An Evolving Commission Ponzi Scheme Investigation

Ponzi schemes have been a key focus for the Commission’s enforcement program, at least since the days of Bernie Madoff. While there are variations as with all schemes, typically the fraudsters solicit investments for an entity with which they are affiliated. The sales pitch frequently promises quick profits and little else. As the investor money flows in, it often goes out just as quickly – payments are made to earlier investors who may become disgruntled over time unless they receive the promised “profits.” The Ponzi payments typically help conceal the scheme by quelling what may become dissatisfaction by disgruntled investors who have yet to see the promised profits.

The Commission cases often have parallel criminal actions. While the filing of parallel criminal charges can aid the Commission’s investigation, it can also result in a type of frozen chaos in which the agency case remain frozen pending the resolution of the criminal charges but actually evolving as the criminal cases move forward as evidence is developed that can and will be used in all of the cases. This seems to the situation with in the Commission’s latest case in this area, SEC v. Weinstein, Civil Action No. 3:23-cv-03848 (D.N.J. Amended Complaint filed July 12, 2024).

The creators of the scheme: Defendant Eliyahu Weinstein is the creator of a scheme that seems to have spawned not just the Commission’s case but a series of related criminal actions. He is currently a resident of the Monmouth County Correctional Institution in Freehold Township, New Jersey and a named defendant in U.S. v. Eliyahu Weinstein, No. 23 MJ-03038 (D.N.J.). Prior to being arrested he used the name Mike Konig in the scheme which spawned the cases here.

Initially Defendant Weinstein concealed two prior felony fraud convictions from investors and some of his confederates. As the Commission’s case moved forward, the parallel criminal cases emerged, charging members of the scheme and making deals based on cooperation. Those actions resulted at least in part in the new amendment to the Commission’s complaint. That complaint now includes eight defendants, some of whom have been named in parallel criminal cases. In addition to Mr. Weinstein, the amended agency complaint now names:

Joel L. Wittels, initially involved with the books and records. He has pleaded guilty in the criminal case listed above.

Aryeh Bromberg, a member of the board of directors of Optimus Investments, Inc. He has been primarily involved in raising capital for that firm and has been named as a defendant in one of the parallel criminal cases.

Joel L. Wittels has been involved with the bookkeeping for Optimus. He pleaded guilty in March 2024 to a three count information in one of the parallel criminal cases, U.S. v. Wittels, No. 24-cr-210 (D.N.J.).

Richard M. Curry has been primarily involved with raising capital for Tryon Management Group, Inc. It was formed to interact with the other entities in the scheme. He pleaded guilty in U.S. v. Curry, 23-cr-689 (D.N.J.).

Christopher J. Anderson, co-founder of Tryon He pleaded guilty in U.S. v. Anderson, 23-cr-684 (D.N.J).

Ala Mohamed Hattab controls certain entities that acted as brokers in the cases.

Shlomo Erez, a citizen and resident of Israel who currently resides in New Jersey. He controlled the investor funds in connection one of the entities involved. He is also a licensed attorney, but not in the United States, who became involved in money laundering charges.

Origins of the scheme: In late November 2021 Defendants Weinstein, Bromberg and Wittels, through Optimus, sought to rise money from investors. Supposedly, the funds were to finance lucrative transactions for Optimus involving the supposed purchase, distribute and re-sell of health care products. Two months later Defendants Anderson and Curry formed Tryon Management Group LLC. The purpose was to raise capital to invest in Optimus through the sale of short-term promissory notes issued by Tryon.

Over the next several months Defendants Weinstein, Bromberg, Wittels, Anderson and Curry sought to raise capital in connection with the sale of the Tryon notes. Investors were solicited using a series of false statements. As the investor funds were raised, they were used in part to make Ponzi type payments.

By August 2022 the actual identity of Mr. Weinstein began to emerge. Details regarding fraudulent actions in connection with deals being made by Optimus also began to emerge. Nevertheless, the deals moved forward. Defendants collectively raised funds from at least 150 Tryon investors. At least $38 million was raised from the investors.

