by T. GormanPosted on Posted in SECActions

While the Commission has limited jurisdiction over municipal bonds it has, nevertheless, brought a series of actions in the area. For example, in 2016 the agency crafted a highly successful cooperation initiative, offering those involved in certain types of misconduct, a predictable outcome for self-reporting and cooperating. Over 80 settled actions resulted.

The current Enforcement focus on retail investors fits squarely within the municipal bond space. Allocations of the bonds are often prioritized for retail investors and/or advisers representing those investors. Since the offerings are frequently oversubscribed, prioritizing retail investors or their representatives helps insure that they can purchase the securities. A scheme crafted by those known as “flippers” – persons who buy the bonds and immediately sell them for a profit – undercut the system which deception and fraud that deprived retail investors of the opportunity to invest in the bonds while locking in profits for themselves. The Commission filed a settled action against one of those firms, its principle and others, two resolved administrative proceedings against participants in one scheme and is litigating against another firm, its principle and a dozen of its assistants.

SEC v. Core Performance Management, LLC, Civil Action 18-cv-8181 (S.D. Fla. Filed August 14, 2018) named as defendants the firm, an entity controlled by defendant James Scherr who directed the scheme, and four other securities industry veterans he hired: Deborah Dora, Sharlene Mestite, James O’Neil and Anadel Pinzon. Each has previously held various securities licenses and has years of experience industry experience.

Mr. Scherr hired the four securities industry veterans over a period of years, starting as early as 2003. The scheme was designed to deceive those selling the municipal bonds and defeat the checks built into the system to ensure that the securities were allocated to retail investors. For example, each of the securities veterans opened accounts under DBA names which were connected to CPM. Each typically had multiple accounts at the same brokerage firm and others, under different names with different registered representatives. Each arranged for the payment terms to be delivery versus payment or DVP which minimized the amount of capital required to implement the scheme. Each immediately sold or “flipped” the securities acquired at $1 above the offer price to others who could not obtain an allocation. Flipping the bonds in this manner resulted in the veterans, paid transaction based compensation, acting as unregistered brokers.

To ensure that each of the Defendants obtained the securities not only were multiple accounts and DBAs used, but also false zip codes while steps were taken in flipping the bonds to avoid detection. During the allocation process checking the zip code was a key step since it ensured that local purchasers were obtaining the bonds. The false zip codes thwarted this check. To avoid checks which monitored transactions in the bonds, allocations being flipped were often broken up and/or re-priced so it would not appear that the initial purchaser was in fact flipping the bond, something that would not have been typical of a retail investor. Using these and similar techniques permitted the defendants to participate in thousands of transactions.

Two other fraudulent devices aided defendants. One involved securing the assistance of a representative from one of the firms involved in the offerings. That representative knowingly placed fraudulent retail orders for CPM. Orders with fraudulent zip codes were used when placing the orders.

A second involved paying kickbacks to Kerry Morris, a former employee of NW Capital Markets Inc., an underwriting firm. The kickbacks were paid to secure the cooperation of Mr. Morris in purchasing recently issued municipal bonds from CPM. The complaint alleges violations of Exchange Act sections 10(b), 15(a) and 20(a), Securities Act sections 17(a)(1) and (3) and MSRB Rule G-17. To resolve the action each defendant consented to the entry of a permanent injunction, agreed to pay disgorgement with interest, a civil penalty and to be barred or suspended from the industry and to cooperate with the Commission. The settlements are subject to court approval. See also SEC v. RMR Asset Management Company (D. Cal. Filed August 14, 2018)(action against RMR Asset Management, a firm controlled by Defendant Ralph Riccardi, and 12 other individuals who had worked in the securities industry for years; the complaint is substantially similar to the one discussed above; the case is pending); In the Matter of NW Capital Markets Inc., Adm. Proc. File No 3-18640 (August 14, 2018)(proceeding naming as Respondents the registered broker dealer and its managing director and CCO; based on participating in the “flipping” of municipal securities; resolved by the firm with a consent to a cease and desist order based on Exchange Act sections 15(a)(1) and 15B(c)(1), a censure and the payment of a penalty of $40,000; by Mr. Fagan with the entry of a cease and desist order based on MSRB Rule G-27 a suspension from acting as a supervisor in the brokerage business and the payment of a $10,000 penalty); In the Matter of Kerry Morris, Adm. Proc. File No. 3-18639 (August 14, 2018)(proceeding against the registered representative for participating in the kickbacks detailed above; settled with the entry of a cease and desist order based on Securities Act section 17(a), Exchange Act sections 10(b) and 15(a)(1) and MSRB Rule G-17, a bar from the industry and the payment of disgorgement in the amount of $156,347.48, prejudgment interest of $22,661.82 and a penalty of $75,000).

