by T. GormanPosted on Posted in SECActions

Fraudsters typically craft a sales pitch for would be investors designed to entice them into turning over their money for a claimed investment that only later becomes known as a fraudulent scheme. Earlier this week, for example, the Commission filed action focused on Syed Arham Arbab, a college graduate now serving 60 months in federal prison for conducting a multimillion dollar fraudulent free riding scheme. There the inducement for investors was trading at no cost, using the capital of the broker-dealer who makes instant funds available on account opening in the hope of gaining new clients and profits.

In offering fraud and Ponzi schemes cases the inducement varies but frequently centers on securing returns which are typically most difficult to obtain. There those who implement fraudulent schemes frequently promise, for examples, returns that are not typically available except in rare circumstances. At times such an offer warns off a potential investor. In some instances promising unrealistic returns may in fact warn possible investors off. In other instances, unfortunately, it attracts would be investors who only later come to realize that the sales pitch was not only unrealistic but false. That is the case in the Commission’s most recent case in this area. There investors were promised large returns. SEC v. Igbara, Civil Action No. 1:22-cv-06669 (S.D.N.Y. Filed November 2, 2022).

Defendant Jebara Igbara is the founder of Halal Capital, LLC, a private investment fund. It was supposed to focus on making Quran-compliant investments. In addition, when Defendant Igbara began soliciting investors Muslim investors October 2019 he promised that his business expertise would result in returns on an analyzed basis of about 40% or more within a year. The fact that the investments were made in a manner that was compliance with his, and those of the investors, interpretation of the Quran facilitated the sales pitch.

Less than one year after initiated his scheme Defendant had raised about $8 million from over a dozen different investors. None of the investor money was invested. To the contrary, the funds were misappropriated by Defendant. The investor funds were used for his own expenses or, in some instances, to make Ponzi like payments.

The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Eastern District of New York announced criminal charges against Defendant. The SEC’s Office of Investor Education and Advocacy “reminds investors to thoroughly research investments and warns them about making investment decisions based solely on shared affinity,” according to a press release dated November 2, 2022, discussing the case.

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by T. GormanPosted on Posted in SECActions

Fraudulent schemes often key to inducing investors to place their trust in the fraudster. While it often seems simple to avoid the would be fraudster when standing back and reading court pleadings and other documents about a fraud, it clearly is not – even for market professionals. For example, the typical offering scheme centers on investors placing their trust in the person or persons soliciting them to invest, a question often resolved based on the attractiveness of the inducements.

Free-riding schemes would seem to be more difficult to execute because the target is typically an experienced market professional convinced to make his or her firm’s credit available to create the opportunity for a “free ride” through a series of quick initial trades. Yet both types of schemes are frequently effective, a point well illustrated by the lead defendant in SEC v. Arbab, Civil Action No. 1:22-mi-99999 (N.D. Ga. Filed October 31, 2022) who operated a free riding scheme just after completing a Ponzi scheme and as the Commission filed its first action against him.

The complaint in the most recent enforcement action against Mr. Arbab names as defendants: Syed Arham Arbab, a graduate of Georgia State University who is currently serving a 60 month in federal prison for securities fraud; Tomas Javier Jimenez, a friend of Defedant Arbab who at the time here was a cook; Blake Douglas McKinney, also a friend of Mr. Arbab who is now pursuing a degree at the University of Michigan-Dearborn; Mushfiqur Rahman, a friend of Defendant Arbab’s father who is now pursuing a degree at Hunter College; John Ryan Shows who attended UGA with Defendant Arbab; and William Carl Spagnoli who attended UGA with Defendant Arbab.

Over a three-year period, beginning in May 2019, Defendants Arhab, Jimenex, McKinney, Shows and Spagnoli engaged in a free riding scheme. Ultimately the scheme generated millions in profits for defendants; the broker-dealers were left with losses.

The scheme was created by Defendant Arbab. Not only did he run his own scheme, Mr. Arbab also solicited dozens of individuals through group text messages and social media to engage in this fraud. In doing this he patiently explained the mechanics of the scheme. This included the fact that there is a delay between the time the trade is placed, and the electronic transfer of funds used to open the accounts is found to be insufficient.

Defendant Arbab and his associates perpetrated their scheme by focusing on two broker-dealers. Each afforded “instance credit” to certain deposits. It is that instance credit which Arbab and his co-defendants, as well as people he solicited, utilized to make the scheme work. The instance credit permitted immediate trading before it was discovered that in fact the electronic transfers did not cover the trades. Overall Mr. Arbab and his co-defendants initiated over $2 million in fraudulent electronic fund transfers into various accounts used during the scheme. Ultimately this resulted in at least $7.8 million in profits while leaving losses of at least $146,660. The other Defendants collectively accounted for fraudulent EFTs of nearly $1.3 million, withdrawn profits of over $3.3 million and broker-dealer losses of $75,124.

The free-riding scheme began on the heels of a Ponzi scheme orchestrated by Mr. Arbab. Beginning in May 2018 Defendant Arhab operated a Ponzi scheme near the University of Georgia campus. In late May 2019 the Commission filed an enforcement action centered on the scheme against Mr. Arbab. SEC v Arbab, Civil Action No. 3L19-cv-00055 (M.D. Ca. Filed May 31, 2019). Subsequently, he was named as a defendant in a parallel criminal action. U.S. v. Arbab, No. 3:19-cr-00051 (M.D. Ga. Filed October 8, 2019). Mr. Arbab is currently serving a sentence of 60 months in prison.

The Commission’s current complaint against Mr. Arbab alleges violations of Exchange Act Section 10(b). The case is pending.

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