Silicon Investor - Anthony @ Equity Investigations, Dear Anthony,

[Buckey] amazing how so many pumpers and long opinions are 100% ok I still cannot figure...

Buckey — 6/11/2026 10:22:13 AM

amazing how so many pumpers and long opinions are 100% ok

I still cannot figure out his crime

[StockDung] Andrew Left faces 20 years in prison — but having a correct opinion about a stoc...

StockDung — 6/7/2026 6:36:23 AM

Andrew Left faces 20 years in prison — but having a correct opinion about a stock shouldn’t be a crime

By Charles Gasparino
Published June 6, 2026, 10:41 p.m. ET

REUTERS
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This past Tuesday afternoon, I rang up Andrew Left, the high-profile short seller long known for meticulously documenting allegations of alleged corporate malfeasance and placing bets against companies like Valeant Pharmaceuticals, Shopify and Chinese real estate giant Evergrande.

“Hey Charlie, I’m at the airport,” Left said as he picked up. “I’m sitting down, having a vodka.”

Given what had transpired just hours earlier, it wasn’t hard to understand the sitting-down-having-a-vodka part. Late Monday night, after a two-week trial, Left was convicted in Los Angeles federal court of 13 counts of securities fraud.

Prosecutors alleged Left circulated his research on social media and financial TV to move a bunch of stocks and make a ton of money. That constituted market manipulation, they said, and got a jury to agree with them.

It sounds to me like what Wall Street does every day — people who “talk their book” — not to mention all the retail trolls you see on X trying to gin up interest in speculative stuff that loses money. Even so, Left now faces 20 years in prison when he is sentenced in August.

Truth be told, there’s something unsettling in what Left admits he did: Purposely pushing stock prices around to make a quick buck. Big firms have strict rules around trading off research, placing stocks on so-called restricted lists. Reporters like myself don’t buy individual stocks out of fear our reporting will get us jammed up because we can move prices.

Left, however, was the ultimate day trader with a name and platform that could enhance market gyrations when his research hit the tape. Having an opinion about a stock that turns out to be right — which were the vast majority of Left’s calls through his company, Citron Research — shouldn’t be a crime.

Yes, the trading may look fishy, and this type of trading around research reports and public comments has been a legal gray area. Purposely moving stocks can be construed as stock manipulation. Fishy, though, isn’t something that’s supposed to land you in prison for 20 years.

Try telling that to a jury — as Left’s lawyers did. In one day of trading, Left could make more than most of those people earned in a lifetime. It didn’t help that Left made his bones as a short seller. Making money from pushing stocks down in value just doesn’t sit well with most people, even if it means exposing various abuses and is necessary for markets to function properly.

Swaying the jury“All these people heard from the prosecution is that I worked with hedge funds, that I’m a short seller. that I made two-and-a-half million dollars for one day’s work and they were like whaaat?” Left tells me.

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One question is: Do the prosecutors who went after Left understand the law or just want to make short selling de facto illegal? Another: Did they know average people on the jury would buy a weird case because they don’t know much about what the shorts do?

In my career covering finance, I’ve seen some shady short-selling tips, but the vast majority of market upheavals, like the dot-com crash of 2000 or the 2008-2009 financial crisis, have been on the long side — people buying stuff based on irrational exuberance and touts.

Keep up with today’s most important newsStay up on the very latest with Evening Update.

Most short selling involves exposing overvalued stocks (Left was famous for unearthing problems at the once high-flying Valeant), irrationally priced securities based on irrational economics (think mortgage-backed securities that led to 2008-2009), or outright sham companies (think Enron).

It was the legendary short seller Jim Chanos who exposed Enron’s house of cards. He made money by “shorting” the stock — borrowing shares of Enron, selling them, and then replacing his borrow when shares tanked — after his research suggested investors were drinking the Kool-Aid.

We probably need short selling now more than ever as stocks continue to reach irrational highs powered by irrational AI valuations.

Yes, I know the lead prosecutor in the Left case came out with a post on X that “short selling is not a crime. Mr. Left was convicted of fraudulently manipulating the market, not for ordinary short selling.”

True. According to the indictment, Left posted that “Citron buys $NVDA. This is the first time in two years [the] stock offers an appealing risk-reward to investors .?.?. We see $165 before we see $120.” Left’s crime was selling out his position two hours later in the $150-$153 range,

But since that “infamous” trade, shares of Nvidia are up nearly 6,000%.

And short selling really was front and center in the prosecution of Andrew Left, even if he got those calls pretty much right as well. The feds made a big deal out of his profits from shorting a cannabis company named Cronos. It was trading at $11.50 in 2018 when he announced a short-selling price target of $3.50. Again, his crime was selling when his research pushed shares lower and before the price target was hit.

On Friday, shares of Cronos closed at $2.74

[StockDung] ZIASUN FRAUD ANALYST RAYMOND DIRKS.PASSED AWAY. THEY ARE BUILDING A SPECIAL RING...

StockDung — 2/8/2026 6:22:53 AM

ZIASUN FRAUD ANALYST RAYMOND DIRKS.PASSED AWAY. THEY ARE BUILDING A SPECIAL RING OF.FIRE IN HADES

.
RAYMOND DIRKS Obituary
DIRKS--Raymond Louis, Jr. Ray Dirks, 89, who exposed massive fraud at Equity Funding Corp. in 1973 and a decade later won a related inside-information case at the Supreme Court, died peacefully at Amsterdam Nursing Home in Manhattan on December 9. Born to Raymond Louis Dirks and Virginia Belle Wagner Dirks in Fort Wayne, IN, on March 1, 1934, Ray attended numerous elementary schools from coast to coast as his father served as an artillery officer during World War II. He graduated from Needham (MA) High School in 1951 and DePauw University in 1955, majoring in history. He went directly to Bankers Trust in New York City, quickly establishing himself as a leading insurance-stock analyst. In 1969 he and his only sibling, Lee Dirks, established Dirks Brothers, Ltd., serving institutional clients, with Ray specializing in insurance stocks and Lee in newspaper stocks. Ray's reputation as a fearless, iconoclastic investigator led a former Equity Funding employee to tip him off to the fraud after regulatory authorities failed to confirm his allegations. Several Equity Funding executives were quickly convicted, but the regulators' civil inside information charges against Ray -- accompanied by a suspension from normal Wall Street employment --took 10 years to resolve, with complete vindication by the Supreme Court's 6-to-3 decision. In his later years, Ray formed or worked with several smaller firms, specializing in young companies in various industries. Ray's wife of 36 years, Jessy Wolfe, died in 2015. His survivors include their daughter, Suzanne Dirks, of New York City, and his brother, Lee, and his wife, Donna Bradley, of Jupiter, FL. A memorial service will be held at 11am on Wednesday, December 27, at All Souls Unitarian Church, 1157 Lexington Ave., NY, NY 10075. Donations may be made in Ray's name to the Amsterdam House, 1060 Amsterdam Ave., NY, NY 10025.

To plant trees in memory, please visit the Sympathy Store.

Published by New York Times on Dec. 17, 2023.

[StockDung] When Deep Value Becomes Deep Doubt From Cash Rich to Trust Poor: The Hidden Risk...

StockDung — 1/21/2026 3:10:18 PM

When Deep Value Becomes Deep Doubt From Cash Rich to Trust Poor: The Hidden Risk in a Seemingly Perfect Setup

The Value Road

Apr 23, 2025

You ever stumble upon a stock so cheap it feels like you’re being dared to buy it?

This one’s got the hallmarks of a deep value dream: a growing business, real free cash flow, and a cash balance that exceeds its entire market cap. Throw in some unlevered operations, a TV station, and even a few overlooked real estate assets… and on paper, it’s a no-brainer.

But here’s the kicker—nobody’s talking about it.

Not a single analyst write-up. No blog coverage. No fund disclosures. Just silence. And that’s where it starts to get strange.

Dig deeper—past the filings, past the earnings—and an entirely different story emerges. One that drips with history. Not the kind found in investor decks, but the kind that shows up when you start googling management with words like “boiler room” and “fraud.”

In this premium report, I walk through why this stock may look like a golden opportunity… until it doesn’t. What appears to be a hidden gem might just be hiding something else entirely.

Is the cash real? Can management be trusted? Or is this a mirage wrapped in financials too good to be true?

Read on. You won’t look at the balance sheet the same way again.

Adaptive Ad Systems, Inc. $AATV is a nano-cap stock that owns a platform that places advertisements on cable television networks. The business essentially involves purchasing and placing advertisements on cable channels, allowing businesses to target specific geographic areas or niche audiences. In addition, the company owns a single low-power television station called KRRI in Reno, Nevada along with a handful of other real estate assets. With 56 million fully diluted shares outstanding and a stock price of $0.21 per share, the company has a market cap of $11.9 million. There is $12.7 million of cash on the balance sheet, offset by $20k of debt, giving AATV an enterprise value of negative $764k.

Investment Thesis:

AATV is a cheap stock with $12.7 million of cash, $20k of debt and a market cap of only $11.9 million. The enterprise value is a negative $764k which means you get the entire business for free, and then some. The capital structure includes 51.2 million common shares outstanding and two classes of preferred stock, preferred A and B. There are 500k Class A preferred stock that have 100 votes per share, no dividend, no liquidation rights and no conversion. These are basically super voting shares that gives management control of the company. There are 1.1 million Class B preferred stock outstanding. These are convertible at a 1-5 ratio into common shares after they have been outstanding for five years. Total potential dilution from the Class B preferred stock is 5.5 million additional shares. The Class B preferred stock is issued to the management team and given the non-dividend rights and the ability to only convert after five years, is similar to a restricted stock unit. Total diluted shares outstanding is 56.7 million.
In 2024 the company generated $7.5 million of revenues $2.0 million of operating income and $2.2 million of cash from operations. Capex was $613 million, resulting in free cash flow of $1.6 million. Revenues were up 46% year over year. In 2023 the company generated $5.1 million of revenue, $99k of operating income and $1.0 million of free cash flow. The company has historically generated free cash flow over the past decade and has built a sizeable cash balance.
Everything looks good on paper. You are buying a cash pile and a profitable business that is growing. In addition, the company owns a single TV station and a few real estate assets. It almost looks too good to be true. A hidden asset that you are getting for free. And no one is talking about the stock. Zero individuals have written about this equity. It is a type of “slap me” am I dreaming moment.
But everything is not as it appears. In fact, if you dig deep enough into the named executive officers, major shareholders and even the accountant, major red flags rip through the bullish thesis.
The three individuals who are listed in the annual report are J. Michael Heil, the CEO, Bryant Cragun, a 22% owner through Willmark Investments and Kevin Orton, the owner of Mainstreet Consulting & Accounting Services, the company’s auditor.
The company is ran by an individual named J. Michael Heil. The J stands for Joseph. His LinkedIn is right here. There isn’t much data on Heil if you search for his name. But if you Google his name along with “boiler room” some interesting data pops up.
The first thread that pops up is from a post in 2011 on the Silicon Investor boards. In the post a user named “jjs64” posts on a thread titled “Boiler Room Operator Bryant Cragun Makes Comeback”. He goes into detail how J. Michael Heil along with Bryant Cragun is involved in a whole bunch of Nevada companies.
If we Google Bryant Cragun along with the keyword “boiler room” and “fraud” there is a bunch of old threads written up about his past business history. The most remarkable is from a post on Investors Hub in 2011 that details one of Bryant’s partners in a boiler room scheme. In the thread it talks about how Bryant ran a boiler room out of Hong Kong and various other countries, pumping fraudulent stocks that eventually went to zero. There is another article written by Share Sleuth titled “ Hot Covid-19 test company has tied to offshore boiler rooms”. There is also a Wall Street Journal article titled “ Beyond the SEC’s Reach, Firms Sell Obscure Issues to Foreign Investors”. Another article, titled “ Chinese coal company’s share placement produces interesting collection of investors” highlights that Bryant was involved in this issue and was the former stockbroker who was the owner of two unlicensed offshore brokerages that sold shares of obscure U.S. listed stocks to investors in Europe, Asia and other parts of the world. Many of the people who bought these stocks lost everything.
The final individual is Kevin Orton, the owner of Mainstreet Consulting & Accounting Services, Inc. which does the auditing for AATV. If you Google “Kevin Orton Fraud” there is a link that leads to this SEC filing from 2001 which found him guilty of securities fraud, wire fraud, money laundering, racketeering, conspiracy and racketeering conspiracy. Here is another article on Kevin Orton which said he got nine years in a federal prison for his part in a major stock fraud. In the article it states that Orton was the certified public accountant for Las Vegas companies Teletek Inc. and United Payphone Services. Here is another thread on Silicon Investor that highlights in detail the operations of Teleket.
What we have now is a cash pile and a seemingly profitable business that appears to be ran by three actors with a shady background. Everything looks ok from the financial standpoint. I don’t see many red flags. Besides the large $1 million cash outflow titled “advances to affiliates” that is located in changes in working capital. My guess is that this is payments to insiders.

Given the shady history of the individuals above, it begs to question, is the $12.7 million of cash on the balance sheet actually there? The company has a long history of generating free cash flow and building up an impressive balance sheet. But how can investors be sure that cash is actually on the balance sheet given the history of the three named individuals? Any rational management team would likely be using this cash pile to do share repurchases, especially at this valuation, or even doing large special dividends, giving management’s large ownership in the common equity. Given the lack of shareholder returns, can we really trust that the cash is actually there?

On paper, AATV looks like a cheap stock. You get a nice pile of cash and a profitable operating business for free. But if you dig into the CEO, one of the large stockholders and even the individual doing the public accounting, the stock quickly becomes uninvestable. I first looked at AATV and thought it was a screaming buy. However, the lack of writeups on the name was concerning as it is the typical deep value investors dream. The more I dug into the stock the more I kept thinking to myself “what am I missing.” Then after digging into the key players involved in the equity, it became crystal clear, avoid this stock and move on.

Disclosure: I am not long or short Adaptive Ad Systems, Inc. $AATV. This is not investment advice. I am not an investment advisor. Do your own research

[Buckey] a lot of theories flying around the past few days on things.

Buckey — 9/12/2025 12:28:03 PM

[Mongo2116] 9-11 TODAY....Amazingly they tied ANTHONY into prior knowledge because he was Eg...

Mongo2116 — 9/11/2025 10:13:49 AM

9-11 TODAY....Amazingly they tied ANTHONY into prior knowledge because he was Egyptian/American and sold stocks prior to 9-11. THAT was total BS. He outed some major scammers costing them big money and they went after him and succeeded. The same type untouchables running the country now with much much bigger fish to fry.....THE TREASURY OF THE USA

[Mongo2116] I still miss Anthony....what an exciting time that was....

Mongo2116 — 7/16/2025 10:33:40 PM

[Cautious_Optimist] Always watching. Here we go: A scam?

Cautious_Optimist — 1/14/2025 4:59:21 PM

[StockDung] GATHER THE CHILDREN. ITS THAT TIME AGAIN TO TELL THE FRANCOIS GOELO CHRISTMAS MA...

StockDung — 12/24/2024 8:43:18 AM

GATHER THE CHILDREN. ITS THAT TIME AGAIN TO TELL THE FRANCOIS GOELO CHRISTMAS MALL STORY AS TOLD BY F G. (22th Anniversary)

FRANCOIS GOELO ONE ONE OF THE MOST NOTORIOUS STOCK MANIPULATORS ON THE MESSAGE BOARD
(Now selling fish in the Cayman Islands after being found guilty of securities fraud ) tells his tale of his true meaning of Christmas.

MERRY CHRISTMAS AND A HAPPY NEW YEAR!!

