In the days leading up to the Memorial Day holiday, the Commission filed a series of enforcement actions that focused on offering frauds and market manipulation. For example, one involved an offering fraud tied to a crypto currency. Another was based on a multi-faceted offering fraud the ran for years. A market manipulation centered on a supposed cannabis firm. Another market manipulation case centered on six manipulations conducted by a band of individuals who were largely securities law recidivists.
Finally, DOJ officials delivered remarks which seemed to carry political messages. One set of remarks decried the use of what were called “nation-wide injunctions” which are interfering with the administration’s policies. Another focused on the “overuse of agency guidance documents.”
Alert: The Commission, NASSA and FINRA issued a Senior Safe Act Fact Sheet to promote greater reporting of suspected senior financial exploitation (here).
MOU: The Commission and the CFTC Participated in the Signing Ceremony for the IOSCO Enhanced Multilateral Memorandum of Understanding Concerning Cross-Border Enforcement (here).
Remarks: Attorney General William P. Barr delivered remarks on Nationwide Injunctions to the American Law Institute, Washington, D.C. (May 21, 2119). The AG decried the use of nationwide injunctions that are blocking the President’s agenda (here).
Remarks: Principal Deputy Associate AG Claire McCusker Murray delivered remarks at the Compliance Week Annual Conference, Washington, D.C. (May 20, 2019). In her remarks Ms. McCusker Murray discussed the importance of compliance and the “overuse of agency guidance documents” which create a problem since they are not law (here).
SEC Enforcement – Filed and Settled Actions
The Commission filed 6 civil injunctive actions and no administrative proceedings this week, exclusive of 12j and tag-along actions.
Pyramid scheme: SEC v. Pacheco, Civil Action No. 5:19-cv-958 (C.D. Cal. Filed May 22, 2019) is an action which names as a defendant Daniel Pacheco, the sole member of IPro Solutions LLC and IPro Network LLC he formed in 2017. Over a two-year period beginning in January 2017 Defendant his IPro raised over $26.5 million selling IPro packages. Those packages were supposed to provide instructions on how to convert what were called points into digital assets. Those points were awarded as a rebate on the purchase of packages and as a separate bonus for the recruitment of others. The digital currency was called PRO Currency. Defendant told investors that IPro would create an ecosystem for e-commerce that would be conducted in PRO Currency based transactions. This would create a long term value. In fact, IPro was a pyramid scheme. Mr. Pacheco misallocated and misappropriated substantial amounts of investor funds. IPro thus lacked the funds to pay promised commissions and eventually collapsed. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) along with Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24478 (May 23, 2019).
Offering fraud: SEC v. Morgan, Civil Action No. 19 Civ 661 (W.D. N.Y. Filed May 22, 2019) is an action which names as defendants Robert Morgan, a residential and commercial real estate developer, Morgan Mezzanine Fund Manager LLC, the manager of three Note Funds, and Morgan Acquisition LLC, a firm used to put properties Mr. Morgan planned to acquire under contract. Over a five year period, beginning in 2013, Mr. Morgan raised over $110 million from investors through the sale of securities. About $80 million of that amount was from investors in four sets of Note Funds. Three of those funds were managed by Fund Manager and one by Morgan Acquisitions. Investors in the Note Funds were told that their capital would be used to make unsecured subordinated loans to affiliated entities. Those investors were also told that the target return for the Notes Funds managed by Fund Manager was 11 % while those managed by Morgan Acquisitions were guaranteed by Mr. Morgan personally. Over 200 investors and entities in 17 states invested. Contrary to those representations, investor funds were used to facilitate Ponzi scheme type payments and to help pay-off prior loans. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b) along with control person liability. The action is pending. See Lit. Rel. No. 24477 (May 23, 2019).
Offering fraud: SEC v. Aura, Civil Action No. 1:19-cv-04780 (S.D.N.Y. Filed May 23, 2019) is an action which names as defendants Savraj Gata-Aura and Core Agents International, LTD. Defendant Aura is a U.K citizen who served as a representative of Bar Works Inc. Core Agents is a U.K. corporation that Mr. Aura controlled. This action follows one brought by the U.K. Financial Conduct Authority against Renwick Haddow based on a fraudulent investment scheme. The Commission also filed an earlier action captioned SEC v. Haddow, Civil Action No. 17-cv-04950 (S.D.N.Y.) alleging investment fraud. A parallel criminal action was filed by the U.S. Attorney’s Office. The action here essentially alleges aiding and abetting the fraudulent schemes in those matters. During the period 2015 to 2017 defendants and/or their sales agents raised over $10 million from at least 100 investors for fraudulent investments. All of those investments are now worthless. The defendants in this case were paid $2.9 million for their efforts. The complaint alleges aiding and abetting violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The action is pending. See Lit. Rel. No. 24479 (May 23, 2019).