Current status of cases: The Commission’s complaint, which has been updated with an amendment, reflects key developments in the cases. It currently alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 26049 (July 15, 2024). The criminal charges are evolving as the investigations move forward. Once those charges are finalized and resolved the Commission may also again amend its complaint. The agency will then move toward resolving the charges.

This Week In Securities Litigation (Week of July 15, 2024)

Last week the Commission filed three new actions. One centered on false statements, a second on insider trading and the third involved misrepresentations.

Be careful, be safe this week and stay cool.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 3 new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.

Offering fraud: SEC v. Iakovou, Civil Action No. 4:22-cv-00194 (MD Ga.) is a previously filed action which named as defendants George Iakovou, Vika Ventures, LLC and Penelope Zbravos. Defendants George Iakovou and Penelope Zbravos are from New York. They control Vika Ventures. The complaint claimed that over a three-year period, beginning in 2019, the two individual defendants, who are dating, and their company conducted an offering fraud centered on the sale of what were supposed to be pre-IPO shares. Investors were solicited using claims that the shares in the offering were of firms that were about to go public. Elaborate documents were created for review by potential buyer about the opportunity. In fact, there was no opportunity because Defendants never had any shares, just a fictitious story spun by two individual defendants who supposedly had over $80 million in assets under management. Investors entrusted Defendants with over $6 million dollars. The only actual investments made, unfortunately, were in the lifestyles of Mr. Iakovou and Ms. Zbravos. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Previously, the court entered a final judgment against Mr. Iakovou. He also resolved parallel criminal charges in January 2024. In that case he pleaded guilty to one count of conspiracy to commit wire fraud and was sentenced to 97 months in prison followed by three years of supervised release. Defendant Iakovou was also ordered to pay restitution of more than $5,958,505 and entered into a pretrial diversion agreement. The firm was ordered to pay a penalty of $8,929,120. Finally, although the Commission alleged that initially Ms. Zbravos did not know about the fraud, there were sufficient red flags over time that she must have learned about it. She consented to the entry of a permanent injunction based on the Securities Act Section 17(a)(3). The final judgement imposes disgorgement and prejudgment interest of $1,843,472.09. See Lit. Rel. No. 26048 (July 9, 2024).

Misrepresentations: SEC v. Amah, Civil Action No. 7:21-cv-06694 (S.D.N.Y) is an action which named as defendant, Evarist C. Amah, an investment adviser. The complaint alleged that Defendant ran a years-long scheme centered on providing clients with false information about his performance as an investment adviser. In September 2023, the court granted the Commission’s motion for summary judgment, concluding that Defendant was liable for fraudulently soliciting investments using positive projections while failing to disclose the losses. A final judgement was entered this week. It enjoins future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4)-8. The court also orderd the payment of disgorgement in the amount of $10,000, prejudgment interest of $1,617.82 and a civil penalty of $669,6667. See Lit. Rel. No. 26047 (July 8, 2024).

Insider trading: SEC v. Levoff, Civil Action No. 2:19-cv-054536 (D. N.J. July 2, 2024). Gene Daniel Levoff is a lawyer and the Director of Corporate Law from 2008 to 2013 and later the Senior Director of Corporate Law at a large, well-known Company. He also served on Company Disclosure Committee from 2008 through 2018 and at one point was the Chair. This position gave him access to inside information about Company. Over a five-year period, beginning in 2015 Mr. Levoff engaged in insider trading, using information obtained from Company to trade in its shares. Through a series of six trades Mr. Levoff had profits of, or avoided losses, which yielded him $382,480. At the time he had a net worth of over $30 million. In 2023 Mr. Levoff’s insider trading scheme ended. He was charged by the U.S. Attorney’s Office with insider trading. He pleaded guilty in December 2023. The Court sentenced him to four years of probation, 2,000 hours of community service and ordered that he pay a fine of $30,000 and forfeit $604,000. Mr. Levoff had a mental disorder which did not erase his liability. Mr. Levoff described his disorder as “self-sabotage.” While Defendant was wealthy, he did not live a lavish life-style. The Commission moved for summary judgement in its case following the resolution of the criminal action. Its motion was based on the guilty plea in the criminal case. Mr. Levoff also moved for summary judgment. The ultimate question for resolution, however, was not guilt or innocence but the amount of the penalty. Frequently, in cases such as this the Commission agrees that monetary remedies are satisfied by those paid in the parallel criminal case. Not here. The key question in this case became the amount of the penalty. The agency wanted three times the profits made/losses avoided or $1,147,440. The Court considered the standard factors – the egregiousness of the violations, the isolated or recurrent nature of them, the degree of scienter and the individual’s net worth. While the Court cited Mr. Levoff’s “mental disorders,” those were not determinative. Ultimately the Court issued a written opinion which seemed to focus on the high degree of scienter. While Mr. Levoff did have a mental disorder and made little money from the trades, he also served on the committee at the Company that “ensured compliance with securities laws and applicable trading restrictions,” the Court wrote. No credit from the criminal case offset the remedies ordered in the civil case. Mr. Levoff was ordered to pay a penalty of $1,147,440.