By: smoking_gunn0
01 Feb 2002, 03:25 PM EST Msg. 10543 of 13151
(This msg. is a reply to 10542 by F_GOELO.)
Jump to msg. #

GOELO xmas mall experience, as told by F G +++ :

A couple of weeks ago, as Christmas was
approaching, I was rushing around
> trying to get some last minute shopping done. I
was stressed out and not
> thinking very fondly of the Christmas season
right then. It was dark,
> cold,
> and wet in the parking lot of the mall as I was
loading my car up with
> gifts
> that I felt obligated to buy. I noticed that I
was missing a receipt that
> I
> might need later, so mumbling under my breath, I
retraced my steps to the
> mall entrance.
>
> As I was searching the wet pavement for the lost
receipt, I heard a quiet
> sobbing. The crying was coming from a poorly
dressed boy of about 12
> years
> old. He was short and thin. He had no coat. He
was just wearing a
> ragged flannel shirt to protect him from the cold
night's chill. Oddly
> enough, he was holding a hundred dollar bill in
his hand. Thinking that
> he
> had gotten lost from his parents, I asked him
what was wrong. He told me
> his sad story. He said that he came from a large
family-three brothers
> and
> four sisters. His father had died when he was
nine years old. His mother
> was poorly educated and worked two full time
jobs.
>
> She made very little to support her large family.
Nevertheless, she had
> managed to skimp and save two hundred dollars to
buy her children
> Christmas
> presents. The young boy had been dropped off at
the mall by his mother on
> the way to her second job. He was to use the
money to buy presents for
> all
> his siblings and save just enough to take the bus
home. He had not even
> entered the mall, when an older boy grabbed one
of the hundred dollar
> bills
> and disappeared into the night.
>
> "Why didn't you scream for help?" I asked.
> The boy said, "I did."
> "And nobody came to help you?" I wondered aloud.
> The boy stared at the sidewalk and sadly shook
his head.
> "How loud did you scream?" I inquired.
> The soft-spoken boy looked up and meekly
whispered, "Help me!"
>
> I realized that absolutely no one could have
heard that poor boy cry for
> help. So I grabbed his other hundred and ran to
my car

[S. maltophilia] Prominent Short Seller Made Millions Off Bait-and-Switch Scheme, U.S. Says Feder...

S. maltophilia — 7/29/2024 1:07:01 PM

Prominent Short Seller Made Millions Off Bait-and-Switch Scheme, U.S. Says
Federal authorities filed charges against Andrew Left, founder of Citron Research, who they said made at least $16 million from a multiyear scheme to manipulate market prices.

nytimes.com

google.com

[StockDung] Posts by Francois+Goelo investorshub.advfn.com >>> I like the Stockchart form...

StockDung — 3/20/2024 1:43:33 PM

Posts by Francois+Goelo

investorshub.advfn.com

>>> I like the Stockchart format, BUT...	StockCharts Support Forum	03/15/2003 11:17:26 AM
>>> Shorted OMC above $49.00... Fitch Negative outlook...	T-Waves	07/10/2002 02:38:44 AM
>>> ELN bears watching tomorrow....	T-Waves	07/05/2002 01:38:02 AM
>>> NDX Chart still looks very Bearish.....	T-Waves	07/03/2002 01:02:20 AM
>>> Thanks, OMC down 11% today...	T-Waves	07/01/2002 05:54:43 PM
>>> Shorting OMC, audited by Arthur Andersen,...	T-Waves	07/01/2002 12:55:23 AM
>>> SHORT: OMC audited by Arthur Andersen,...	Boats & Stocks (B&S)	07/01/2002 12:42:43 AM
>>> SHORT: OMC audited by Arthur Andersen,...	Short Positions To Have (SHORT)	07/01/2002 12:40:00 AM
>>> GOLD FEVER justified by Main Stream Bankers....	Boats & Stocks (B&S)	06/23/2002 03:08:57 AM
>>> Shorted IPG: Huge Intangible Valuation...	T-Waves	06/21/2002 12:20:40 AM
>>> Should Bush resign, Part II?...	Boats & Stocks (B&S)	06/20/2002 11:48:19 PM
>>> Should Bush consider resigning?...	The Question and Answer Board (IHUB)	06/20/2002 11:45:23 PM
>>> Should Bush resign, Part I?...	Boats & Stocks (B&S)	06/20/2002 11:44:21 PM
>>> Quite generous Valuations, actually, Papa Doc....	PowerLinx Inc (PWNX)	06/20/2002 04:00:20 AM
>>> Matt, try the Lion Board...	The Question and Answer Board (IHUB)	06/20/2002 03:49:22 AM
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=385644	PowerLinx Inc (PWNX)	06/16/2002 02:06:19 PM
>>>> CIA, anyone?...	The Question and Answer Board (IHUB)	06/15/2002 06:44:45 PM
>>> Anyone wants to join the CIA?...	Boats & Stocks (B&S)	06/15/2002 06:43:42 PM
>>> INTANGIBLES and Market Melt-Down...	Boats & Stocks (B&S)	06/13/2002 08:45:50 PM
>>> INTANGIBLES and Market Melt-Down...	T-Waves	06/13/2002 08:41:43 PM
>>> Shorted OMC: $2 Billion NEGATIVE Tangible Assets...	T-Waves	06/13/2002 04:33:33 AM
>>> Bought CVC on opening dip.... CLHB+4.3%...	T-Waves	06/12/2002 09:55:55 AM
>>> CVC Fundamentals seem to indicate...	T-Waves	06/12/2002 03:44:43 AM
>>> Joe, lacking overall perspective...	Boats & Stocks (B&S)	06/12/2002 02:24:27 AM
>>> Joe, The Rise and Fall of Empires,...	Boats & Stocks (B&S)	06/11/2002 08:55:56 AM
>>> Views on Currencies/Gold...	T-Waves	06/11/2002 04:52:37 AM
>>> Hi... Check CLHB for Day Trading...	T-Waves	06/11/2002 04:17:16 AM
>>> CLHB was harder to ride than a	Marketgems Earnings Trader- Trading Strong or Weak (MKTGEMS)	06/10/2002 04:13:39 PM
>>> Some Views on CLHB...	Boats & Stocks (B&S)	06/09/2002 04:45:50 AM
>>> Joe, CLHB... I have followed the stock...	Marketgems Earnings Trader- Trading Strong or Weak (MKTGEMS)	06/09/2002 04:44:20 AM
>>> If this happens, Precious Metals should explode...	Boats & Stocks (B&S)	06/08/2002 05:44:40 AM
>>>> To Extort or not to Extort?...	Has Board Admin bias gone too far?	06/07/2002 08:39:50 PM
>>> What a great day for CLHB+37%...	Marketgems Earnings Trader- Trading Strong or Weak (MKTGEMS)	06/07/2002 04:09:35 PM
>>> Finally News came through: CLHB+30%...	Marketgems Earnings Trader- Trading Strong or Weak (MKTGEMS)	06/07/2002 10:36:50 AM
>>> Claire, PAL has retraced and Palladium Spot...	Boats & Stocks (B&S)	06/07/2002 01:17:42 AM
>>> GSVI becomes ACTIVE... Only 1.8 million shares...	Marketgems Earnings Trader- Trading Strong or Weak (MKTGEMS)	05/31/2002 10:16:41 AM
>>> CLHB+7%... Could see as much as 2	Marketgems Earnings Trader- Trading Strong or Weak (MKTGEMS)	05/31/2002 10:15:15 AM
>>>>>> CLHB taking off pre-market on awaited News...	Marketgems Earnings Trader- Trading Strong or Weak (MKTGEMS)	05/31/2002 09:35:43 AM
>>> CLHB+4.4%, so far today...	Marketgems Earnings Trader- Trading Strong or Weak (MKTGEMS)	05/30/2002 10:27:17 AM
>>> Claire, check PAL...	Boats & Stocks (B&S)	05/30/2002 10:16:22 AM

[S. maltophilia] From Matt Levine today -- JournalismOne thing that I think about sometimes ...

S. maltophilia — 11/1/2023 5:38:02 PM

From Matt Levine today --

Journalism

One thing that I think about sometimes is the similarity between journalism and insider trading. Consider: You are in the business of finding out things about companies that nobody else knows, so you spend your time developing sources at those companies who will tell you things. If their company has a new product coming out, or is about to announce a merger, or has been doing fraud, they call you to tell you before anyone else knows.

Sometimes they tell you things just because you ask, and they are indiscreet. Sometimes they tell you things out of a sense of public-spiritedness: They think that what they know should be known more broadly. Sometimes they tell you things out of a sense of grievance: They are mad at their bosses and want to leak information. Sometimes they tell you things because you are friends: You have done such a good job of developing relationships that your sources think of you as a personal friend, not just a transactional counterparty. Sometimes there is some amount of favor-trading involved: You get information from them, and in exchange you give them something that they want. Perhaps that is also information: You give them news or gossip about their firm or industry that you got from other sources. Or perhaps you can give them career advice. Or maybe you just buy them lunch, or drinks. Maybe you pay them cash! [1] Often, of course, their motives are mixed; they tell you stuff out of public-spiritedness and grievance and friendship and favor-trading and carelessness all at once.

What do you do with this information? Here are three possibilities [2] :

You work at a newspaper, you write up a story containing your sources’ secret information, and you publish it on your website and in your print newspaper.
You work at a hedge fund, and you trade on your sources’ information: You buy ahead of the merger announcement, sell ahead of the accounting fraud, whatever.
You work at a very small and odd newspaper, one that charges $1 million a year for a subscription and that has only five subscribers, all of them hedge funds. You write up a story containing your sources’ secret information, you put it in your newspaper, and you send it to your subscribers, who then trade on it.

Option 1 is called “journalism.” [3] It is generally considered a good thing — the public has a right to know secret stuff, etc. — and in the US it is protected by the First Amendment. [4] Of course some of the readers of your newspaper will trade on what you publish, but that’s fine; journalism can move markets.

Option 2 is usually called “insider trading,” and in most cases, in the US, it is illegal. [5]

Option 3 is a gray area! It seems clear to me that if you have one subscriber and a million-dollar subscription, that’s insider trading: You work for a hedge fund, but you have an obfuscatory job title. Probably at five subscribers it is still insider trading. [6] On the other hand, at a million subscribers and a $200 subscription, you are clearly a journalist: Publishing a story behind a paywall, to paying customers who get it before everyone else, still counts as journalism.

Disclosure! Bloomberg News publishes many stories to Bloomberg Terminal subscribers before they are on the website. But that is still journalism.

I think that probably the dividing line between “journalism” and “insider trading” is, like, some number of subscribers? The number is not that high. I think that sending a newsletter to 50 subscribers, 95% of them hedge funds, for $50,000 each per year, probably looks more like journalism than like insider trading. Whereas five subscribers is insider trading. But I am just making that up and oh boy is it not legal advice.

Anyway the Financial Times reports:

A group of veteran US financial journalists is teaming up with investors to launch a trading firm that is designed to trade on market-moving news unearthed by its own investigative reporting.

The business, founded by investor Nathaniel Brooks Horwitz and writer Sam Koppelman, would comprise two entities: a trading fund and a group of analysts and journalists producing stories based on publicly available material, according to several people familiar with the matter.

The fund would place trades before articles were published, and then publish its research and trading thesis, they said, but would not trade on information that was not publicly available.

The start-up, called Hunterbrook, had raised $10mn in seed funding and is targeting a $100mn launch for its fund, according to two people involved. “Watchdog” was a name floated early on for the news arm. …

In an early message to potential investors, seen by the Financial Times, Horwitz said the investment fund would get “unique access” to articles before they are published. “Rather than try to predict or react to events, we time trades on news we break ourselves,” he wrote, styling the venture as “the first trading fund driven by a global publication”.

The reporting team — which Horwitz’s email said would include journalists who have worked for the WSJ, BBC and Barron’s, as well as “intel analysts” — aims to publish market-moving investigative pieces “like Bloomberg”, but with no advertisements or subscription paywall.

I don’t know! The two claims here are:

You “break news” and “publish market-moving investigative pieces ‘like Bloomberg,’” which means that you employ reporters who get sources to tell you stuff that is not already public, and
You produce “stories based on publicly available material.”

There is someoverlap between those categories. Sometimes you can, like, read a company’s securities filings closely, notice something weird, publish a story saying “Company X admits Y in its annual report,” and say you have broken news and moved the market with your investigation of public documents, without using “information that was not publicly available.” Or Freedom of Information Act requests are a common journalistic tool that can get you information that is technically public and yet known only to you. You can buy a company’s product and take it apart and see if it’s made of cobwebs. Other things. Still I feel like a lot of investigative journalism involves calling sources and asking them to tell you stuff that isn’t public? And then if you publish it that’s fine, that’s great, that’s classic journalism. But if you trade on it first, that’s riskier. [7]

Of course, there is another obvious comparison for this model. What is, like, Hindenburg Research if not an investigative reporting organization that trades on its investigations before it publishes them? The whole model of activist short selling looks pretty much like this: You try to find public companies that are frauds, you investigate them, you short their stock, and then you publish your investigation, hoping that it will drive the stock down. Carson Block, another activist short seller, “ describes what he does as ‘investigative journalism married to a different business model’ and is trying to rebrand activist shorts as ‘journalist investors.’”

The risks of that model are pretty well known. For one thing, yes, insider trading; some short sellers try to rely mostly on public information to avoid being accused of insider trading. [8] For another thing, activist short sellers are constantly accused of market manipulation: It is just widely assumed that, if you bet against a company’s stock and then publish bad stuff about the company, you are doing something fraudulent and manipulative. If you publish stuff that is wrong, you will get in trouble for securities fraud: Betting against a stock and then publishing falsehoods about the company to drive down the stock is classic fraud, and no one will be sympathetic if you say you made an honest mistake. Even if you publish stuff that is right, people will be suspicious. There is an ongoing US Department of Justice investigation of activist short sellers, “probing possible coordination surrounding the publication of short reports, looking for signs of market manipulation or other trading abuses.” Is Hunterbrook/Watchdog's whole business model a “sign of market manipulation or other trading abuses?” I don’t think so, but I bet some people will.

[S. maltophilia] From Matt Levine today -- Sorrento & ScilexI suppose we have to talk about Sor...

S. maltophilia — 7/27/2023 4:27:23 PM

From Matt Levine today --

Sorrento & Scilex

I suppose we have to talk about Sorrento and Scilex, so here goes. Sorry!

Sorrento Therapeutics Inc. is a biopharmaceutical company. It is publicly traded and was listed on the Nasdaq until it filed for bankruptcy in February. The bankruptcy was caused by developments in some complicated litigation: Sorrento had sold a drug to another company called NantPharma to commercialize, and NantPharma alleged that the drug was not close to regulatory approval and that it had been scammed. [2] On Dec. 2, 2022, an arbitrator awarded NantPharma $175 million and, while Sorrento kept fighting that award and has won a different arbitration against NantPharma, it did not have anything close to $175 million in cash. So it filed for bankruptcy.

Sorrento has a subsidiary called Scilex Holding Co. Scilex is also a public company, also listed on the Nasdaq. Sorrento is its biggest shareholder; it currently owns about 43% of Scilex’s common stock, and it also owns preferred shares that give it majority voting power. Scilex’s stock closed yesterday at $5.08 per share. There are about 149 million common shares outstanding, so Scilex is worth about $750 million, and Sorrento’s controlling stake is worth hundreds of millions of dollars.

Sorrento’s stake was much bigger not too long ago: When Scilex went public last November, Sorrento owned about 96% of its stock, and was locked up from selling it until at least this May. [3] But on Dec. 30, 2022, after losing that NantPharma arbitration, Sorrento announced that it would distribute 76 million Scilex shares — roughly half of its stake — to its shareholders. In January, Sorrento handed out about 0.14 shares of Scilex stock for each outstanding Sorrento share, as a special dividend. Basically Sorrento had one asset — Scilex — worth hundreds of millions of dollars, it was heading for bankruptcy itself, and before it filed for bankruptcy it handed out that asset to its shareholders.

