by T. GormanPosted on Posted in SECActions

Municipal bonds are an important area in which few cases are typically filed. Frequently, when a case is filed it focuses on the financial information included in an offering which is at times not updated as required. Another key area, however, involves “flippers,” that is, those who improperly obtain bonds in an offering not for an investment but to sell to others. Offering procedures for municipal bonds typically prioritize investors over flippers. Yet there are increasing numbers of cases where the offering procedures are thwarted. This week the Commission brought another case based on flippers.

In the Matter of Kenneth G. Bredrich, Adm. Proc. File No. 3-20569 (September 17, 2021) is an action which named as a respondent the registered representative. He was employed at Major Broker. The internal procedures of Major Broker required that municipal bond sales be prioritized to allocate bonds per a standard methodology that prioritized customers and dealers over flipper absent different instructions from issuers. Over a four-year period beginning in 2014, however, the firm in a number of instances failed to follow the procedures. Indeed, at times Major Broker used the flippers to circumvent issuer priorities. As a result, the Order alleges violations of Exchange Act Section 15B(c)(1). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order and to a censure. In addition, Respondent shall not act in the securities business or negotiate the purchase and sale of municipal bonds for a period of six months. He will also pay a penalty of $30,000. See also In the Matter of Jaime I. Durando, Adm. Proc. File No. 93044 (September 17, 2021)(Respondent is also employed by Major Broker and engaged in essentially the same conduct as above; resolved with a cease-and-order based on the same Section and the payment of a $25,000 civil penalty).

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by T. GormanPosted on Posted in SECActions

Crowdfunding was a key part of the 2012 JOBS Act, passed under President Obama. The idea was to facilitate raising small amounts of capital for start-up operations. One of the key concerns with the Act has been ensuring that there is adequate disclosure and preventing fraud. To date the Commission has brought few enforcement actions involving the crowd funding portals.

Earlier this week, however, the agency filed an enforcement action centered on the operation of a portal that supposedly was tied to hemp. Unfortunately, the facility seemed to operate in the same fashion as many offering fraud cases. SEC v. Shumake, Civil Action No. 2:21-cv-12193 (E.D. Mich. Filed September 20, 2021).

Named as defendants in the action are: Truecrowd, Inc. dba Fundanna, a Commission registered portal, based in Chicago which hosted crowdfunding offerings for Transatlantic Real Estate and 420 Real Estate — a real estate entity that focused on hemp properties; Vincent Petrescu, a CPA and the founder and CEO of Truecrowd; Robert Shumake, a convicted felon who violated the terms of his probation by participating in this venture; Willard Jackson; and Nicole Birch, an attorney.

Mr. Shumake was the moving force behind the two Truecrowd offerings on which this case is based. Transatlantic and 420 Real Estate raised funds through the offering portal. Defendant Petrescu was responsible for selecting which issuers could use the platform to conduct offerings. Accordingly, under the applicable regulations he served as the gatekeeper for the offerings.

Defendants Shumake, Birch and Jackson sold the securities of the entity defendants through the portal. Defendants Shumake and Birch sold shares Transatlantic from September 2018 through May 2019. Defendants Shumake and Jackson sold the securities of 420 Real Estate through the portal from May 2019 through June 2020.

Investors for each of the offerings were assured that the investments would provide substantial profits tied to the cannabis industry. The profits would flow from acquiring real estate and leasing it to firms engaged in the cannabis industry.

Unfortunately for investors, the sale pitch was false. Mr. Shumake’s criminal record was not disclosed. While the funds were supposed to be dedicated to acquiring real estate to lease to the cannabis industry, the claim was not true. Rather, much of the investor money was diverted to the personal use of Defendants. The complaint alleges violations of Securities Act Sections 4A(a)(5), 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending.

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