The retail investor focus of SEC Enforcement continued in this holiday shortened week. First, there was an action based on a microcap fraud. Then a case involving the so-called “blockchain evangelist” and a crypto currency fraud. Another case focused on touting a microcap stock. A fourth action centered on a registered representative who used his long established client relationships to create a mini-Ponzi scheme, fleecing retail investors who trusted him while lining his own pockets at their expense. Finally, as the week drew to a close an insider trading case was filed against an investment banker.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 4 civil injunctive cases and 1 administrative proceeding, excluding 12j and tag-along proceedings.
Insider trading: SEC v. Jung, Civil Action No. 1:18-cv-04811 (S.D.N.Y. Filed May 31, 2018) is an action which names as a defendant Woojae Jung, an investment banker based in San Francisco. From February 2015 through July 2017 Defendant accessed inside information of the firm and used it to trade. Over the period he had over $140,000 in illicit trading profits. To try and conceal the transactions Mr. Jung placed the trades through the account of a friend who lived overseas. The complaint alleges violations of Exchange Act sections 10(b) and 14(e). The case is pending. A parallel criminal action was filed by the Manhattan U.S. Attorney’s Office. See Lit. Rel. No. 24153 (May 31, 2018).
Offering fraud: SEC v. Fagartanis, Civil Action No. 2:18-cv-03250 (E.D.N.Y. Filed May 30, 2018). Defendant Steven Pagartanis has been a registered representative at various Commission registered broker-dealers for almost thirty years. Recently he has been associated with Lombard Securities, Inc. at its Setauket, New York branch office. Over a five year period beginning in 2013, Mr. Pagartanis solicited and obtained a total of $8 million from nine retail investors who were long standing clients. Investors were told that they would receive returns of 4.5% to 8% annually. The investments were paid with checks made payable to Genesis, supposedly for a land deal investment. None of the investor money was ever invested, according to the complaint. To the contrary, Defendant transferred the investor capital to his personal bank account. About $1.8 million was used to make monthly payments back to the investors. In early 2018 Defendant stopped making payments to the investors. Requests to reinstitute the payments or for a return of the investment were ignored as were inquiries by the brokerage firm and FINRA which then barred him from the securities business. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The Suffolk County District Attorney’s Office filed criminal charges against Mr. Pagartanis.
Virtual currencies: SEC v. Titanium Blockchain Infrastructure Services, Civil Action No. CV18-4315 (C.D. Cal. Unsealed May 29, 2018). Named as defendants are two firms and their owner, Michael Stollery. The firms are Titanium Blockchain Infrastructure Services, Inc. or TBIS and EHI Internetwork and Systems Management, Inc. or EHI. By late October 2017 Defendant Stollery, calling himself the “blockchain evangelist,” was using social media to tout The Titanium BAR Token for an ICO to commence in January 2018. The idea was to essentially “crowdfund” and raise money to create products and services for the TBSI platform. As a precursor to the ICO, a pre-sale campaign was launched. One distinguishing feature of this offering was supposed to be the use of the funds – they were to be used for the development of an IT platform. Investors would share in TBIS’ future earnings and in the appreciation of the BAR digital assets. Investing in the BAR was comparable to buying Google stock at a very early stage in the history of that firm, according to Mr. Stollery. The White Papers for the ICO – there were several versions – stated that the supply of BAR would be 60 million digital assets. A list of 25 firms was included in the White Papers. The firms identified were all well known companies such as Apple, General Electric, Pfizer and The Federal Reserve. Logos for a number of the firms were depicted. The claims regarding these firms were bolstered by testimonials listed on the website. The representations about the relationships with the firms were false. By February 2018 Mr. Stollaire began receiving cease and desist letters from the companies cited. By late April 2018 Defendants shifted to trading. They announced the retention of a person who would promote the coins as one of the world’s “largest crypto markets.” In May 2018 TBIS noted that they expected the coins to be listed on a “well known exchange soon.” The assets were never registered with the SEC. The complaint alleges violations of Securities Act sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act section 10(b). The court granted a freeze order and appointed a receiver for the firms at the time the complaint was unsealed.