That’s. That’s, uh, pretty weird? Ordinarily it is considered bad form for a company to dividend out its assets to its shareholders just before filing for bankruptcy: Those assets belong to the creditors now, not the shareholders. In fact NantPharma sued in California Superior Court to stop Sorrento from paying out the dividend, arguing “that STI was balance sheet insolvent and ‘lack[ed] adequate capital to sustain operations and pay creditors,’” but the judge was like “meh no seems fine” and let Sorrento go ahead. [4]

So then Sorrento filed for bankruptcy, saying that “given the valuable (but currently locked up and restricted (with exceptions and carveouts)) Scilex stock that [Sorrento] owns, the Debtors are hopeful that … they will be able to propose a plan of reorganization that pays off all creditors (including the Nant Companies) in full and reinstates equity.” Sorrento’s stock still trades over the counter, and it closed at $0.315 yesterday, for a market capitalization of about $170 million, suggesting that its investors have some confidence in that plan.

Also the bankruptcy court has some confidence in that plan, because it appointed an Official Committee of Sorrento Equity Securities Holders so that Sorrento’s shareholders would have some representation in the bankruptcy. Ordinarily a bankrupt company doesn’t have enough money to pay its creditors, it splits what’s left among the creditors, the shareholders get nothing and there is no need to consult them. Here, though, it is apparently plausible that Sorrento will be able to pay off its debts and continue as a company owned by its shareholders, so it still owes those shareholders some fiduciary duties, and there’s a committee to represent them. [5]

But Sorrento is in bankruptcy, and that dividend of Scilex stock, in bankruptcy, looks crazy. Sorrento took like half of its value and just handed it over to its shareholders shortly before filing for bankruptcy. If it turns out that Sorrento doesn’t have enough assets left to pay off all its creditors, it would be very bad that Sorrento’s shareholders got hundreds of millions of dollars of Scilex stock right before the bankruptcy.

In bankruptcy law, this is called a “ fraudulent transfer”: If a company (1) transfers any property within two years before bankruptcy, (2) “received less than a reasonably equivalent value in exchange” and (3) was insolvent or close to it at the time of the transfer, then a bankruptcy court can claw it back. If Sorrento was insolvent in January— after the arbitration award that pushed it into bankruptcy — then surely its creditors can claw back the Scilex stock that it handed out to its shareholders for free.

Normally it’s very hard to claw back publicly traded stock: It trades on the exchange, thousands of regular investors can buy it, and if A buys shares from B who bought them from C who bought them from D who bought them from E who got them in a dividend, it is hardly fair to claw back the shares from A, who after all paid fair value for them. It is hard to trace all the money among anonymous public shareholders trading on the stock exchange.

But there is an oddity with Scilex stock. The oddity is that the Sorrento shareholders who got Scilex stock as a dividend can’t sell it. Because Sorrento couldn’t sell it — its Scilex stake was locked up until May 2023 — it dividended the stock to its shareholders subject to that restriction. “The Dividend Stock you will receive on the Payment Date is subject to restrictions on transfer until May 11, 2023,” Sorrento told its shareholders at the time.

And then once Sorrento was in bankruptcy, Sorrento’s creditors asked the bankruptcy court to extend that transfer restriction, so that they could try to claw back the Scilex stock if necessary. The bankruptcy judge agreed, extending the restriction until September. [6]

The thing is, Scilex stock kept trading. Since Sorrento’s bankruptcy filing, Scilex’s average trading volume has been more than 5 million shares a day. Now, the small public float of Scilex’s stock that was publicly held before Sorrento’s January dividend — the equity committee says it’s about 3 million shares [7] — is freely tradeable. The 62 million shares held by Sorrento, and the 76 million shares that Sorrento dividended out to its shareholders, though, are not allowed to trade. Almost all — not all, but almost all — of Scilex’s stock is locked up; the tiny amount of stock that is freely tradable sure seems to trade a lot.

What does that mean? If your answer is “shadowy hedge funds are conspiring with big Wall Street banks to print millions of phantom shares in order to naked short them and drive down Scilex’s stock in order to tank Sorrento’s bankruptcy,” then I am very sorry to tell you that the official equity committee agrees with you. Here is a lawsuit that they filed in the bankruptcy case last month against several big brokerages including Merrill Lynch, Morgan Stanley and JPMorgan:

This action concerns the pervasive and abusive “naked” short-selling – i.e., taking a short position without correlating shares being located and borrowed by the short-seller – of the common stock of Scilex Holding Company (“Scilex”) in violation of SEC regulations and established industry practices. The Debtors, which own a majority of the Scilex stock, are victims of these illegal practices. This action, brought by the estate fiduciary appointed to represent the Debtors’ shareholders with the Debtors’ approval, seeks relief against the defendant brokerage firms that have allowed illegal naked shorting of Scilex stock. …

The certifications filed by the Defendants with this Court prove that there has been illegal naked shorting of the Scilex stock. To obtain a legal short position, the short-seller must “borrow” or “locate” freely tradeable stock in the subject stock before closing the short sale. However, the reports provided by Defendants indicate that the short interest in Scilex stock totals millions of shares more than the entire public float of approximately 3 million Scilex shares. The ineluctable conclusion is that these short positions resulted from illegal short-selling.

The next day the bankruptcy judge, David Jones of the Southern District of Texas, issued an order banning short sales of the dividend stock.

The brokerages replied to these claims saying, essentially, what are you even talking about:

The alleged stay violation claims against them lack any basis and rest on a misunderstanding of basic facts, the Movants’ continued perpetuation of which amounts to misrepresentation. In particular, Movants did not appear to understand when the Adversary Proceeding was initiated that the short positions in Scilex Dividend Stock were all positions (not sales) inherited from short positions in Sorrento at the time of the dividend, and thus were the result of Sorrento’s own corporate action distributing those shares in January 2023. None of the Defendants’ customers’ short positions in Scilex Dividend Stock are a result of short selling in those shares, as trading in such shares remains restricted pursuant to Court order.

That is: If you were short Sorrento stock in January (normal, legal, not-naked short), what that meant was:

You had borrowed Sorrento stock from someone, andYou owed them back their Sorrento stock, plus any dividend on that stock.So when Sorrento dividended out 76 million shares of Scilex stock, that created millions of shares of short positions in Scilex: Everyone who was (normally, legally) short Sorrento now owed their share lenders some Scilex shares as well. The short positions were not created by naked short selling of phantom shares in a nefarious Wall Street conspiracy: They were created by the mechanical effect of Sorrento’s own dividend.

Still there might be a real problem here. If you were short Sorrento stock in January, you were right — Sorrento filed for bankruptcy the next month, and the stock went from about $2.50 a year ago to about $1 in January to about $0.33 today — but you are a bit stuck. Your Sorrento short turned into (1) a Sorrento short (fine, great, buy the stock back for less than you sold it for and make a profit) plus (2) a Scilex short: The dividend left you short some Scilex shares, and it is hard to buy those back because most Scilex shares are not tradeable. Meanwhile you are probably paying a lot to borrow those Scilex shares. Some brokerages “have charged short-selling customers as much as 300% interest per annum for borrowing any shares for short-selling,” says the equity committee, in the lawsuit in which it also claims that all of the short sales are phantom shares and not actually borrowed at all.

Anyway Sorrento and its equity committee hit on a solution to the alleged problem of phantom shares: Sorrento would give the “dividend short holders” the “exclusive opportunity to purchase … restricted Scilex stock … for the sole purpose of covering their short positions … and to the extent applicable, delivering the borrowed shares to the lenders thereof.” And “the Dividend Short Holders shall receive releases of any and all claims that Sorrento and Scilex may have relating to any naked short-selling and claims.” Or the short holders could buy shares in the open market, deliver those shares to their share lenders and get the release from the supposed naked-shorting claims. The equity holders wrote:

The Debtors and the Equity Committee have also explored potential direct claims against the customers of the Brokerage Firms that have engaged in naked short-selling. Given the status of the Chapter 11 Cases and the cost, complexity, and delay of filing litigation against these parties, the Debtors and the Equity Committee have determined to pursue a “win-win” resolution of these disputes directly with the Dividend Short Sellers. …

The Offering provides an entirely voluntary, efficient and cost-effective method of resolving any potential claims held by Sorrento and/or Scilex against the Dividend Short Sellers, allowing the Dividend Short Sellers to cover their short positions, and providing the Debtors with much-needed liquidity for the estates and the Debtors’ restructuring efforts.

The brokerage firms were horrified, sending in a “statement” to “clarify for the record that Defendants have not agreed and do not agree to the ‘term sheet’ attached to the Motion despite the Movants’ unilateral listing of the Defendants as a ‘party’ to it”:

Moreover, the “settlement agreement” that Movants ask the Court to authorize does not purport to resolve the Adversary Proceeding. Instead, the Movants propose to settle unripe, future disputes with non-parties to the Adversary Proceeding, the so-called “Dividend Short Sellers.” To the extent that the Motion can be construed as seeking an order from the Court compelling the Defendants to “require” their clients to take action with regard to their short positions Defendants oppose the Motion. Any resolution the Debtors and Equity Committee reach with the so-called Dividend Short Sellers should not impose any obligation on Defendants (who are not Dividend Short Sellers) in the Adversary Proceeding. Moreover, Defendants are perplexed by the Movants’ position that the Motion—setting forth a complex securities offering—must be heard on an emergency basis and question why the Movants would ask the Court to consider a settlement proposal that neither Defendants nor any other party (to the knowledge of Defendants) has even suggested that they would accept. Indeed, the Dividend Short Sellers, to whom the proposed settlement and offering are directed, appear to have no notice that either the settlement or the proposed offering even exist.

Basically Sorrento has reached a “settlement” entirely with itself, and has just presumed that people with Scilex short positions will accept the deal, without asking them. Nonetheless the judge approved this last week, and Sorrento announced the offering:

The Dividend Short Holders can purchase the Restricted Scilex Stock either in open market purchases or in private, secondary transactions with Sorrento at a price to be determined by Sorrento's Chief Restructuring Officer, in consultation with the Official Committee of Unsecured Creditors and the Equity Committee. In connection with the Offering, an Information Memorandum was distributed via FedEx and emailed to approximately 160 brokerage firms or record holders of short positions in Restricted Scilex Stock on July 20, 2023 pursuant to the Order. The deadline to participate in the Offering is July 31, 2023, subject to any extensions granted by Sorrento following consultation with the Equity Committee.

I suppose this has some appeal for everyone:

If you were short Sorrento, and are now short Scilex, you can conveniently buy in your shares and close out that short. (At a profit? Scilex is also down since January, though it’s a little unclear what price Sorrento would get for the shares. “The pricing of all sales by Sorrento to the Dividend Short Sellers described in the Offering shall be determined by the Debtors’ Chief Restructuring Officer in consultation with the Creditors Committee and the Equity Committee,” says the judge’s order.)If you are Sorrento’s equity committee and worried about naked shorts, and all the shorts are closed out, then I guess you can be satisfied that none of them were naked? Or something? I don’t know. If you are Sorrento, you get to raise cash by selling more shares of Scilex stock, to the short sellers.But the offering is “entirely voluntary,” and if short holders want to keep on their bets against Scilex I guess they can. They are presumably paying a lot to borrow the stock, and the position might be hard to close out later since, you know, who knows what will happen next here. Here is an FAQ that Sorrento issued today:

Sorrento, Scilex and Scilex Dividend Short Holders (“Buyer”) will execute a stock purchase agreement providing for the sale of Scilex common stock by Sorrento to Buyer (the “Purchase Agreement”). The shares will be sold pursuant to the Registration Statement on Form S-1 (File No. 333-268603) filed by Scilex with the SEC on November 30, 2022, and declared effective by the SEC on December 27, 2022 (the “Form S-1”).

Sorrento will instruct Scilex’s transfer agent to transfer the shares to the Buyer. The shares will be recorded by Continental in book entry format.

As set forth in the Purchase Agreement, Scilex will instruct Continental to “waive” application of the Lockup solely for the purpose of Sorrento’s sale of the shares to the Buyer. The Lockup will continue to apply to the returned shares in Buyer’s name.

If the Buyer is using the shares to cover all or a portion of any outstanding short position in Scilex stock, Buyer will instruct Scilex’s transfer agent to transfer the shares to the lender of the short position. This same process will apply if the lender is also a borrower of Scilex shares (i.e., short) and, in turn, is returning the lender’s borrowed shares to a downstream lender.

Scilex will further instruct its transfer agent to “waive” application of the Lockup solely for the purpose of Buyer conveying shares to the lender. The Lockup will continue to apply to the returned shares in lender’s name. This same process will apply if the lender is also a borrower of Scilex shares (i.e., short) and, in turn, is returning the lender’s borrowed shares to a downstream lender.

Also, the day after the judge approved all of this, Scilex announced its own $75 million public stock offering, though that … seems unrelated? “We expect to use the net proceeds that we receive from this offering for working capital and general corporate purposes,” says Scilex, though it goes on to add that it might use some of the money to help out Sorrento. “We do not currently know whether any such share repurchase transaction or additional debt financing transaction with Sorrento using the proceeds from this offering would ultimately be approved by the independent conflicts committee,” though.

I don’t know what to tell you! All of this is weird, starting with Sorrento’s decision to hand out a bunch of property to its shareholders shortly before filing for bankruptcy, and going through its decision to hold a special stock offering to help short sellers close out their positions.

Mostly though we have talked a few times about the very popular, long-running and always very perplexing to me conspiracy theory about how big Wall Street banks are conspiring to print millions of phantom shares for naked short sellers to use to drive down the prices of innocent companies. This theory is generally presented without evidence, or with misleading evidence (“short interest is higher than the float!” etc.), but it seems very durable. Here it is again!

[S. maltophilia] What is a security, anyway? From a Matt Levine email today: RippleStatistical...

S. maltophilia — 7/14/2023 7:57:55 PM

What is a security, anyway?

From a Matt Levine email today:

Ripple

Statistically speaking, almost nobody who has ever bought Meta Platforms Inc. stock bought it from Meta. Between its founding in 2004 and its 2012 initial public offering, Facebook (as Meta was then called) raised about $2.9 billion by selling stock to venture capitalists. [1] That IPO raised about $16 billion, though only about $6.8 billion went to Facebook; the rest went to early investors who sold their own stock in the IPO. Facebook did another stock offering a year later, raising another $1.5 billion for the company; it has never sold stock since then. [2] So over the last two decades, people have invested about $11.2 billion in Meta by buying its stock.

That is a drop in the ocean compared to the amount of Meta stock that people buy from each other on the stock exchange. People bought $9.5 billion of Meta stock yesterday. The day before, they bought about $11.2 billion of Meta stock: as much in one day as Meta sold in its whole history. Last year about $1.6 trillion of Meta stock traded; the year before it was only a little less. In the entire history of Meta, on the order of 0.1% of all the money spent to buy Meta stock went to Meta; in the last nine years, the percentage is exactly 0%.

It is conventional to say that if you buy a share of Meta stock, which closed yesterday at $313.41, you are “investing in Meta.” But what does that mean? It does not mean that you are giving $313 to Meta to use to buy computers or pay workers; your $313 does not go to Meta at all, but to whoever else had the share of stock before you did. It does not mean that you get a check for your share of Meta’s profits: Meta has enormous profits and has never paid a dividend. (Meta does do stock buybacks, in which it voluntarily buys back shares from time to time, but I suppose it could just as well buy Apple Inc. shares; nothing about Meta’s propensity to buy Meta shares seems to make those shares an “investment in” Meta.) It does not mean that you get a say in the management of Meta: Mark Zuckerberg owns super-voting shares and can make all the decisions himself. It does mean that if someone acquires Meta in a merger, you will get your proportionate share of the merger price, but Meta is an $800 billion company so that seems unlikely. [3]

And yet buying a share of Meta stock does seem, practically speaking, to be a way to bet on Meta’s success. The stock goes up when Meta has good news and down when it has bad news; the stock does behave like an investment in Meta. And I think that that is not pure wishful thinking or confusion on the part of the stock market; there are norms and fiduciary duties and expectations that, for instance, if Meta makes a ton of cash and has no business need for it, it will spend the cash on buying back stock, and will not spend it on building giant glass houses for Mark Zuckerberg or whatever. The company has certain obligations to its shareholders, and though those obligations are not exactly “share the profits with the shareholders,” that is sort of how the market interprets them.