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by T. GormanPosted on Posted in SECActions

The Commission ended last week with the filing of a case against an issuer in the plant extract business and its controlling shareholder centered on the sale of unregistered shares to three individuals and errors in company filings about the transactions. The focus on the sale of unregistered securities continues this week with the addition of unregistered broker charges in the latest case filed by the agency. SEC v. White, Civil Action No. 18-cv-61870 (S.D. Fla. Filed August 13, 2018).

The action centers on offerings of securities made by Aegis Oil, LLC and 7S Oil & Gas, LLC, conducted over multiple years. During that period investors were solicited and purchased shares in each firm. Specifically, beginning in October 2010, and continuing over about a five year period about 250 investors purchased Aegis securities, investing approximately $35 million through a continuous series of 15 different offerings. Similarly, between November 2014 and July 2016 7S, previously the field operator for the Aegis projects, offered and sold its securities in oil well projects. About $7 million was raised from 70 investors. The Commission previously brought actions against each firm based on the fraudulent sale of securities.

Defendants Alexander White and Paul Vandivier, neither of whom has ever been registered with the Commission or FINRA, helped manage the offerings. The securities sold by the two men and their teams were investment contracts. Generally, investors were told that the securities paid large returns and were safe investments. For example, pitch men told potential investors that the Aegis securities paid a return that ranged from 15% to as high as 200%. For 7S the range was 20% to to 30%. Commissions supposedly were not over 10% according to the information given to potential purchasers. The claims about the securities were exaggerated and untrue.

Mr. White managed a team of sales agents that solicited and raised money for Aegis and 7S. Generally, he supervised about a dozen sales agents with offices in several states. As a team leader he assisted with training for the agents and helped close the transactions which typically began with a telephone solicitation, followed by written materials.

Defendant White was paid 35% for sales by his team of Aegis securities and 28% to 35% for the 7S offering. In 2012 and 2013 he was paid about $2.9 million for the Aegis offerings. In addition, Mr. White was paid about $3.94 million in commissions from Aegis through CC Excel Energy, LLC, a now defunct company that he controlled. For the 7S offerings Mr. White was paid about $32,600 from July through October 2015 and another $197,000 through Conservative Surveyors, LLC, another firm he controlled. Mr. White paid out portions of the commissions to his team.

Mr. Vandivier also served as a team leader. In that role he carried out duties substantially similar to those of Mr. White. Mr. Vandivier was paid about $870,000 for his work and that of his team on the Aegis offerings and an additional $23,000 for the 7S offerings. The complaint alleges violations of Securities Act sections 5(a) and 5(c) and Exchange Act section 15(a)(1). The case is pending. See Lit. Rel. No. 24234 (August 13, 2018); see also SEC v Lewis, Civil Action No. 18-cv-61869 (S.D. Fla. Filed August 13, 2018)(action naming as a defendant Chad Lewis who also acted as an unregistered broker on the offerings described above; settled with a consent to the entry of a permanent injunction based on Securities Act sections 5(a) and (c) and Exchange Act section 15(a)(1); and the payment of disgorgement, prejudgment interest and a penalty in amounts to be determined by the court at a later date). See Lit. Rel. No. 24233 (August 13, 2018).

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