Touting: In the Matter of Alexander Kon, Adm. Proc. File No. 3-17674 (May 29, 2018). Respondent was the sole member of 007Stockchat LLC, an entity through which microcap stocks were promoted. In early 2014 Respondent entered into an arrangement with Issuer A’s former CEO under which he would, on April 14, 2014, run a marketing campaign on the issuer’s stock on four websites. Mr. Kon was paid $25,000 for the promotions. In the postings there was a disclaimer which stated that “third party Casey Cummings” had paid for the postings. Mr. Cummings was the son of the former CEO, although that was not disclosed. The Order alleges a violation of Securities Act section 17(b). To resolve the proceedings, Respondent consented to the entry of a cease and desist order based on the section cited in the Order. In addition, he agreed to be suspended from participating in any penny stock offering for a period of twelve months after which he may resume participating in such offerings without further action by the Commission. Respondent will also pay disgorgement of $25,000, prejudgment interest of $332 and a penalty of $20,000.
Microcap fraud: SEC v. Nielson, Civil Action No. 18-cv-1217 (D.D.C. Filed May 24, 2018). Defendant Niel Nielson, a U.S. citizen residing in London, became the president of E-Waste Systems, Inc. or EWSI in June 2011. He also became the firm’s majority shareholder and EWSI became a reporting company under Exchange Act section 12(g). Mr. Nielson and EWSI announced a reorganization and a new business focus at the end of June 2011. The firm intended to enter the global e-waste recycling and electronic asset recovery business through a series of high-quality acquisitions. The investing public learned about its first deal by late October, 2011. All of the capital stock of Tech Disposal, Inc., a Columbus, Ohio based firm, would be acquired. The acquisition never became profitable. Nevertheless, the firm continued to announce acquisitions in the U.S. and later abroad. None generated cash flow for the firm – they were little more than sham transactions. Throughout the period of these announcements Mr. Nielson had been acquiring firm shares. In December 2011 he became the majority shareholder of the firm after acquiring 62.5 million shares. Between July 2012 and April 2014 he acquired an additional 17.5 million in lieu of salary. In July 2013 Mr. Nielson acquired an additional 50 millions shares for extinguishing certain obligations. Between January 25, 2013 and June 27, 2014 Mr. Nielson sold over 6.9 million shares of EWSI for proceeds of just over $181,000. The complaint alleges violations of each subsection of Securities Act sections 5 and 17(a) and Exchange Act sections 10(b), 13(a), 13(b)(5) and 16(a). The complaint is pending. See also SEC v. Johnson, Civil Action No. 18-cv-364 (S.D. Ohio Filed May 24, 2018)(action against Carolyne Johnson, former Secretary and Treasurer of EWSI; settled with the entry by consent of a permanent inunction based on Securities Act sections 17(a) and Exchange Act sections 10(b), 13(b)(2)(A) and 13(b)(2)(b) and the entry of an officer and director bar and penny stock bar); see also the cooperation agreement entered into with Arthur Kaplan discussed here. Lit. Rel. No. 24151 (May 25, 2018).
False documents: U.S. v. Johnson (S.D.N.Y.) is an action which names as a defendant Terry Johnson who ran an accounting firm that specialized in auditing public companies. When the SEC requested voluntarily document productions and later issued a subpoena for documents related to certain audits he created materials for those that did not exist. Mr. Johnson pleaded guilty to falsifying records furnished to the SEC. The date for sentencing has not been set.
New York AG
Misappropriation: New York v. Mustaphalli, No. 355 (S.Ct. N.Y.) is an action which charged Dean Mustaphalli, a former Citigroup adviser, with grand larceny, forgery and fraud. The chargers are based on allegations that the adviser bilked a group of largely elderly clients out of about $11 million which he took and invested in his hedge fund without their permission. The transfers were effected by using forge documents. In 2012 for example, Mr. Mustaphalli brought in 22 new clients with $5 million using forged documents. By the end of 2015 about 80% of the funds were lost. The case is pending
Suitability: The Securities and Futures Commission found, after an inspection of securities and futures dealer Noah Holdings (Hong Kong) Limited that the firm failed to comply with various regulatory requirements regarding obligations to know your client, due diligence, suitability assessment and sales supervision and controls. Specifically, the firm’s risk profiling questionnaires were inadequate to properly assess the clients’ risk appetite and tolerance, it failed to ensure the risks were properly assessed and the firm sold clients potentially unsuitable investment products as a result of its failures.