Also, Meta did sell stock. Ages ago, and not very much of it compared to the current trading volume, but it did. And part of the deal, when it sold that stock, was that the buyers would eventually be able to resell it. [4] The deal — not spelled out, but the background to all stock offerings like this — was “give us money today, and we’ll give you some stock, and if all goes well the stock will go up 100x and you will be able to resell it on the stock exchange to someone else for billions of dollars.” If you buy Meta stock today, you might be buying it from someone who bought it from Meta all those years ago, and who is now cashing out. Probably not. But you are certainly buying it from someone who bought it from someone who bought it from someone who bought it from … etc. … someone who bought it from Meta all those years ago. [5] All the stock came from Meta, originally. You are not giving Meta any money, today, when you buy Meta stock. But by a sort of financial backward induction, you are making it possible for someone to have given Meta money years ago. If you and people like you weren’t around to buy Meta stock in 2023, nobody would have bought Meta stock in 2008.

In the US, there are securities laws that apply to Meta and other companies that issue stock to the public. They generally have to register their sales of stock, filing a registration statement with the US Securities and Exchange Commission with details about their business and finances. They generally have to file annual and quarterly financial reports with the SEC so that the public can get updates on their financial results. If they lie in those reports, they can be sued for securities fraud. You can avoid many of these requirements (though not the fraud ones) by not issuing stock to the public, by only selling it to rich people and institutional investors rather than letting everyone buy your stock: The securities laws are mostly to protect public retail investors, and there are fewer disclosure requirements for sales to sophisticated institutional investors.

The simple story for why those rules exist is that in, like, the 1920s, a lot of people started very shady companies and raised a lot of money by selling stock with bad and misleading disclosures. And so the securities laws were created to say “no, if you want to sell stock, you have to do this disclosure, so people can know what they are buying and sue you if you lie.” [6]

That story does not really apply to Meta Platforms in 2023. Meta has not sold stock in ages. “We are not asking anyone to give us money for our stock,” you could almost imagine Meta saying, “and it just trades on an exchange totally disconnected from us. Why should we have to file all of these reports and get sued for all our misstatements, just because some people still want to trade this stock that we sold a decade ago? Maybe in 2012 we looked like one of those shady 1920s issuers, and the SEC needed to keep an eye on us and make us disclose everything about our finances to raise money, but that doesn’t apply now, not because we were shady then and aren’t now, but because we were raising money then and aren’t now.”

But Meta doesn’t say that, in part because it does care about its stock price — in particular, a lot of its executives’ wealth happens to consist of Meta stock — and in part because that is absurd. The rule is that if you go public you are a public company, and if your stock trades publicly you stay a public company until it stops trading. (For instance, because somebody — a bigger company, a private equity firm, Elon Musk — buys all the stock.) Facebook files quarterly reports now because, by a sort of financial backward induction, that makes it possible for it to have raised money years ago. That’s the deal of being a public company.

Now, in the 1920s, and afterwards, when people were promoting shady companies, they could get creative about it. They didn’t just sell “stock” in “companies.” There were all sorts of ways to raise money for all sorts of schemes. And when the securities laws were written, they didn’t just cover stock. “The term ‘security,’” says the law, “means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘security’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”

The way that list is usually understood comes mostly from a 1946 US Supreme Court case called SEC v. W.J. Howey Co., which interprets the term “investment contract,” perhaps the most general category on the list. Howey owned a bunch of orange groves and sold plots in them to investors, along with service contracts in which Howey would manage the groves for the investors, harvest the oranges, sell them and split the profits among the investors. Howey argued that it wasn’t selling shares in a business; it was selling real estate — land, trees — and also offering a service contract. The Supreme Court said, nope, that’s a security:

An investment contract, for purposes of the Securities Act, means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise. Such a definition … permits the fulfillment of the statutory purpose of compelling full and fair disclosure relative to the issuance of “the many types of instruments that, in our commercial world, fall within the ordinary concept of a security.” … It embodies a flexible, rather than a static, principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits. …

The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.

Howey, like the shady companies of the 1920s, was seeking “the use of the money of others on the promise of profits.” So was Facebook in 2012. Meta in 2023 is … not, quite. It’s not seeking any money. Meta has the money already, and keeps making more. The stock is already out there. If you buy Meta stock, is that an investment contract? Is it “an investment of money in a common enterprise,” when you are not actually giving Meta any money? Are you expecting profits “solely from the efforts of others” — the work that Mark Zuckerberg does to increase the profits of Meta — when, after all, Meta has no direct obligation to share its profits with you? Aren’t you just expecting profits from the speculative market movements in Meta stock? If you buy Meta stock at $313 and it goes to $320 and you sell, you have a profit, but your profit is not due (directly) to the efforts of anyone at Meta; your profit is due to the anonymous inscrutable market forces of the stock exchange.

Well, this is dumb, it doesn’t matter if Meta stock is an “investment contract” under a literal reading of Howey. Meta stock is stock, and “the term ‘security’ means any … stock,” as well as the other stuff.

Ripple Labs Inc. is a company that does crypto stuff. It “seeks to modernize international payments by developing a global payments network for international currency transfers,” that sort of thing. [7] A big part of that network involves the XRP token, a crypto token that runs on the XRP blockchain, which was created by Ripple’s founders. Unlike Bitcoin and many other cryptocurrencies, though, XRP are not generated by mining in a decentralized way: All the XRP that will ever exist were created at the founding and given to Ripple and its founders; XRP was totally owned and controlled by Ripple. “Of the 100 billion XRP generated by the XRP Ledger’s code, the three founders retained 20 billion for themselves ... and provided 80 billion XRP to Ripple.”

And then Ripple, to raise money to build its global payments network, and to create a market for the XRP token that would underpin that network, started selling XRP. It raised about $728.9 million by selling XRP in over-the-counter sales directly to institutional counterparties (hedge funds, banks, etc.), usually with legal documents governing the terms of the purchases. XRP became a popular and widely traded crypto token, listed on many crypto exchanges. And as it became publicly traded on crypto exchanges, Ripple also sold some of its XRP in the open market on those exchanges, raising about $757.6 million by selling XRP “‘programmatically,’ or through the use of trading algorithms.” Ripple also distributed XRP as employee compensation, and to “third parties that would develop new applications for XRP and the XRP Ledger.”

In 2020, the SEC sued Ripple, arguing that XRP is a security and Ripple was doing unregistered securities offerings. Ripple was selling this token to raise money to build its business, and it was selling the token by telling investors that it was a good investment. It was, the SEC reasonably believed, one of “the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits,” but Ripple did not register its securities offerings or file financial statements with the SEC.

Yesterday the federal judge in the case, Judge Analisa Torres of the Southern District of New York, issued an important and rather strange ruling in the case. Here is her opinion. Basically she ruled that sometimes XRP is a security and sometimes it isn’t. When Ripple sold XRP to institutional investors in over-the-counter trades, with due diligence and investment agreements, that was an “investment contract” and so a securities offering. When Ripple sold XRP to retail investors in on-exchange trades, anonymously and with no disclosure, that was not an “investment contract” and so not a securities offering.

That’s so weird!

I should say: I don’t have a strong view on whether XRP is a security. My gut is that it is, that it is effectively a kind of quasi-stock in Ripple’s ecosystem, that it is valuable if Ripple does the work to find banking partners and build a good payments network and useless if it does not. Here, from Judge Torres’ opinion, is the argument that XRP is a security, that it is an “investment contract” because it “involves an investment of money in a common enterprise with profits to come solely from the efforts of others” (citations omitted):

Here, the Institutional Buyers invested money by providing fiat or other currency in exchange for XRP. Defendants do not dispute that Ripple received money for XRP through its Institutional Sales. …

Each Institutional Buyer’s ability to profit was tied to Ripple’s fortunes and the fortunes of other Institutional Buyers because all Institutional Buyers received the same fungible XRP. Ripple used the funds it received from its Institutional Sales to promote and increase the value of XRP by developing uses for XRP and protecting the XRP trading market. When the value of XRP rose, all Institutional Buyers profited in proportion to their XRP holdings.

Based on the totality of circumstances, the Court finds that reasonable investors, situated in the position of the Institutional Buyers, would have purchased XRP with the expectation that they would derive profits from Ripple’s efforts. From Ripple’s communications, marketing campaign, and the nature of the Institutional Sales, reasonable investors would understand that Ripple would use the capital received from its Institutional Sales to improve the market for XRP and develop uses for the XRP Ledger, thereby increasing the value of XRP.

Starting in 2013, Ripple marketed XRP to potential investors, including the Institutional Buyers, by distributing promotional brochures that touted XRP as an investment tied to the company’s success. For instance, in the “Deep Dive” brochure, which was circulated to prospective investors, Ripple explains that its “business model is predicated on a belief that demand for XRP will increase . . . if the Ripple protocol becomes widely adopted,” and “f the Ripple protocol becomes the backbone of global value transfer, Ripple . . . expects the demand for XRP to be considerable.” … In February 2018, Schwartz posted on Reddit that what “really set[s] XRP apart from any other digital asset” is the “amazing team of dedicated professionals that Ripple has managed to amass to develop an ecosystem around XRP.”

Ripple raised money by selling XRP to investors, it used the money to try to build its payments network, and it told the investors that if it successfully built its payments network then the value of XRP would go up. That seems very securities-offering-like.

Still I think that there is a real argument that XRP is not a security, that it is what crypto people call a “utility token,” or a commodity like Bitcoin. XRP comes from the fairly early days of crypto, and it seems to have originally been conceived as a Bitcoin competitor, a pure payment token. (In 2013, Ripple’s marketing materials said “Can a virtual currency really create and hold value? Bitcoin proves it can.”) You can imagine saying something like “well the XRP Ledger is just this decentralized blockchain that kind of exists on its own, and anyone can work on it and use it to transfer value, and the XRP tokens are just the currency of that blockchain, like Bitcoin is the currency of the Bitcoin ledger. XRP, like Bitcoins, are not securities, and it just so happens that Ripple Labs owns almost all of them, but it can sell them freely just like any Bitcoin billionaire can sell her Bitcoins.” I don’t really think that that’s right, but I wasn’t paying that much attention in 2013, and I think it’s possible. “XRP is just a commodity that Ripple owns a lot of, just like oil is a commodity that Saudi Aramco owns a lot of, and oil is not a security.” [8]

But Judge Torres seems to have (implicitly) rejected that argument and found that when Ripple went around selling XRP to institutional investors, it was selling securities.

But then she went on to say that when Ripple went around selling XRP on crypto exchanges with no disclosure, it was not selling securities. The disclosure creates the liability: If you go to an investor and say “hi, we are the issuer of this token, we think it is a good token, would you like some,” then you are selling a security; if you just anonymously dump the token to retail investors on a crypto exchange, then you are not. Judge Torres writes (citations omitted):

The Court next addresses Ripple’s Programmatic Sales, which occurred under different circumstances from the Institutional Sales. The SEC alleges that in the Programmatic Sales to public buyers (“Programmatic Buyers”) on digital asset exchanges, “Ripple understood that people were speculating on XRP as an investment,” “explicitly targeted speculators[,] and made increased speculative volume a ‘target goal.’” ...

Having considered the economic reality of the Programmatic Sales, the Court concludes that the undisputed record does not establish the third Howey prong. Whereas the Institutional Buyers reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP, Programmatic Buyers could not reasonably expect the same. Indeed, Ripple’s Programmatic Sales were blind bid/ask transactions, and Programmatic Buyers could not have known if their payments of money went to Ripple, or any other seller of XRP. Since 2017, Ripple’s Programmatic Sales represented less than 1% of the global XRP trading volume. Therefore, the vast majority of individuals who purchased XRP from digital asset exchanges did not invest their money in Ripple at all. An Institutional Buyer knowingly purchased XRP directly from Ripple pursuant to a contract, but the economic reality is that a Programmatic Buyer stood in the same shoes as a secondary market purchaser who did not know to whom or what it was paying its money.

Further, it is not enough for the SEC to argue that Ripple “explicitly targeted speculators” or that “Ripple understood that people were speculating on XRP as an investment.” … It may certainly be the case that many Programmatic Buyers purchased XRP with an expectation of profit, but they did not derive that expectation from Ripple’s efforts (as opposed to other factors, such as general cryptocurrency market trends)—particularly because none of the Programmatic Buyers were aware that they were buying XRP from Ripple.

Again: If you buy Meta stock on the stock exchange, there is a 0% chance that you are buying it from Meta, or that Meta will get your $313 and use it to improve the Threads ecosystem and thereby increase the price of Meta stock. And yet it is a security. What makes it a security is not that you have entered into a direct transaction with Meta, but that it was originally issued to raise money for Meta. It keeps being a security even as it trades.

Now I should say that there is a popular argument in crypto circles that this is not true for “investment contracts,” that an investment contract is only an investment contract when you buy it from the issuer, and that when it trades in the secondary market it is no longer a security. [9] This argument is, for instance, very important to Coinbase Global Inc., which is being sued by the SEC for operating an unregistered securities exchange: If crypto tokens are never securities in the secondary market, then Coinbase is off the hook.

But notice that Judge Torres goes way beyond that claim: She seems to conclude not only that secondary-market transactions are never securities offerings, because the money doesn’t go to Ripple, but also that even when the money does go to Ripple it’s not a securities offering, as long as Ripple’s sales are mixed in with enough secondary sales that people don’t know that their money is going to Ripple. Imagine if that were the law for stock offerings! (It is not: Public companies do “at-the-market” offerings where they sell stock anonymously on the stock exchange, but they have to register them and announce them publicly.) The implication is that if a crypto issuer publicly and openly sells its tokens, that is an illegal securities offering, but if it sneaks in a few token sales on the exchange then it is not. [10]

She goes on (citations omitted):

It may certainly be the case that many Programmatic Buyers purchased XRP with an expectation of profit, but they did not derive that expectation from Ripple’s efforts (as opposed to other factors, such as general cryptocurrency market trends)—particularly because none of the Programmatic Buyers were aware that they were buying XRP from Ripple. ...

The Institutional Buyers were sophisticated entities, including institutional investors and hedge funds. An “examination of the entirety of the parties’ understandings and expectations,” including the “full set of contracts, expectations, and understandings centered on the sales and distribution of” XRP supports the conclusion that a reasonable investor, situated in the position of the Institutional Buyers, would have been aware of Ripple’s marketing campaign and public statements connecting XRP’s price to its own efforts. There is no evidence that a reasonable Programmatic Buyer, who was generally less sophisticated as an investor, shared similar “understandings and expectations” and could parse through the multiple documents and statements that the SEC highlights, which include statements (sometimes inconsistent) across many social media platforms and news sites from a variety of Ripple speakers (with different levels of authority) over an extended eight-year period.

That is: If you go around making public statements, on your website and on Reddit and elsewhere, saying things like “if you buy our token we will use the money to build an ecosystem and make the token more valuable,” that makes your token a security, but only to people who are sophisticated enough to read your website. Sophisticated institutional investors who read your disclosure documents and understand that they are making an investment in your business are entitled to the protections of the securities laws, while random retail day-traders who just like your ticker symbol are not. You cannot be doing securities fraud on them, because they are not paying attention.

I want to say three things about that theory. First, it is actually intuitively very plausible? “If investors didn't read your advertising, then it doesn’t matter if those advertisements were lies.” Traditionally an element of fraud is “reliance”: If you lie to people to get them to give you money, and they give you the money because of the lies, then you have defrauded them; if they didn’t listen to you and were going to give you the money no matter what then maybe you haven’t.