False statements: SEC v. Silvergate Capital Corporation, Civil Action No. 24 Civ. 4987 (S.D.N.Y. Filed July 1, 2024) names as defendants: the firm, a public company that filed an S-1 registration statement that went effective in late October 2019; Alan Lane who joined Silvergate in 2008 and became its CEO; Kathleen Fraher who joined the company in 2008 and became its COO; and Antonio Martino. A Canadian citizen who joined the firm in 2019 and later became the CFO. From November 2022 through January 2023 Defendants made false or misleading statements and engaged in other conduct that was misleading regarding the effectiveness of the Bank’s BSC or Bank Secrecy and Anti-Money Laundering or AML compliance programs. While Defendants claimed the systems were very effective in fact they were not. For much of the period the Bank had not conducted the necessary compliance testing. Key to the system was the Silvergate Exchange Network or SEN which, when tested, failed. Nevertheless, the Bank continued to publish positive statements regarding the system. The Bank had borrowed billions of dollars as the CFO knew, and would have to sell billions of dollars of securities to managing the debt. Yet Mr. Martino falsely disclosed that the institution would only sell a relatively small amount of securities. In an earnings release Mr. Martino approved the use of a method that miscalculated the potential losses. When regulators threatened an enforcement action in view of these misstatements and demands by the auditors for corrections, the firm announced it would liquidate. The complaint alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) as to the company which settled by agreeing to the entry of permanent injunctions based on the cited Sections. The firm will also pay a $50 million penalty. Defendants Lane and Fraher settled, consenting to the entry of permanent injunctions, a five-year officer and director bar and agreed to each pay a penalty of $250,000 each. Silvergate’s payment may be offset by penalties paid to the Board of Governors of the Federal Reserve System and/or the California Department of Financial Protection and Innovation. Mr. Martino was charged with aiding and abetting Silvergate’s violations of Securities Act Sections 17(a)(2) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). In parallel actions the FRB and DFPI announced settled charges against Silvergate. See Lit. Rel. No. 26044 (July 23, 2024).

FinCEN

Release: The Financial Crimes Enforcement Network or FinCEN issued a supplemental alert on Israeli Extremist violence in the West Bank on July 11, 2024 (here).

Australia

Release: The Australian Securities and Futures Commission issued the final rules and information for the financial accountability regime on July 11, 2024 (here).

BaFin

Announcement: The Federal Financial Supervisory Authority for Germany published a release on July 3, 3024, noting that while there has not ben a particularly extensive range of European Long-Term Investment Funds available, that is likely to change (here).

ESMA

Report: The European Securities and Markets Authority or ESMA published the Final Report on the Guidelines on Enforcement Sustainability Information and a Public Statement on the first application of the European Sustainability Reporting Standards on July 5, 2024 (here).

Hong Kong

Release: The Securities and Futures Commission of Hong Kong and the China Securities Regulatory Commission recently held their 16^th regular high level meeting on enforcement cooperation. The key point was on initiatives to strengthen collaboration, according to the July 12, 2024 statement (here)Remarks: Julia Leung delivered the keynote address at the recent Bond Commect Anniversary Summit 2024 on July 9, 2024 (here).

Singapore

Announcement: The Monetary Authority of Singapore announced the return of the FinTech Festival 2024 with a Spotlight on Artificial Intelligence and Quantum Technology, July 8, 2024 (here).