by T. GormanPosted on Posted in SECActions

Maker-taker fees and payment for order flow are much discussed topics. SEC Chair Gensler, had repeatedly talked about payment for order flow, for example, suggesting that he wants to reform the process. Whether and when that may happen is an open question. As the discussions continue, two friends devised a way to create what is essentially a riskless profit from the fees paid through the use of wash sales – riskless at least until the Commission uncovered the process.

SEC v. Gu, Civil Action No. 21-cv-17578 (D.N.J. Filed September 27, 2021) is an action which names two friends as defendants, Suyun Gu and Yong Lee. Defendants implemented a trading scheme in the first quarter of 2021 to utilize wash trades to take advantage of the maker-taker fees in the markets paid by some brokers.

First, Defendants used accounts at a broker that passed back to clients the rebate collected for providing liquidity by placing limit orders for out-of-the-money options. Second, Defendants would go to a different broker that did not pass along take fees to place orders on the opposite side of the market for the same put options. This trade completed the wash trade since it effectively canceled out the first trade. Defendants profited by keeping the rebate. By implementing the scheme repeatedly, Defendants were above to make over $1 million in profits in a short period. Stated differently, what were actually riskless wash trades made a profit.

To conceal their actions Defendants used the accounts of friends. Defendant Gu placed most of the trades. The complaint alleges violations of Securities Act Sections 17(a)(1) and (2) and Exchange Act Section 10(b). To resolve the case Defendant Lee consented to the entry of permanent injunctions based on the Sections cited in the complaint. He also agreed to pay disgorgement in the amount of $51,334, prejudgment interest of $515 and a penalty of $25,000. Defendant Gu, who placed most of the trades did not settle. That action is in litigation.

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by T. GormanPosted on Posted in SECActions

Offering fraud actions are one of the largest groups of cases brought by the Commission. The cases generally have a common theme – those running the scheme offer securities that are promised to be safe and profitable, a sure thing. It seems nobody can resist this pitch. In every instance the people the running the scheme were able to raise substantial amounts of money, most of which ends up in their pockets. Consider, for example, the two recent cases below. In one $66 million was raised while in the other about $250 million was obtained from investors. In each the quest for the quick, easy buck ended with huge investor losses.

SEC v. Sky Group USA, LLC, Civil Action No. 1:21-cv-23443 (S.D. Fla. Filed September 27, 2021) is an action which named as defendants the firm, a finance company, and Efrain Betancourt, Jr., the firm’s CEO. The company specialized in what are known as pay day loans – those targeted to persons in lower economic circumstances. Over a four-year period, beginning in 2016 the company sold promissory notes to investors that were supposed to pay high rates of return and were represented to be safe. Investor were told that the firm was profitable. About $66 million was raised from over 500 investors. In fact, the firm was not profitable. In fact, it made a number of Ponzi type payments and portions of the investor revenues were misappropriated. The scheme unraveled when investors were told that repayments were suspended. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending.

In the Matter of Resolute Capital Partners LTD, LLC, Adm. Proc. File No. 3-20597 (September 24, 2021) is an action which names as respondents the firm, Homebound Resources LLC, Thomas Powell, the owner of Resolute Capital, also a Respondent, and Stefan Toth, the owner of Homebound Resources, LLC, also a Respondent. Over a three year period, beginning in 2016, Respondents sold over $250 million in debt and equity securities in unregistered offerings based on working interest in oil and gas wells to retail investors. The disclosure was either insufficient or false. For example, Respondents provided projections with insufficient supporting facts regarding future production; made statements about potential tax benefits that were not available to certain investors; overstated cash reserves; and made incomplete disclosure regarding the potential use of the funds. The Order alleges violations of Securities Act Section 5(a), 5(c) and 17(a)(2) and (3) and Exchange Act Section 15(a). In resolving the proceedings, Respondents agreed to implement certain undertakings. In addition, each Respondent consented to the entry of a cease-and-desist order based each Securities Act Sections cited in the Order and, in addition the individual Respondents also consented to the entry of a cease-and-desist order based on the Exchange Act Section cited in the Order. Each of the individual Respondents also consented to the entry of an order barring them from: the securities business, serving in any capacity with an advisory firm or underwriter and from participating in any penny stock offering. Respondents Powell and Toth will each pay a penalty of $75,000; each firm will pay $225,000.

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