Second, it is very much not the rule of the stock market. It is absolutely the case that many retail investors buying Meta stock have never looked at any of Meta’s SEC filings. If it turned out that Meta was lying in those filings, and shareholders brought a securities-fraud class action, you could imagine Meta saying “well, half of these plaintiffs didn’t read the filings, so you should throw the case out.” But that wouldn’t work! It is very standard US securities law that if you lie in your securities filings, all your shareholders can sue you, because somebody read the filings, and the lies affected the stock price, and everyone who bought the stock at the (wrong, higher, inflated-by-your-lies) price was defrauded. (This is called “ fraud on the market”: Each individual investor may not have relied on the lies, but the market did.)

Third, it is … obviously … terrible … policy? “The securities laws protect only sophisticated investors who negotiate directly with the company, not retail investors who trade on public exchanges” is the exact opposite of the normal rule. At the Information, Akash Pasricha writes:

Securities laws were specifically designed to protect individual investors, based on the idea that they “can’t fend for themselves,” James Carlson, a New York University adjunct securities regulation professor, told me today. By the same token ... “big institutional investors don’t need the protections of the securities laws. … This effectively stands that philosophy on its head,” he said.

The implications of this part of the ruling are worrisome. As Carlson said, “The potential for bucket shop or boiler room fraud … is alarming.” Carlson painted a scenario where a crypto firm issues tokens to heavyweight institutional traders, who get detailed disclosures required by securities laws, but they then flip it to individual traders, who don’t get those disclosures.

Except you don’t even need that. Why sell tokens to institutional traders (with securities disclosures) so that they can flip to retail, when you can just sell to retail yourself with no disclosure? As long as you sell to retail investors on the exchange, you’re safe. Even if you broadly advertise how good a job you will do and how much profit those investors will make, you are still not doing a securities offering! Because you are selling the tokens anonymously on the crypto exchange, so no one can prove who bought them from you, so no one can prove if any of the buyers read your advertising. It is a get-out-of-securities-law-free ruling.

I assume the SEC will appeal. I suppose there are three possibilities here:

Judge Torres is wrong, the SEC is right, and a thing is an "investment contract” based on its original substance, even if it later trades in the secondary market. If Meta sells me a share of stock and then I sell it to you, it remains a security; if Howey sells me an orange-grove-management contract and I resell it to you, it remains a security. I think that this is the right answer, though I am not confident in that. Particularly in crypto, where tokens have a non-security utility, there is a good argument that tokens can change character over time, that they can start off as securities and end up as something else. We have discussed that theory before, but I will just note that it is not the theory of the Ripple opinion. The theory here is much stranger: It’s that each individual token sale is a securities offering if the investors are sophisticated and not if they are not.Judge Torres is right in her “investment contract” analysis, but the Howey “investment contract” test is not the right way to think about crypto. The right way to think about crypto tokens is that they are quasi-stocks in crypto projects, and so they are securities even upon resale, not because each resale meets the Howey test but because stock is always stock. The right way to think about crypto tokens is not by parsing the Howey elements for each transaction, but by saying “well how does it work with stock?” and reasoning by analogy. I think that this is, broadly speaking, the right intuition, and I kind of wish it was the law, but I don’t really think it is. (And, again, it breaks down for tokens that have utility in a blockchain ecosystem, which can start out looking like stock and end up looking like airline miles or Starbucks gift cards or a currency to pay for cloud computing time.)Judge Torres is right, the SEC is wrong, and no crypto token is a security unless the issuer sells it directly to venture capitalists in a fundraising round.In some ways, that last result would be very good for the crypto industry. Most immediately, it would be a complete win for Coinbase Global Inc., which is fighting its own case in which the SEC argues that it is operating an unregistered securities exchange. One implication of Judge Torres’ ruling is that cryptocurrencies are only securities if you know that you are buying them directly from the company; if you buy them in the secondary market — on Coinbase, for instance — then they are not. So there are no securities listed on Coinbase — in fact, it is impossible for Coinbase to list any securities [11] — so it is not an illegal securities exchange. Good news for Coinbase:

Coinbase Global Inc. rose the most since its public debut, climbing as high as $109.21. The exchange is embroiled in a lawsuit of its own with the SEC that alleges that it sold tokens that are unregistered securities.

“This underscores that direct sales of digital assets by an issuer will often be securities, but other sales, most notably sales on the secondary market, are unlikely to be deemed securities, which is a key argument in Coinbase’s defense against the SEC,” said Elliott Stein, Bloomberg Intelligence senior analyst for litigation.

More broadly, if you take this decision seriously, it means that the SEC has essentially no jurisdiction over crypto. Most token sales will either be (1) direct to institutional investors or (2) on exchanges. Sales on exchanges, says Judge Torres, are not securities offerings, because the buyer doesn’t know that she is giving money to the issuer. Sales to institutional investors are securities offerings, but anyone selling anything to institutional investors in 2023 can do so under an exemption from securities registration. (Securities registration is only for public sales, not sales to big institutions.) So basically no crypto sales will ever require SEC registration, no crypto exchange or brokerage will be a securities exchange or brokerage, [12] and the SEC is out of crypto entirely.

But I am not sure that it is actually all that good for crypto in the long run. The message of this decision is that crypto companies can freely sell tokens to retail investors as long as those retail investors are uninformed and the companies are secretive about it; only if they sell tokens openly to sophisticated investors will they get in trouble. That’s bad.

In the 1920s, a lot of people started very shady companies and raised a lot of money by selling stock with bad and misleading disclosures, and so the securities laws were created to stop them. That did not have the result of stamping out stock issuance in the US. Quite the contrary! The US stock market was helped enormously by having disclosure rules and protections for retail investors. The basic rule of the US stock market is “you can kind of do what you like with sophisticated investors, but there are strict rules about how much you have to disclose to retail investors,” and that works out well. The opposite rule in this case — “you can do what you like with retail, but stay away from sophisticated investors” — seems likely to work out poorly. If the law encourages crypto companies to take advantage of the least sophisticated investors, then who would want to invest in crypto?

Things happen
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[1] Lazily estimated from the “additional paid-in capital” line in the capitalization table of the IPO prospectus.

[2] I mean, in a public offering for cash captured by Bloomberg’s CACS function. I am ignoring stock-based compensation and M&A, which are sort of financing mechanisms, and in some economic sense relevant here, but never mind!

[3] You could tell a merger story like “Meta loses 99% of its value and is then small enough to be acquired by Twitter for cash, at which point shareholders get cashed out,” but that is not a reason to buy the stock today!

[4] They could resell it when Facebook went public, in the case of most of the pre-IPO sales, or immediately, in the case of the IPO and post-IPO sale.

[5] Or who got it as employee compensation or founder’s stock or in M&A.

[6] That is, the *company* has to register its offerings of stock, and certain affiliates and underwriters of the company have to register their sales. Ordinary sales by outsiders on the stock exchange don’t require registration — but they are still securities transactions, and so for instance the brokers and stock exchange involved in the transaction are subject to SEC regulation.

[7] The quotes in this paragraph and the next come from yesterday’s court decision.

[8] A somewhat paradoxical element here is that the more Ripple actually *does*, the more it works to make XRP *useful*, the more security-like it is. If Ripple’s situation is just “hey we have this stash of XRP, they aren’t useful for much, but people keep trading them so we’re gonna sell some,” then XRP is probably not a security. If Ripple succeeds in building out a widely used payments network and signing up a bunch of banks and institutions to use XRP for their business, then the price of XRP will go up in a way that is directly tied to Ripple’s business, making it a bit more security-like. I don’t think that this is entirely true — if Ripple gets everyone to use XRP for payments, in some ways that helps the argument that XRP is a currency rather than quasi-stock in Ripple — but it is partly true.

[9] Proponents sometimes say that “the investment contracts in Howey are securities, but the oranges are not.” This is irrelevant. The question is: If you buy a plot of land and a service contract from Howey, and three years later you find someone else to buy that same arrangement from you, is that still a security? When institutional XRP buyers bought XRP from Ripple, they didn't get XRP *plus* some explicit contractual arrangement to build out the ecosystem: They got XRP, and understood that if the ecosystem grew then XRP would go up.

[10] Similarly, it is well understood that Mark Zuckerberg, as an affiliate of Meta, generally has to register his own sales of Meta stock, or sell within some exemption from registration. He can’t just quietly dump Meta stock on the exchange and say “well, no one knows they’re buying from me, so I don’t have to tell them.” But Judge Torres finds that Ripple’s executives can sell XRP freely, because no one knows that they’re buying from those executives so the sales aren’t securities offerings: “Larsen and Garlinghouse did not know to whom they sold XRP, and the buyers did not know the identity of the seller. Thus, as a matter of law, the record cannot establish the third Howey prong as to these transactions.”

[11] Unless it listed stocks, I mean. Tokenized stocks, etc. Because a "stock" is explicitly a security whether or not it satisfies the Howey test.

[12] Well. I suppose if you are a crypto investment bank in the business of brokering token sales from issuers to venture capitalists, then those are securities offerings and you technically need to register with the SEC as a securities brokerage. But brokers and exchanges in the secondary market would not.

[StockDung] SEC defendant Offill makes his sentencing pitch 2023-07-11 20:45 ET - Street Wi...

StockDung — 7/12/2023 10:21:42 AM
SEC defendant Offill makes his sentencing pitch

2023-07-11 20:45 ET - Street Wire

Also Street Wire (U-MCPI) Mansfield-Martin Exploration Mining Inc

This item is part of Stockwatch's value added news feed and is only available to Stockwatch subscribers.

Here is a sample of this item:

by Mike Caswell

Phillip Offill, a former Texas securities lawyer who pleaded guilty to charges arising from the "wholly fraudulent" sale of $1.3-million worth of stock on the OTC Markets, has asked the judge to impose a term of no more than 3-1/2 years. (All figures are in U.S. dollars.) He says that others had far more to do with the scheme than he did. Despite that, most of the scheme's participants were never charged, he complains.

Mr. Offill, who has many Canadian connections in his past, is awaiting sentencing for a scheme with Mansfield-Martin Exploration Mining Inc., a mining listing on the OTC Markets. Prosecutors in Virginia said that he and an associate obtained shares of the company through forgery, deception and a fraudulent board resolution, and then sold those shares on the market. The government is seeking an eight-year jail term for Mr. Offill, based in part on his prior criminal record. In particular, prosecutors cited a 2010 conviction that Mr. Offill received for helping insiders of nine companies obtain illegally issued stock, which they then used in pump-and-dumps.

[SEC-ond-chance] Will he ever stop getting himself into these OFFILL situations.........

SEC-ond-chance — 7/6/2023 5:28:48 PM

[StockDung] JUST OFFILL, Francois Goelo attorney facing 8 years up the river ==============...

StockDung — 7/6/2023 10:55:37 AM
JUST OFFILL, Francois Goelo attorney facing 8 years up the river

=======================

SEC defendant Offill facing eight-year sentence

2023-07-05 20:34 ET - Street Wire

Also Street Wire (U-MCPI) Mansfield-Martin Exploration Mining Inc

This item is part of Stockwatch's value added news feed and is only available to Stockwatch subscribers.

Here is a sample of this item:

by Mike Caswell

Phillip Offill, a former Texas lawyer with many Canadian connections, should spend eight years in jail for defrauding investors in a supposed Arizona mining company, prosecutors say. He helped run a scheme that prosecutors describe as "wholly fraudulent," coming as part of a pattern of "longstanding and blatant criminal conduct." He and an associate unloaded $1.3-million worth of improperly obtained shares on investors who ultimately lost their money, the government says. (All figures are in U.S. dollars.)

The request from prosecutors comes as part of a case in which they cited Mr. Offill, 63, for a scheme with Mansfield-Martin Exploration Mining Inc., a mining listing on the OTC Markets. He and an associate obtained shares of the company through forgery, deception and a fraudulent board resolution, and then sold those shares on the market, the government said. There was no trial for Mr. Offill, as he pleaded guilty to one count of conspiracy to commit securities fraud, entering the plea before a federal judge on March 13, 2023.

[S. maltophilia] Their Crypto Company Collapsed. They Went to Bali. The implosion of Three Arrow...

S. maltophilia — 6/9/2023 5:47:52 PM
Their Crypto Company Collapsed. They Went to Bali.
The implosion of Three Arrows Capital, a cryptocurrency hedge fund, devastated the industry. Its two founders spent the next year surfing, meditating and traveling the world.

Not long after his cryptocurrency hedge fund collapsed last year, spawning a market meltdown that devastated the industry, Kyle Davies got on a plane and left his troubles behind.

He flew to Bali. As his company was liquidated and law enforcement authorities opened investigations on two continents, Mr. Davies spent his........

nytimes.com

[StockDung] SEC Obtains Final Judgment Against Investment Adviser Thomas Carter Ronk in Micr...

StockDung — 5/23/2023 2:07:38 PM
SEC Obtains Final Judgment Against Investment Adviser Thomas Carter Ronk in Microcap Stock Trading Scheme

Litigation Release No. 25732 / May 22, 2023Securities and Exchange Commission v. Thomas Carter Ronk, 18-civ.-00607 (C.D. Cal., filed September 28, 2018; amended December 17, 2020)
On April 14, 2023, the U.S. District Court for the Central District of California entered a final consent judgment against Thomas Carter Ronk imposing injunctive relief, a five-year officer-and-director bar, a five-year penny stock bar, and a civil penalty.

According to the SEC's amended complaint, Ronk was involved in three separate fraudulent schemes. First, Ronk was allegedly engaged in fraudulent promotional efforts in order to sell or assist in the sale of two microcap stocks by disseminating misstatements in newsletters. Second, the SEC alleged that Ronk made false statements to prospective investors in connection with a private stock offering. Third, according to the complaint, Ronk manipulated the price of common stock in the same two issuers for which he engaged in fraudulent promotional efforts.

The SEC's amended complaint charged Ronk with violating Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the anti-touting provision of Section 17(b) of the Securities Act. Without admitting or denying the SEC's allegations, Ronk consented to a final judgment in which he agreed to be permanently enjoined from violations of the charged provisions and agreed to a five-year officer-and-director bar and a five-year penny stock bar. He additionally agreed to pay a civil penalty of $75,000.

The SEC's litigation is being handled by Christopher Dunnigan and Preethi Krishnamurthy of the New York Regional Office and is being supervised by Sheldon L. Pollock.

[Buckey] quite a story

Buckey — 5/21/2023 8:44:07 PM

[S. maltophilia] The Billion-Dollar Ponzi Scheme That Hooked Warren Buffett and the U.S. Treasury...

S. maltophilia — 5/18/2023 9:01:30 PM
The Billion-Dollar Ponzi Scheme That Hooked Warren Buffett and the U.S. Treasury
How a small-town auto mechanic peddling a green-energy breakthrough pulled off a massive scam

theatlantic.com

[Glenn Petersen] Carl Icahn’s company stock falls again after prosecutors seek financial informat...

Glenn Petersen — 5/10/2023 11:04:38 AM
Carl Icahn’s company stock falls again after prosecutors seek financial information

PUBLISHED WED, MAY 10 202310:44 AM EDT
UPDATED 7 MIN AGO
Yun Li @YUNLI626
CNBC.com

Carl Icahn speaking at Delivering Alpha in New York on Sept. 13, 2016. / David A. Grogan | CNBC
-------------------------------------

Icahn Enterprises, Carl Icahn’s conglomerate, saw its stock drop again Wednesday after a disclosure showed regulators are seeking information regarding its corporate governance.

The shares fell as much as 20% in morning trading, following a near 25% loss last week. A regulatory filing revealed the U.S. Attorney’s office for the Southern District of New York contacted Icahn Enterprises last Wednesday seeking information about corporate governance, capitalization, securities offerings, dividends, valuation, marketing materials, due diligence and other materials.

Regulators sought information a day after notable short seller Hindenburg Research took a short position against Icahn’s company. Hindenburg alleged “inflated” asset valuations last Tuesday, among other reasons, for what it says is an unusually high net asset value premium in shares of the publicly traded holding company.