Offering fraud: SEC v. Natural Diamonds Investment Co., Civil Action No. 19-80633 (S.D. Fla. Filed May 13 2019). A years long fraud built on three different investment funds conducted by Defendants Jose Aman, Harold Seigel and Jonathan Seigel, according to the complaint. The vehicles for the fraud were Natural Diamonds, Eagle Financial Diamond Group Inc., and Argyle Coin, LLC. Beginning as early as May 2014, and continuing to this year, the individual Defendants used the entity Defendants to raise about $30 million from approximately 300 investors through the sale of securities in the form of promissory notes and investment contracts tied to each entity Defendant in a series of offerings. Those offerings began with Natural Diamond investment contracts which represented that investor funds would be used to purchase high grade diamonds. Investors would receive 2% simple interest for 24 months. At the end of the period the investor’s principal was supposed to be returned. Overall about 133 investors put up almost $1.8 million to secure the unregistered securities of the company. During the period portions of the investor funds were transferred to the other entity Defendants. Portions of the investor funds were also diverted to other interests of the individual Defendants. By February 28, 2019 Natural Diamonds bank accounts had negative balances of about $120,000. The Eagle offerings began in March 2015 and also continued up to this year. Investors were to have a one-time partnership with Eagle to cut, polish and sell diamond for a profit for a period of 18 months. The scheme essentially operated like the first. Portions of the investor funds were comingled with capital raised by the other two entity Defendants. Portions were used for other purposes by the individual Defendants. By February 28, 2019 the Eagle bank accounts had a combined balance of $155.26 despite the millions of dollars that had traveled through them. Finally, the Argyle Coin offering began in December 2017. The investments were supposed to be in cryptocurrency token called “RGL.” The token was backed by what are known as “fancy colored diamonds,” according to the sales pitch. As with the typical crypto coin offering, a “White Paper” was used to tout it. Under the terms of the offering investors were to receive an 8% return on principal after 12 months and an additional 2% return at the end of 24 months if they elected to extend the investment. The White Paper detailed the manner of the offering, using typical crypto currency terms. The results were the same as with the other investment vehicles used by the individual Defendants. The claims were not accurate – the coins were not backed by diamonds. The investor funds were comingled with those from the other entity defendants. Ultimately the investor funds were dissipated and by February 28, 2019 the Argyle Coin bank account had a balance of $376.53. 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 case is pending. See Lit. Rel. No. 24473 (May 21, 2019).
Manipulation: SEC v. Osegueda, Civil Action No. 2:19-cv-04348 (C.D. Cal. Filed May 20, 2019) is an action which names as defendants David Osegueda, Ishmail Ross, Zachary Logan and Jessica Snyder. The complaint centers on Green Cures & Botanical Distribution, Inc. The firm was supposedly in the cannabis and beverage business. Mr. Osegueda and a partner acquired a shell which they named Green Cures in February 2014. Efforts to make a profit in the cannabis business over the next year failed. By December 2015 Defendant Osegueda who had been joined by Mr. Ross, met with Zachary Logan, supposedly a stock expert. He was to assist in making a market for the shares of Green Cures. Over the next eighteen months the three men deposited their shares in the firm with a broker. The documents used represented that Green Cures was not a shell company, that it was current in its submissions to OTC Link where the shares were traded and that Messrs. Osegueda, Ross and Logan, who collectively controlled the firm, were not affiliates of the company. Each of the representations was false. In January and February 2014, the four Defendants organized a promotional campaign for the stock. It included false and misleading press releases issued without the knowledge of Green Cures’ CEO – a figure head – email blasts and text messages as well as posts on Twitter and InvestorsHub.com message board. The campaign that began in March continued until November 2016. By that point Messrs. Osegueda, Ross and Logan had sold their stock and obtained proceeds of, respectively, $857000, $887,000 and $164,000 based on the dramatic rise in the share price that followed the promotions. 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 case is pending. See Lit. Rel. No. 24472 (May 20, 2019).
Manipulation: SEC v. Farmer, Civil Action No. 4:19-cv-01774 (S.D. Tx. Filed May 15, 2019). The Defendants in this action are: Andrew Farmer, Eddie Austin, Jr., Scott Sieck, Carolyn Austin, and John Brotherton.Most of the defendants are recidivist securities law violators. The issuers involved in the action are six OTC Link traded firms that engaged in massive distributions of their stock, generally in 2013 to 2014. The manipulation took place over a six year period beginning in May 2011. It was conducted in virtually text book fashion. First: It was coordinated through frequent meetings in a windowless “war room” with the use of encrypted communications. The effort began by securing secret control of much of the float for each issuer and installing controlled management. The stock was then deposited with a number of entities that served as alter egos for the group. Second: The markets were conditioned for the coming manipulation through a series of matched and controlled trades. The illusion of an active, trading market for the shares of each firm was thus created. Third: Defendants arranged for massive, false publicity about each company and its shares centered on a story created for each. The campaigns typically used email blasts and “click adds.” As the public purchased shares in the wake of the false PR, the share price rose. Fourth: Defendants sold their shares into the manipulated market at artificial prices. By the end Defendants had reaped over $11 million from unsuspecting investors who were defrauded. The complaint, filed two years after the end of the scheme, alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24470 (May 17, 2019).
