Unregistered Brokers – Another Key to Protecting Retail Investors

Frequently the retail investor focus of the Enforcement Division results in offering fraud actions – those in which investors are convinced to purchase shares in fraudulent offerings of securities. Another facet of the retail investor focus, however, can be seen in the unregistered broker actions. In those cases persons soliciting retail investors are not properly registered with the Commission to sell securities. Those acting in this prohibited role are also frequently unscrupulous, marketing the securities through improper means. The results in these cases are often the same as in the offering fraud actions – the retail investor is defrauded. That is precisely the case with the Commission’s most recent action in this area. SEC v. Bongiorno, Civil Action No. 1:20-cv-00469 (N.D. Ohio Filed Feb. 28, 2020).

This action centers around the sale of shares in two microcap firms by Defendants Christopher Bongiorno and Jason Arthur. Over a period of several years ending in 2019 the two men received over $2.5 million in commissions for selling shares of the two issuers despite not being properly registered with the Commission and while using fictitious names and making misrepresentations.

The sales began in September 2015. At that time Mr. Arthur was introduced to the president of a microcap issuer based in Florida whose shares were traded in the over-the-counter market. Mr. Arthur claimed to be Jim Gates – a fictitious name. Later when the President ran the name through FINRA’s broker-check at the urging of Mr. Arthur, the results showed a broker with the same name.

President was anxious to raise capital through the sale of additional shares. He retained “Jim Gates” or Mr. Arthur to do the job. Defendant Arthur retained his Mr. Bongiorno to assist. He used the fictitious name Jim Powers. Again, President was urged to research Mr. Powers.

Subsequently, Defendants began cold calling leads they generated through a website and other sources. Prospective investors were told that the firm made LED lighting that cost less to produce and operate and that the firm was about to expand. Some investors were also told that the caller was paid a salary. The representations were false. In fact, Defendants were paid about 40 to 50% of the investor proceeds.

The shares of the second microcap issuer were marketed and sold by Defendants using similar techniques. To market the shares of this Canadian firm, Defendants Arthur and Bonglorno employed the same fictitious names. Again the potential investors were called and pitched about the value of the shares. The value was tied to a claimed cost efficient process for extracting oil from reclaimed oil sands. The process supposedly generated a higher rate of return on investment.

Portions of the investor funds paid for shares never made it to the Canadian firm. To the contrary those funds were diverted to other entities and at times the Defendants. Indeed, Defendants were paid on average 39% of the investor proceeds. The complaint alleges violations of Exchange Act Sections 10(b) and 15(a)(1) and Securities Act Section 17(a). The case is pending. See Lit. Rel. No. 24754 (March 2, 2020).

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