“The U.S. Attorney’s office has not made any claims or allegations against us or Mr. Icahn with respect to the foregoing inquiry,” Icahn said in the 10-Q filing. “We believe that we maintain a strong compliance program and, while no assurances can be made and we are still evaluating the matter, we do not currently believe this inquiry will have a material impact on our business, financial condition, results of operations or cash flows.”

Icahn, the most well known corporate raider in history, made his name after pulling off a hostile takeover of Trans World Airlines in the 1980s, stripping the company of its assets. Most recently, the billionaire investor has engaged in activist investing in McDonald’s and biotech firm Illumina.

Headquartered in Sunny Isles Beach, Florida, Icahn Enterprises is a holding company that invests in a myriad of businesses including energy, automotive, food packaging, metals and real estate.

Last week, in response to the Hindenburg report, Icahn said in a statement that the short seller’s report was intended “solely” to generate profits on its short position at the expense of Icahn Enterprises’ long-term stakeholders.

“We stand by our public disclosures and we believe that IEP’s performance will speak for itself over the long term as it always has,” Icahn said last week. “We continue to believe that activism is the best paradigm for investing and my activist investments over the last 25 years have well proved this out.”

Shares of Icahn Enterprises are now down more than 35% year to date.

Carl Icahn's company stock falls as much as 20% after prosecutors seek financial information (cnbc.com)

[Glenn Petersen] SEC awards record $279 million to whistleblower PUBLISHED FRI, MAY 5 202311:13 ...

Glenn Petersen — 5/5/2023 12:50:50 PM
SEC awards record $279 million to whistleblower

PUBLISHED FRI, MAY 5 202311:13 AM EDT
Chelsey Cox @THEREALCO
CNBC.com

KEY POINTS

-- The SEC announced a record $279 million award to a whistleblower.

-- The unidentified whistleblower aided in the successful enforcement of SEC-related actions, the agency said.

-- The award is more than double the second-highest amount, which was awarded in 2020.

WASHINGTON — The nation’s top securities regulator on Friday announced it had given a $279 million award through its whistleblower program — the largest in its history.

The Securities and Exchange Commission said the unnamed whistleblower provided information and assistance that led to a successful enforcement action, which the agency didn’t describe. The payout is well more than double the second-largest award of $114 million, issued in October 2020.

The huge sum is intended to incentivize witnesses to disclose potential securities law violations and “reflects the tremendous success of our whistleblower program,” Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a statement released Friday.

The program also directly benefits investors, he added, because whistleblowers have aided enforcement actions resulting in the return of over $4 billion in ill-gotten gains and interest.

The SEC didn’t offer much information about the case or the whistleblower other than they gave “sustained assistance including multiple interviews and written submissions was critical to the success of these actions,” said Creola Kelly, chief of the SEC’s Office of the Whistleblower.

A representative for the agency did not immediately respond to a request for comment from CNBC.

The identity of whistleblowers is protected under the 2010 Dodd-Frank Act. Whistleblower payments are withdrawn from an investor protection fund established by Congress. Rewards can range from 10% to 30% of the money collected when sanctions exceed $1 million.

SEC awards whistleblower record $279 million (cnbc.com)

[SEC-ond-chance] This is quite an Offill situation, LoL.

SEC-ond-chance — 3/16/2023 12:34:43 AM

[StockDung] Francois Goelo's old attorney pleads guilty to second stock scam ==============...

StockDung — 3/15/2023 8:21:09 PM
Francois Goelo's old attorney pleads guilty to second stock scam

=========================================

SEC lawyer turned fraudster guilty, again

Pair pleaded guilty in penny stock fraud scheme

By: James Langton March 14, 202315:43
A former regulator turned securities fraudster has pleaded guilty to the latest charges against him for his role in a penny stock manipulation scheme.

The U.S. attorney’s office for the Eastern District of Virginia said that Phillip Offill, Jr. and Justin Wallace Herman admitted to conspiracy to commit securities and wire fraud. They will be sentenced on June 21.

According to court filings, the pair conspired with others to misappropriate millions of shares of mining company Mansfield-Martin Exploration Mining, Inc. using forged documents and sham transactions, and then dumped those shares on investors.

The company’s stock was misappropriated with the use of fabricated documents that induced the company and its transfer agent to issue millions of shares to satisfy a purported convertible debt obligation, and to transfer millions of shares of another shareholders’ stock to them.

Offill, who once worked as an attorney at the U.S. Securities and Exchange Commission (SEC), was convicted back in 2010 for participating in another multi-million-dollar pump-and-dump scheme. He was serving a three-year term of supervised release (following an eight-year prison term) resulting from that conviction when he orchestrated the latest scheme, authorities said.

The SEC also charged Offill and Herman in connection with this latest case in January 2022.

[Glenn Petersen] U.S. charges exiled Chinese businessman Guo Wengui with $1 bln fraud By Jonath...

Glenn Petersen — 3/15/2023 3:13:10 PM
U.S. charges exiled Chinese businessman Guo Wengui with $1 bln fraud

By Jonathan Stempel
Reuters
March 15, 2023

Guo Wengui (also known as Miles Kwok) holds a news conference with Steve Bannon in New York, New York, U.S., November 20, 2018. REUTERS/Carlo Allegri
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NEW YORK, March 15 (Reuters) - The U.S. government on Wednesday charged Guo Wengui, an exiled Chinese businessman with ties to former Donald Trump adviser Steve Bannon, with leading a complex conspiracy to defraud his online followers out of more than $1 billion.

Authorities said Guo, with help from his longtime financial adviser Kin Ming Je, cheated thousands of followers by promising "outsized" investment returns, but diverted much of their money to fund lavish lifestyles for himself and his family.

The alleged improper purchases included a $37 million yacht, a 50,000 square-foot mansion in northern New Jersey, a $3.5 million Ferrari for Guo's son, a $62,000 TV, and two $36,000 mattresses, according to authorities.

Guo was charged with 11 criminal counts, after "lining his pockets with the money he stole," U.S. Attorney Damian Williams in Manhattan said in a statement.

A lawyer for Guo did not immediately respond to requests for comment.

Guo has been a business associate of Bannon, who was arrested in a fraud case in August 2020 while aboard Guo's yacht, the Lady May.

Trump pardoned Bannon in the final hours of his presidency. Bannon is not accused of wrongdoing in Guo's criminal case.

The U.S. Department of Justice said it seized and is seeking the forfeiture of $634 million of alleged fraud proceeds from 21 bank accounts, including several at the now-closed Silvergate Bank.

It said it also seized assets purchased with proceeds from Guo's alleged fraud, including a Lamborghini Aventador.

Guo, 52, has used other names including Ho Wan Kwok and Miles Kwok.

He was arrested on Wednesday morning and faces charges that include securities fraud, wire fraud and concealment of money laundering, carrying several decades of potential prison time.

Guo also faces related U.S. Securities and Exchange Commission civil charges.

Je, who lives in London and is also known as William Je, faces the same 11 criminal counts plus an obstruction charge. He is at large.

'SERIAL FRAUDSTER'

Guo is a prominent critic of China's Communist Party.

He left the country in 2014 during an anti-corruption crackdown under President Xi Jinping, and has been accused there of crimes including bribery and money laundering. Guo has denied wrongdoing.

Court papers filed on Wednesday described a web of offerings that according to prosecutors targeted investors aligned with Guo's policy objectives in China, and inclined to believe the self-proclaimed billionaire when it came to investing.

"We allege that Guo was a serial fraudster," SEC enforcement chief Gurbir Grewal said in a statement.

Guo's offerings allegedly included a $262 million fundraising through a purported cryptocurrency "ecosystem," the Himalaya Exchange, that promised a so-called H Coin, also known as Himalaya Coin or HCN, with an estimated $27 billion valuation.

The indictment quotes from an October 2021 video in which Guo allegedly said 20% of H Coin's value was backed by gold, and that he would fully reimburse investors who lost money.

"Whoever loses money, I will bear it," Guo was quoted as saying.

Prosecutors said the alleged fraudulent scheme occurred from 2018 until this month. The Lady May is among the assets the government wants to seize.

In February 2022, Guo filed for Chapter 11 bankruptcy in Connecticut after a New York judge ordered him to pay $134 million for moving the Lady May out of a lender's reach.

Reporting by Jonathan Stempel in New York; Additional reporting by Luc Cohen in New York and Chris Prentice in Washington, D.C.; Editing by Marguerita Choy and Bill Berkrot

U.S. charges exiled Chinese businessman Guo Wengui with $1 bln fraud | Reuters

[Cautious_Optimist] Opinion Meet the con man who sold America on ‘fake it till you make it’ Febr...

Cautious_Optimist — 2/27/2023 11:50:29 AM
Opinion

Meet the con man who sold America on ‘fake it till you make it’

February 27, 2023 at 7:00 a.m. EST

No paywall:
wapo.st

[S. maltophilia] The Man Who Moves Markets Carson Block uses covert techniques to uncover fraud ...

S. maltophilia — 2/21/2023 8:13:26 PM
The Man Who Moves Markets
Carson Block uses covert techniques to uncover fraud for profit. Now he’s under investigation himself. Is he the hero of Wall Street, or the villain?

By Evan Hughes
theatlantic.com [long]

[nicewatch] The Great Gatsby of Gold Took Their Millions—and Vanished yahoo.com

nicewatch — 2/5/2023 1:12:44 PM

[kidl] Billion $$$ Fight Against Naked Short Selling The incredible story of how John ...

kidl — 1/28/2023 10:59:58 AM
Billion $$$ Fight Against Naked Short Selling

The incredible story of how John Brda, CEO of Torchlight $TRCH, fought naked short sellers, took his share price from $0.30 to $11.00, raised $183 million and closed a $1.9 billion $META merger. All in 6 months.

Billion $$$ Fight Against Naked Short Selling - YouTube

[S. maltophilia] Open AccessPublished: 05 January 2023How pervasive is corporate fraud?Alexander ...

S. maltophilia — 1/15/2023 3:05:42 PM
Open AccessPublished: 05 January 2023How pervasive is corporate fraud?Alexander Dyck, Adair Morse & Luigi Zingales Review of Accounting Studies (2023) Cite this article

Abstract
We provide a lower-bound estimate of the undetected share of corporate fraud. To identify the hidden part of the “iceberg,” we exploit Arthur Andersen’s demise, which triggered added scrutiny on Arthur Andersen’s former clients and thereby increased the detection likelihood of preexisting frauds. Our evidence suggests that in normal times only one-third of corporate frauds are detected. We estimate that on average 10% of large publicly traded firms are committing securities fraud every year, with a 95% confidence interval of 7%-14%. Combining fraud pervasiveness with existing estimates of the costs of detected and undetected fraud, we estimate that corporate fraud destroys 1.6% of equity value each year, equal to $830 billion in 2021.

Introduction

link.springer.com

[StockDung] SEC defendant Isen receives five-year sentence 2023-01-10 20:55 ET - Street Wir...

StockDung — 1/11/2023 1:20:15 PM
SEC defendant Isen receives five-year sentence

2023-01-10 20:55 ET - Street Wire

Also Street Wire (U-ICEIF) Intelligent Content Enterprises Inc

by Mike Caswell

A New York judge has imposed a five-year jail term on Lawrence Isen, a banned broker convicted for a boiler room operation that defrauded seniors and others of $15-million. (All figures are in U.S. dollars.) Prosecutors said that Mr. Isen was part of a group that boosted four stocks, including Canadian Securities Exchange listing Intelligent Content Enterprises Inc., through a cold-calling operation that ran over a four-year period. Mr. Isen "routinely and relentlessly" lied to investors for personal financial gain, prosecutors claimed.

Mr. Isen received his sentence in an appearance on Jan. 6, 2022, before New York Judge Joanna Seybert. In addition to the five years in jail, the judge ordered Mr. Isen to pay $8-million in restitution. Upon his release, he must serve two years of supervised release. The judge gave Mr. Isen until Sept. 8, 2023, to report to the Bureau of Prisons to begin his sentence.

The five-year jail term is hardly a victory for prosecutors, who had asked the judge to put Mr. Isen in jail for 20 years. In a letter filed on April 12, 2022, they described him as an experienced stock market fraudster who had once worked as a broker. His career, as set out by the government, was cut short in 1993 after the U.S. Securities and Exchange Commission banned him for receiving undisclosed payments in return for selling shares. He was later convicted of criminal charges arising from those payments.

[Glenn Petersen] The legal threat coming for venture capital By SAM SUTTON Politico 01/06/2023...

Glenn Petersen — 1/7/2023 5:35:07 AM
The legal threat coming for venture capital

By SAM SUTTON
Politico
01/06/2023 08:00 AM EST

After being battered by rising interest rates and choppy markets, the venture capital industry is sweating new regulations that could expose fund managers to legal risks.

The SEC is putting the final touches on a rule that would make it easier for investors to sue VCs for bad behavior, negligence or recklessness. It would “open up all types of litigation risk to being a venture capitalist,” Justin Field, the National Venture Capital Association’s senior vice president of government affairs, told MM.

The proposal, which could be finalized as soon as this quarter, would “drive a wedge between VCs and portfolio companies that will hurt both innovation in this country as well as [investor] returns, which is what the SEC is supposed to be trying to protect,” he added.

Of course, the rule wouldn’t just apply to venture capitalists. It would also cover private equity firms, hedge funds and certain real estate investment companies – any private investment fund that’s already subject to SEC oversight.

But the proposed changes might be especially vexing for VCs because of their investment model. Most venture-backed companies fail. And while the vast majority of those businesses peter out because they can’t attract a buyer (or make beaucoup bucks via public markets like Facebook or Google), a handful will go under because their founders are either frauds or comically inept.

And as we’ve learned over the last years, venture firms don’t always catch that in due diligence.

“As an investor, when the environment is ‘frothy’ you are much more likely to run into these problems,” Bill Gurley, a general partner at the Silicon Valley venture fund Benchmark, wrote in a recent blog post. “Ironically this is also the precise time when raising concerns will make you look like a washed up veteran who is unable to adjust to the new ‘realities.’”

It gets a lot harder to cover up those mistakes when markets go down. With economists pegging the odds of a recession at 70 percent — that’s hardly an inevitability, writes our Victoria Guida — more bad bets will be exposed and, in all likelihood, some venture-backed CEOs will be found to have cut corners.

When that happens, investors are going to have questions about the fund managers who boosted those businesses. (Lawmakers posed similar questions during last month’s FTX hearings, and Reuters is reporting the SEC is also probing the matter).

From the NVCA’s perspective, exposing VC to new legal claims wouldn’t do much to change that. And it might make it that much more difficult for new startups to attract capital in the meantime.

“This is going to significantly increase the cost of operating a venture capital fund without materially impacting outcomes,” Field said.

<snip>

The legal threat coming for venture capital - POLITICO

[StockDung] Ponzi: The Financial Idiot Who Scammed the World youtu.be [youtube video]

StockDung — 1/6/2023 6:55:31 PM

[Glenn Petersen] How a Ponzi Scheme Mastermind Made Millions Off the Most Vulnerable The Daily B...

Glenn Petersen — 12/28/2022 5:42:42 AM
How a Ponzi Scheme Mastermind Made Millions Off the Most Vulnerable

The Daily Beast
December 28, 2022

A con man who ran what the FBI called “the largest Ponzi scheme ever prosecuted in western New York”, and then tried to sell the federal government nonexistent COVID-19 masks during the pandemic, has been sentenced to 20 years in prison.

“I think you are a con man, the biggest con man I have ever had to deal with in this court,” U.S. District Judge Frank Geraci Jr. told Christopher Parris, 42, at his sentencing on December 19.

Parris was convicted of defrauding over 1,000 victims who invested over $100 million as part of the scheme which involved a string of fake companies and non-existent investment opportunities.

In January 2020, after his network of phony investment businesses collapsed, Parris was arrested and charged with mail fraud and money laundering.

