ackerman repeatedly reported to his two partners by text message that the amount of funds invested had increased significantly as did the profits, in fact the claims were false. In truth, Mr. Ackerman had only invested a fraction of the offering proceeds. For example, while Mr. Ackerman reported a trading account balance on September 1, 2019 of over $181,930,351, in fact it was only about $1.5 million.

The three founding partners also paid themselves about $4 million in licensing fees. Yet in fact no licensing fees for the software were due. Claims regarding the safety of the investment, keyed to alleged internal controls, were also false – the controls did not exist. Claims that investor funds would be used for trading were also false – Mr. Ackerman misappropriated about $7.5 million. The complaint alleges violations of each subsection of Securities Act Section 17(a), and Exchange Act Section 10(b). The case is pending. A parallel criminal action was filed by the Manhattan U.S. Attorney’s Office.

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Money laundering is a topic that many may only think of when the discussion turns to organized crime. While the topic certainly includes traditional notions of organized crime, in recent years it also has come to include terrorism, sanctions and a number of other subjects.

The key enforcement agency in this area is the Financial Crimes Enforcement Network or FinCEN. When many clients hear this name the first reaction is “they are not interested in me.” Not so. While the focus of the agency is banking, its portfolio has grown to include a wide array of activities tied to broker-dealers, futures commission merchants, mutual funds and others.

FinCEN Deputy Director Jamal El-Hindi recently delivered remarks at the SIFMA 20th Anti-Money laundering and Financial Crimes Conference. Those remarks provide an overview of the FinCEN charge and AML (NYC, Feb. 6, 2020)(here).

The Deputy Director began with reflections on select issues he has observed since assuming his position at FinCEN about 13 years ago. The basic AML principles involved here “revolve around promoting appropriate transparency for the benefit of both the financial institutions processing them and FinCEN’s law enforcement stakeholders,” the Deputy Director noted. It is this dynamic which makes the sector “challenging” he noted.

There are significant differences in approach to the topic of transparency despite the fact that many discuss its importance. For example, about 40% of depository institutions have registered to participate in a business to business information sharing program. In contrast, only about 14% of those in the securities/futures area participate in such a program. FinCEN’s reach in the area is, however, limited largely to broker-dealers, mutual funds, introducing brokers in commodities and futures commission merchants.

While strides in this regard have been made in recent years, the importance is critical. A good example is a recent discussion of the staff for FinCEN, the SEC, FINRA and banking regulators focused on offshore brokers attempting to use omnibus accounts for illicit purposes. Cross-regulatory awareness in an instance such as this is key. Coordination among regulators with respect to rule making and guidance is also very important.

The Deputy Director then turned to a discussion centered on the value of the information furnished to regulators to reinforce the point regarding transparency and information sharing. From the year the first SAR-SF was filed in 2003 through last year, the number of suspicious activity reports filed annually by those in the securities and commodities area has increased about eight-fold. While that is clearly significant, it represents only a small fraction of the nearly 2 million SARs filed each year.

The SARs filed are reviewed by about 13,000 agents, analysts and investigative personnel drawn from over 450 unique federal, state and local agencies. Each day FinCEN law enforcement, regulators and others query the data 30,000 time or about 7.4 million times each year. This data “is used to initiate investigations, expand existing investigations and identify trends and focus resources . . .” All of this makes it much more difficult for wrong doers to move money through the system.

In closing the Deputy Director emphasized the importance of those working in the securities and commodity areas with FinCEN pronouncements which are driven by the underlying focus of the statutes. That work is a “critical part of maintaining the integrity of our financial system, which is a critical part of maintaining the rule of law. That work . . . [helps guard against] illicit actors from terrorists, to rogue regimes, to drug lords, to kleptocrats, to human traffickers, to fraudsters ripping of the elderly and abusing our health care system. . .[it] saves lives directly and makes our lives better.”

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