Manipulation: SEC v. Appel, Civil Action No. 18-cv-3200 (E.D. Pa.) is a previously filed action which named as a defendant Howard M. Appel. The Court, on May 10, 2019, entered a final judgment by consent against Mr. Appel. The judgment included permanent injunctions based on Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 9(a)(1) and 10(b). It also imposes permanent penny stock and officer-director bars and directs the payment of $3,868,699 in disgorgement and $487,248 in prejudgment interest. The judgment is based on a manipulation conducted by Defendant and others in which Mr. Appel obtained over $3 million in profits by selling his shares into a manipulated market he helped create. See Lit. Rel. No. 2445 (May 22, 2019).
The World Bank debarred Jiangsu Zhongtian Technology Co., Ltd., a Chinese fiber optic Cable manufacturer and distributor, for 20 months for “fraudulent practices.” The firm misrepresented its past contract experience in bidding on the $210 million Lusaka Transmission and Distribution Rehabilitation Project in Zambia. The project was designed to improve the electricity transmission and distribution in the area. ZTT’s shares are listed on the Shanghai Stock Exchange. The firm has committed to the development of an integrity compliance program consistent with the principles in the World Bank Group Integrity Compliance Guidelines.
Offering fraud: U.S. v. Fujinaga, No. 2:15-cr-00198 (D. Nev.) is an action in which Edwin Fujinaga was sentenced to serve 50 years in prison followed by three years of supervised release and ordered to pay over $1.1 billion in restitution and forfeit $813,297,912.65. The sentence follows a five week trial in which Mr. Fujinaga was found guilty on eight counts of mail fraud, nine counts of wire fraud and three counts of money laundering in connection with running a Ponzi scheme. Specifically, since 2013 Defendant has fraudulently solicited over $1 billion in investments through MRI International, Inc. from residents of Japan who transmitted the money to Las Vegas. The funds were suppose ed to be used to purchase medical claims. In fact Defendant misappropriated it.
Offering fraud: U.S. v. Falci, No. 3:17-cr-00228 (D.N.J.) is an action which names Vincent Falci as a defendant. Previously, he was convicted on three counts of wire fraud and one count of securities fraud following a two week jury trial. The Court imposed a 15 year sentence this week. The action alleged that Mr. Falci ran two investment funds which he looted. One was called Saver Funds. It supposedly invested in tax liens which generated high returns. Interests were sold to friends, family, policemen, firemen and retirement funds. About $10 million was raised. Over 200 investors put money in the fund. Later he developed the Victor Funds for wealthier investors. This fund raised about $20 million. In marketing each fund Mr. Falci misrepresented his experience and the use to which the investor funds would be put – much of it was misappropriated.
Manipulation: The Securities and Futures Commission announced that Tsoi Wan pleaded guilty to three charges of manipulating the calculated opening price of the Hang Seng Index futures contracts. He was fined $60,000. The SFC concluded that Mr. Tsoi manipulated the contracts by placing various orders during the morning pre-market opening period on June 10, 2013, August 21, 2013 and September 4, 2013.
Insider dealing: The Securities and Futures Commission banned Wang Can, a former licensed representative of China Galaxy International Securities for 30 months. Mr. Wang became privy to information regarding the acquisition of Linmark Group Ltd. in November 2014 when he assisted his firm in preparing pre-engagement documentation for a potential client. He then purchased shares of Linmark in his friend’s account. The shares were sold two days after the deal announcement at a profit of $7,800. Mr. Wang failed to disclose his personal trading to his employer. A fine equal to the amount of the trading profits was also imposed.
Manipulation: The Serious Fraud Office acknowledged that it has opened an investigation with Dutch authorities into trading in Biodiesel fuel by Greenergy and others (May 16, 2019).
FCPA Institute: On June 21 and 22, 2019, Professor Mike Koehler will conduct the FCPA Institute at the Offices of Dorsey & Whitney LLP in Minneapolis, Minnesota. The Institute provides a unique learning experience for those seeking to elevate their knowledge of the Foreign Corrupt Practices Act. Professor Koehler is one of the foremost scholars on the FCPA and conducts an interesting and most informative program. The program is live in Minneapolis and also webcast. You can obtain more information about the program and register here.