While he was out on pretrial release in the Ponzi scheme case, Parris embarked on another audacious scheme to defraud the federal government in a COVID-19 protective equipment scam.

As the COVID pandemic wracked the United States in early 2020 and thousands of Americans were sick and dying, Parris offered to sell scarce personal protective equipment (PPE), including 3M-brand N95 respirator masks, to the Department of Veterans Affairs (VA) and other government, state and medical entities.

In April 2020, Parris called a person he thought was a VA employee and said his company, Encore Health Group, acquired and produced PPE and ventilators, and could produce them in one to two weeks, according to court records viewed by The Daily Beast.

A spokesperson for Parris’ company told another VA employee they had access to 190 million 3M masks that were available for purchase, as well as 10,000 ventilators and 1.5 million protective face shields. (The Minnesota-based company 3M manufactures PPE.) Parris’ company was selling the masks for $7.50 a pop, while 3M-contracted companies were offering them for $0.50 each.

In an email to the VA, Parris said the masks were “on the ground” and his team was inspecting them, according to court documents.

Prosecutors say Parris misrepresented his ability to provide the VA with 125 million face masks and other PPE that would have totaled over $750 million.

“In fact, [Parris] had no ready access to 3M factories or 3M N95 masks or other PPE, no proven source of supply, and no track record of procuring and delivering such items,” the U.S. Attorney’s Office of the Western District of New York said in a statement.

What Parris didn’t know was that federal authorities were already suspicious. An agent from the U.S. Department of Homeland Security Investigations went undercover, pretending to be a procurement specialist with the state of Louisiana who was trying to buy masks and other medical supplies, according to court documents.

The undercover agent discovered the state of Louisiana’s Office of Homeland Security and Emergency Management had put in an order with Parris’ company for more than $7.3 million of PPE in March 2020, including 160,000 face masks, none of which arrived.

Parris was arrested in April 2020, and charged with fraud in the COVID-19 scam. Meanwhile, he was still facing charges for his earlier involvement in a Ponzi scheme that defrauded over 1,000 people.

Prosecutors say that between 2008 and 2018, Parris and his co-defendant Perry Santillo conspired to defraud their victims by falsely representing investment opportunities in a classic “Ponzi scheme.” Parris and Santillo ran an investment company called Lucian Development out of Rochester, New York. They solicited investments from older people, who entrusted Parris and Santillo with their life savings or retirement money. Instead, it was used to pay prior investors, prosecutors say.

The scheme finally collapsed in June 2018, but not before Parris and Santillo had obtained at least $115 million, according to court documents.

Santillo spent lavishly on cars, country clubs, casinos, real estate, and expensive suits, according to a complaint filed with the Securities and Exchange Commission. He threw himself a $150,000 birthday party in Las Vegas while misappropriating investor funds, the complaint says.

Santillo even commissioned a song about himself, called “King Perry: The King of Hyde,” that described him as wearing a “ten-thousand-dollar suit everywhere he rides.”

In October, Santillo was sentenced to 17 years in prison after pleading guilty to fraud by U.S. District Judge Frank Geraci Jr.

Two months later, on Dec. 20, the same judge found Christopher Parris guilty of conspiracy to commit mail fraud in relation to the Ponzi scheme, and wire fraud for the fraudulent sale of masks and over PPE equipment.

In emotional testimony given at Parris’ sentencing, victims of the Ponzi scheme detailed the devastating impact the scam has had on their lives. One described becoming suicidal when she learned of her financial loss, according to the Democrat and Chronicle. Others described losing over $1 million, or being forced to work well into their seventies, having lost financial security.

“How many innocent victims now can’t pay their rent or heat their homes?” one victim asked during the sentencing.

Prosecutors also slammed Parris for his COVID-19 PPE scam.

“This defendant exploited a situation like none other in our recent history,” said U. S. Attorney for the District of Columbia Matthew M. Graves after Parris’s sentencing. “Fraud like this, playing off fears during a pandemic, merits a significant sentence, as the court imposed today. This sentence should be a warning to anyone who thinks they can get away with ripping off the government or others during a crisis.”

In court, Parris’ lawyer, John Sperenza, said his client began as a successful young investment banker but was led astray when he became involved in a failing company, according to the Democrat and Chronicle. He argued that unlike his co-defendant Santillo, Parris didn’t spend lavishly, and made efforts to return some money to investors.

“There’s no getting around it that many people were severely damaged,” Sperenza said, according to the newspaper. But Parris, he went on, “was part of that sadness and wreckage.”

Prosecutors had a different take.

“It seems Parris’ multi-million-dollar Ponzi scheme to defraud investors out of their hard-earned cash was not enough, so he turned his attention to a multi-million-dollar COVID fraud scheme. There were no boundaries in Parris’ cons, and no one person was safe as long as he was lining his pockets with their money,” said Thomas M. Fattorusso, special agent in charge of IRS-CI New York, after Parris’ sentencing. “Parris will face justice; putting his scamming days behind him as he spends his time behind bars.”

The post How a Ponzi Scheme Mastermind Made Millions Off the Most Vulnerable appeared first on The Daily Beast.

How a Ponzi Scheme Mastermind Made Millions Off the Most Vulnerable – DNyuz

[StockDung] Former VICE Journalist Charged with Attempting to Anally Penetrate a 9-Year-Old ...

StockDung — 12/27/2022 12:55:02 PM
Former VICE Journalist Charged with Attempting to Anally Penetrate a 9-Year-Old Boy

Shane Trejo |
Dec 26, 2022 Share via Email

A former VICE journalist has been charged with attempting to anally rape a 9-year-old boy, according to a press release from the Department of Justice.

“[Efrem] Zelony-Mindell allegedly attempted to engage in sexual activity with a nine-year-old boy. The protection of children from predation remains of critical importance to this Office, and we will continue to use our resources and work with our law enforcement partners to bring offenders to justice,” said Damian Williams, the United States Attorney for the Southern District of New York, in the press release.
“As alleged, Mr. Zelony-Mindell’s actions are nearly unfathomable. Through a series of conversations with undercover FBI agents conducted on encrypted messaging platforms, he stated his desire to have sex with minor children, and he ultimately met with one of the agents who he believed would provide him an opportunity to do so,” FBI Assistant Director Michael J. Driscoll said.

“Today’s action should serve as a reminder to anyone who seeks to prey on children – the FBI Human Trafficking and Child Exploitation Task Force and our law enforcement partners will continue to aggressively pursue you and hold you accountable,” Driscoll added.
When Zelony-Mindell wrote for VICE, he penned at least two perverted articles that were published in 2016, including an art display that highlighted the sexuality of a 13-year-old child prostitute. He highlighted photographer Mary Ellen Mark’s controversial photography project, Tiny: Streetwise Revisited, which centered around “Tiny (Erin Charles), a 13-year-old prostitute who talked of wanting diamonds and a horse farm.”

“For Mark, Tiny became a 30-year focus of turmoil and intrigue that became integral to her artistic practice… What starts off as a portrait of a young girl with big dreams progresses over the years into a life that’s fallen apart through drugs, abuse, ten children, and other turmoil,” Zelony-Mindell wrote.

It should come as no surprise that the accused pedophile Zelony-Mindell was severely stimulated by the art portraying the child sex worker.

“Both Aperture and the exhibition’s treatment of Mark’s photos nurtures this sentiment, as well as another: The work isn’t about a happy story or even inspiring one, but it’s a damn good one nonetheless,” Zelony-Mindell stated.
It should come as no surprise that VICE is giving harbor to potential predators at their publication. These far-left media outlets are getting ready to mainstream pedophilia under the banner of “minor-attracted persons.” They must all be brought to justice before civilization can be redeemed.

[StockDung] Phillip Offill was also Frank Goelo's attorney in the BluePoint scam. Offill in ...

StockDung — 12/27/2022 12:44:33 PM
Phillip Offill was also Frank Goelo's attorney in the BluePoint scam. Offill in another tussle.

==============================

SEC defendant Offill protests Mansfield charges
2022-12-23 21:01 ET - Street Wire

Also Street Wire (U-MCPI) Mansfield-Martin Exploration Mining Inc

by Mike Caswell

Phillip Offill, a former Texas lawyer with many Canadian connections, has asked a Virginia judge to throw out criminal charges that he faces for a scheme to sell $1.3-million worth of improperly issued shares in a purported mining company. (All figures are in U.S. dollars.) He claims that the evidence prosecutors have presented so far falls far short of making a case against him. Among other things, the government has not established that he had anything to do with misleading news releases or a call centre that touted the company, he says.

The request from Mr. Offill comes as part of a case in which prosecutors in Virginia claim that he was behind the sale of shares in Mansfield-Martin Exploration Mining Inc., a mining listing on the OTC Markets. He had obtained the shares through forgery, deception and a fraudulent board resolution, the government said. The sales also came shortly after Mr. Offill had left prison for a prior scheme that involved two Ontario men. A judge has since ordered Mr. Offill to return to prison, where he awaits trial.
==============================================

[Buckey] Love reading about these scumbags. However only really enjoy the end part when ...

Buckey — 12/15/2022 9:03:04 PM
Love reading about these scumbags. However only really enjoy the end part when they are sentenced.

[Glenn Petersen] SEC says 8 social media influencers used Twitter and Discord to manipulate stock...

Glenn Petersen — 12/14/2022 10:08:21 AM
SEC says 8 social media influencers used Twitter and Discord to manipulate stocks

The regulatory agency charged them in what it says was a $100 million securities fraud scheme run by people who portrayed themselves as successful stock traders.

By Kat Tenbarge
NBC News
December `4, 2022

The Securities and Exchange Commission has charged eight social media influencers with securities fraud, saying Wednesday they were part of a $100 million scheme to use social media platforms Twitter and Discord to manipulate the price of certain stocks.

Though the influencers are not household names, they had accrued more than two million followers across various social media platforms, where they routinely posted photos of their wealth including of exotic sports cars, according to an SEC complaint filed Tuesday.

Discord is a private chatroom and messaging platform that is popular with gaming influencers and, more recently, financial influencers. According to the regulatory agency, seven of the defendants promoted stocks to their hundreds of thousands of Twitter followers and in stock trading rooms on Discord since at least January 2020.

After purchasing the stocks and encouraging their followers to do the same, the defendants “regularly sold their shares without ever having disclosed their plans to dump the securities while they were promoting them,” the SEC said in a news release.

The alleged form of fraud is commonly referred to as a “pump and dump” scheme, a phrase which was used in the grand jury indictment filed Dec. 7.

According to the SEC, the scheme occurred in three phases: The group would identify a stock and organize purchases at a lower price prior to the alleged manipulation. They would then promote the stock to their followers and inflate the share price, announcing price targets and teasing upcoming news about the company. They would then sell their shares into the demand generated by their hyping, creating a profit. To cover up their scheme, they would delete old tweets and Discord chats, then lie to their followers about why particular stock picks were followed by price declines, thus obscuring their roles in having generated losses for their followers.

“None of the Primary Defendants disclosed that they were either planning to sell, or were actively selling, a Selected Stock while recommending that their followers buy it,” the SEC’s complaint states. “Nor did any of the Primary Defendants disclose that they were coordinating with each other to manipulate the price and volume of trading in the stocks they were promoting.”

The influencers charged include “PJ Matlock,” whose real name is Perry Matlock. On Wednesday, he had deactivated his Twitter account with more than 340,000 followers. One defendant, Daniel Knight who goes by the online handle “Dip Deity,” was charged with “aiding and abetting the alleged scheme” after co-hosting a podcast that promoted the other defendants.

Other defendants include Edward Constantin, who went by the online handle “Zack Morris.” He has more than half a million Twitter followers.

The eight individuals are also facing federal criminal fraud charges.

“Today’s action exposes the true motivation of these alleged fraudsters and serves as another warning that investors should be wary of unsolicited advice they encounter online,” Joseph Sansone, chief of the SEC enforcement division’s market abuse unit, said in the news release.

This is a developing story. Please check back for updates.

SEC says 8 social media influencers used Twitter and Discord to manipulate stocks (nbcnews.com)

[StockDung] Vancouver capital markets: amended SEC complaint reveals shady underground capit...

StockDung — 12/8/2022 1:07:47 PM
Vancouver capital markets: amended SEC complaint reveals shady underground capital markets money laundering ecosystemBy Christine Duhaime | March 2nd, 2022

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The biggest money laundering case in Canadian history, only it isn’t taking place in CanadaThe US Securities and Exchange Commission (“SEC”) filed a proposed amended complaint on February 3, 2022, in the US District Court of Massachusetts in case of SEC v. Frederick Sharp, Avtar Dhillon, Zhiying Chen, Courtney Kelln, Michael Veldhuis, Paul Sexton, Jackson Friesen, William Kaitz and Graham Taylor. It’s 91 pages so this is a slow burn, and there are many moving parts. The complaint was amended because Zhiying Chen and Graham Taylor sought further particulars from the SEC. The amended complaint is mere allegations that have not been proven in any court of law.

The case involves allegations that the defendants conducted securities fraud of over US$1 billion in Vancouver, making it the biggest money laundering case in Canadian history. It’s also the largest microcap pump and dump fraud case ever brought to court in the US so it’s a very important case in both countries, with many eyes all over the world on it. The US government says there are thousands of victims. And, I was told, the Canadian Crown, namely the prosecution service, determined that most of the victims are American, which perhaps answers the question of personal jurisdiction of the US government over the defendants. Even if it did not, the correspondent banking system means every defendant conducted financial transactions on and through the US financial system for transactions alleged to have occurred in the amended complaint.

Although the amended complaint does not say so, there are different prongs to this case and this amended complaint is only one such prong. There is a prong involving actions against lawyers; there is a financial services and underground banking prong; and there is a prong against the users of these alleged dark or underground services, whether they be issuers or undisclosed control persons.

The complaint sets out how a very sophisticated multi-layer structure was allegedly put in place with tentacles in high-risk jurisdictions, to allegedly commit securities fraud and launder the money back through layers of corporate vehicles to avoid detection, where facilitators included Vancouver and foreign corporate law firms[1], an underground payment processor with operations in various countries including Canada, and a fake asset manager. The US government says the underground payment processor served no economic purpose, other than to deceive banks and launder money back to control persons [in Vancouver].

Surprisingly, other than Vancouver, which was the starting point and often the ending point of the laundering that was allegedly going on, it all took place in a tiny little village in Finhaut, Switzerland.

Or did it?

Did scammers simply pick an obscure little village and expropriate someone’s address in that village to hoodwink the capital markets into believing a massive international asset management corporation was headquartered in Switzerland?

While there is no money laundering prosecution in this prong of proceedings, the SEC has characterized the multi-party, multi-case scheme as a coordinated money laundering operation and one defendant in one prong has been convicted of money laundering for moving the proceeds of crime attached to this alleged securities fraud scheme.

One thing the allegations make clear, irrespective of who the bad actors may prove to be, is that the three stages of money laundering were consciously deployed in the scheme – for both money and securities – they were placed; they were layered; they were integrated.

The case with these defendants has four legal proceedings – some criminal and some civil. The diagram below (click to enlarge) shows the proceedings, the parties and the allegations of each (and in the case of the SEC, generally and not specifically as against each defendant).

Our Summary of ProceedingsLet’s dig into the new complaint first, then let’s look at tiny little Finhaut, Switzerland.

Criminal Complaint – DhillonThe criminal complaint against Vancouver’s Avtar Singh Dhillon (“Dhillon”), alleges that Dhillon committed securities fraud, conspiracy and obstructed an official proceeding and an SEC proceeding by lying.

Dhillon allegedly secretly controlled shares of public companies that he was in control of as a director or officer, and sold them after pump and dumps in violation of securities laws. The complaint is based on affidavit evidence of an FBI agent.

Avtar Singh Dhillon, 2017 (Source: Instagram)
The FBI agent deposed that Dhillon worked with lawyers at a law firm in furtherance of the criminal conduct, who didn’t just work to take in the proceeds from illicit stock sales, they set up and managed companies for Dhillon for the express purpose of engaging in securities fraud of little issuers he controlled. Dhillon named one of his companies “Walk on Water.”

The FBI agent deposed that shares of issuers were issued to Dhillon for which no consideration was paid and to cover it up, in respect of one issuer, the Dhillon lawyer and the CEO of the issuer, on the instructions of Dhillon, created and back-dated a share purchase agreement a year later.[2] The Dhillon lawyer then allegedly lied and created other fake documents to move shares secretly held by Dhillon beneficially. When questioned under oath about his shareholdings, the FBI says that Dhillon lied.

One example provided in an FBI affidavit was the alleged acquisition of shares of Arch through Walk on Water which the FBI says were sold by Dhillon to investors right after they became free-trading, from April to July 2016, allegedly generating proceeds of US$1.3 million to Dhillon. During this time, Dhillon was a director of the issuer, and chairman of its directors.

Arch Therapeutics Inc. stock price February 2016 to July 2016 (Source: Pitchbook)
An FBI affidavit filed in support of the criminal complaint against Dhillon describes how Dhillon’s lawyer allegedly assisted to integrate the proceeds of stock fraud back into the financial system by writing cheques for third parties, including allegedly the spouse of Dhillon, and to a medical treatment centre for his daughter.

The lawyer provided his records to the FBI – he had to – advice in furtherance of a crime (or alleged crime that constitutes more than mere allegations for which there exists tangible evidence) is not legal advice and privilege never attached, and if it did, if there was a pre-criminal phase of advice, then it was waived the moment the intention or the act became imbued with criminality, irrespective of if the lawyer was duped.

Criminal Complaint – Sharp et. al.In the criminal complaint against Frederick Sharp (“Sharp”), Luis Carrillo (“Carrillo”), Michael Veldhuis (“Veldhuis”) and Courtney Kelln[3] (“Kelln”), the defendants are accused of securities fraud and conspiracy for having provided pump and dump activities as a service to defraud the capital markets. Part of the alleged services involved consolidating control of shares of little issuers by funnelling such shares into several corporate vehicles they allegedly controlled to conceal beneficial ownership.

It is alleged that the corporate vehicles, such as Trius Holdings Limited, Morris Capital Inc., Varese Capital Inc., Santos Torres LLC, and more, used to obfuscate were mostly controlled by Sharp, who charged fees for obfuscation services in Vancouver. Sharp, the FBI agent deposed, also caused the fake asset manager to set up other corporate vehicles for Sharp’s clients. Because the corporate vehicles were designed to be dark, the shareholders and officers/directors on paper were mere nominees.

The FBI says that each corporate vehicle had its own (what we call “disposable”) email address that Sharp Group people created and logged into to send and receive emails, meaning that it was Sharp (or his team) behind the communications pretending it was not Sharp. They used, according to the FBI, “protonmail.com” or “yourmail.bz”. If you follow what’s being alleged here and on this point, it seems that the picture being painted is that Sharp Group people were in Vancouver and were allegedly logging into email accounts of these nominee companies, apparently pretending they were who-knows-who and far away in tiny Finhaut, Switzerland, giving instructions on the acquisition, transfer and disposition of various shares of various little issuers to third parties, and on occasion, to law firms or other parties a mere block away.

To carry out the fraud, the FBI agent says that two lines of communication were used by some defendants– one through email to give the illusion of being legit; the other on encrypted communications where they discussed the alleged criminal conduct, including sharing in the proceeds of alleged illegal stock trades.

Carrillo was a defendant in another SEC proceeding in 2013, involving stock fraud activities in Vancouver, Canada, that involved the proceeds funnelled into a law firm trust account and disbursed. A co-defendant in that proceeding was Benjamin Thompson Kirk, believed to be in the Hope / Kelowna area of British Columbia, who was charged again in September 2021, with securities fraud and is alleged to be a client of the Sharp Group. This is important simply because the entities that are nominees were already on the red flag radar in Vancouver because of earlier enforcement actions.

Carrillo was allegedly in charge of a boiler room in the world’s cocaine capital, Medellín, Colombia, which cold called investors to lure them into buying stock of Evolution Blockchain Group, and its predecessor entity. That issuer, the alleged global Blockchain tech company, was headquartered above a little quilting store on Granville Island, Vancouver. Proceeds, the FBI says, from the boiler room-generated sales of stock to innocent investors, were moved to a number of Sharp nominees, including Santos Torres LLC.

Carrillo allegedly used the proceeds he obtained on luxury and personal items including expensive watches, to pay personal law firm legal bills, for luxury cars, to pay for services rendered by his girlfriend (US$40,000), to pay for a luxury 10-day ski vacation in Switzerland (US$84,000) for he and his family and for Vancouver residents Raymond Dove, the Vancouver convicted fraudster Frank Biller from the Eron Mortgage scandal, and their families, and for high end dental work in Switzerland.

If you follow what is going on here on the latter point, what the FBI affidavit and SEC filings are saying about Vancouver is that people previously kicked out of the capital markets jumped right back into the capital markets and did so using hidden control persons and entities so they would not be discovered, and they not only defrauded the capital markets and investors again, for a second time, but went on fancy exotic vacations and bought a fancy Porsche using the proceeds of fraud paid for by innocent investors. Meanwhile, the first set of investors from previous frauds they were involved in remain uncompensated.

Civil Complaint – Sharp GroupOn the civil side, the SEC amended complaint similarly alleges that Sharp provided services in Vancouver to secret control persons of little issuers to help them hide their control so that they could engage in pump and dump activities. One service he provided was as a company service provider.[4]

Sharp rented out the use of corporate vehicles and the offshore bank accounts tied to those corporate vehicles, and also provided payment processing and remittance services as well as acted as a lender. He also allegedly provided what he called: “keeping clients out of jail” services (emphasis in the complaint). According to a subsequent complaint in another of the prongs, he also sold shelf companies in Vancouver for $500,000 each.[5]

The Sharp team included Sharp, Kelln and Zhiying Chen (???) (“Chen”) (together, the “Sharp Group”). Sharp, his brother Thomas, and Chen were directors at one time of a corporate entity in Vancouver called Corporate House. Sharp also had a movie career, which included starring in a short film in 2017, about a man accused of a $100 million stock fraud (embedded from YouTube, below), a very Krystian Bala move.

Was he giving us a hint in 2017? Frederick Sharp acting in his own short film about a man accused of a $100 million in stock fraud (Source: Sharp Art Pictures, YouTube)In order to keep it all secret (and clients out of jail), Sharp allegedly used encrypted phones called X phones, which he allegedly mistakenly believed were not capable of penetration by LE. He also allegedly used an accounting system called “Q”, (after the James Bond movies which feature Q Branch, a WWII quartermaster facility where agents would receive gadgets for underground work).

In the X phone system, Sharp called himself “Bond”.

The SEC says that, on the encrypted X phones and in other encrypted communications, Sharp insisted that the participants use code names, like it was a James Bond movie. Chen’s code name was “Wires” because she was allegedly the money person – allegedly in charge of remittances, wires and the financial transactional work to move the proceeds for the participants.

Dhillon subsequently told the SEC that he also used encrypted communications, but we do not know if he used Sharp’s X phones or the app Threema or something else.

The SEC alleges that both Chen and Kelln fabricated documents and routinely created false invoices[6], loan agreements and subscription agreements for backup in case they were questioned by (financial crime officers at) banks.

The SEC says that Chen was aware that Sharp clients were laundering money through the Sharp Group. The SEC provided an eye-popping organized crime example of Sharp allegedly communicating with Chen on the X phones about a bank draft to Grand Yachts (in Coal Harbour). The SEC says the exchange was as follows:

Sharp: “Hells Angels gives us cash. We give them a draft to buy a boat. Later, boat is seized, polic[e] investigate, find out Charter House [a Sharp Group administered company] paid for it; visit us and ask why. What will u say?”

Chen: “Can we lend money to them [Hells Angels]?”

Chen: “Thomas asks them sign loan agreement for us.”

An FBI agent deposed that on one occasion, Sharp informed Kelln that it is dangerous coming back to Canada (with Sharp records in her possession), but not dangerous in Switzerland, and on another occasion, Veldhuis sent a communication to Kelln after landing in LA that he made it through US customs and was “not in jail. So that’s nice.”

Civil Complaint – Avtar Singh DhillonDuring the period the allegations occurred, Dhillon was at various times a director and often an officer of three little issuers: (a) Legend Mining, which became Stevia First Corp. (“Stevia”), which became Vitality Biopharma Inc. (“Vitality”), which became Malachite Innovations Inc. after the arrest of Dhillon; (b) Arch Therapeutics Inc. (“Arch”); and (c) OncoSec Medical Inc. (“Onco”).

Dhillon, his relative Punit Dhillon, and Jim DeMesa, who flowed into other issuers together (Source: Facebook)Together with a Vancouver naturopathic therapist named Gaetano Morello, Dhillon has worked at an issuer named Contact Gold Corp., and at Inovio Pharmaceuticals Inc., Venturi Ventures Inc., Emerald Health Therapeutics Inc. and Skye Bioscience Inc. According to our review of the securities law disclosure, a small group of the exact same people flowed in and out of these issuers contemporaneously with Dhillon, including two of his nephews, a Maheep Dhillon and a Punit Dhillon, who were placed in positions of senior management of little issuers with no requisite experience, according to securities law disclosure filings.

The SEC alleges that Dhillon worked with defendants Veldhuis, Paul Sexton (“Sexton”) and Jackson Friesen (“Friesen”) (together, the “ Trio”), and with Graham Taylor (“Taylor”), and they all worked with Sharp and the Sharp Group in furtherance of the alleged scheme.

According to the SEC, in 2011, Taylor introduced Dhillon to an as-yet unnamed Vancouver lawyer in the microcap issuer space who did an RTO of Stevia, and a stock split, resulting in Dhillon holding 31.5 million shares of Stevia. Prior to that, Dhillon acquired 4.5 million shares of Stevia from Tao Chen (??).[7]

From that point forward, the SEC says that Dhillon failed to file insider reports in respect of his share position, and changes of that position, and failed to disclose beneficial shares he held, as well as failed to disclose deals with the Trio to sell shares for him.

Among the services offered by the Sharp Group, the Trio and Taylor were, the SEC alleges, obfuscation services of the identity of shareholders. The obfuscation would be necessary if the allegations are true, to defraud investors (the public) and the capital markets and to provide darkness (lack of visibility) to regulators and exchanges, and a lack of visibility over the movement of funds and its provenance.

The SEC says that several corporate vehicles were used as the tools of obfuscation and to move the illicit proceeds therefrom, including but not limited to, Morris Capital Inc., Trius Holdings Limited, Santos Torres LLC, Caledonia Partners, Peaceful Lion Holdings and if that is proven to be the case, they can only be characterized as criminal enterprises. Again though, the SEC complaint is merely a set of allegations.

Fraud Round OneThe SEC alleges that Sharp Group administered entities Morris Capital Inc. and Trius Holdings Limited, among others, were used to receive shares of Stevia. In three months, the Sharp Group administered entities received 19.6 million shares of Stevia and Vitality, in effect becoming fake shareholders because they were mere nominee placeholders. The amount transferred to the Sharp Group was 37% of the issued and outstanding shares of Stevia.

Once the shares were controlled by the Sharp Group, the SEC alleges that the defendants commenced a pump of the stock for a two month period so that its price would jack up artificially. The stock was then dumped when the price was high. That dump, according to the SEC, generated US$24 million in illicit proceeds. Some of the illicit proceeds were transferred from the Sharp Group to a Swiss bank account held by Taylor and Taylor then gave Dhillon a cut of 60%. Dhillon’s cut was wired to Banque Heritage SA, a private bank in Switzerland in the name of Ortivo Enterprises Corp., a Panama company which the SEC says is controlled by Dhillon.

Fraud Round TwoThe SEC alleges that Dhillon did a second round of a Stevia / Vitality pump and dump, causing the issuance of 1.3 million shares to another corporate nominee controlled by the Sharp Group which divided those shares into two other nominee shareholders. The Trio then worked to sell those shares and hide the identity of the true shareholders and payments, by running the stock trades back up through Sharp Group nominees.

According to the SEC, Kelln managed some of the paperwork, including using as-yet unnamed lawyers to prepare false closing opinions.[8]

The SEC says that when the proceeds of the illicit stock sales came in, Sexton and Veldhuis allegedly used the X phones to plan distributing the proceeds among them. On March 6, 2014, Veldhuis sent a message to Friesen in respect of his cut of the proceeds:

“u r getting 173k today … buy a boat bitch”

“Rich mother fucker”

In August 2014, Veldhuis asked Chen to give him US$124,000 cash from Stevia. He picked up US$120,000 in cash from Sharp’s office in Vancouver – all in $50s.

Fraud Round ThreeThe SEC alleges that there was a third round using similar methods in which Dhillon caused to be issued shares in the name of other nominees to hide controlling interests in the issuer and conceal true ownership of the shares. In round three, Sharp directly wired funds to Dhillon’s personal bank account.

The SEC says that the illicit stock was funneled through two of Dhillon’s relatives, whose identities have not yet been revealed, as well as Dhillon’s accountant. Those people then funneled the stock to various other Sharp administered vehicles, including the repeat vehicles Morris Capital Inc. and Trius Holdings Ltd.

The SEC alleges that Sexton met Dhillon in California in October 2014, and that Sexton informed Veldhuis, using the X phones, that Dhillon wanted to be aggressive and get the Stevia price and volume up. Dillon is also alleged to have said all his “buddies” had $0.42 warrants in Stevia and therefore a financing couldn’t be lower than $0.42 (or the “buddies” wouldn’t be in the money).[9]

Additional transfers of Stevia shares were made in Vancouver involving Morris Capital Inc. and Trius Holdings Limited. Round three continued into December 2016, and the SEC alleges that Sexton and Veldhuis, again using X phones, discussed that Dhillon instructed to keep going with a stock promotion and they only had one million “to chew thru”.

The SEC says that, in respect of paying William Kaitz[10] (“Kaitz”) the promoter, certain of the defendants sought to do so deliberately to violate §17(b). The SEC alleges that Kelln, Chen, Sharp and Veldhuis discussed which Sharp Group entity to use as the fake payor.

The SEC says that Dhillon sought to further obfuscate his conduct by directing payments from the illicit stock trades be made to third parties to pay expenses of his family. Sexton allegedly did the same and had a mortgage paid this way for land he owns in California.

The SEC says that Taylor sent invoices to Chen to take care of and she did so using an offshore entity, making entries in the “Q” accounting system.

In one instance, Chen allegedly had the offshore entity pay Taylor US$10,000 and when that payment was received, a Taylor nominee in Singapore then wired that amount to a Vancouver corporate law firm acting for Veldhuis in another matter. In other words, the proceeds of the alleged stock fraud went a circuitous route from the Sharp Group in Vancouver –> to Switzerland –> to Singapore –> back to a Vancouver law firm trust account for another matter. In effect, if the allegations are true, the receiving Vancouver corporate law firm acted as Taylor’s laundromat, receiving illicit proceeds. We know from the evidence which law firm this is.

US$10,000 inexplicably goes around the world, from Vancouver to Vancouver landing in a trust account from a third party.Fraud Round FourThe SEC alleges that Dhillon and his co-conspirators conducted a fourth round of activity secretly selling Stevia stock. In round four, the SEC alleges that the Sharp Group advanced US$4.4 million to buy securities of Vitality and recorded the shares under the same various corporate nominees administered by the Sharp Group. Kelln then paid as-yet unnamed lawyers to write false closing opinions to effect free-trading status of the shares, allowing the shares to be sold to the public. Kelln is then alleged to have structured shareholdings to defeat the 5% disclosure rule writing :

“[the] 5% rule is biting me in the ass.”

The SEC alleges that illicit sales of Stevia and Vitality stock netted US$45,639,343.

Arch Pump and DumpThe SEC alleges that Dhillon engaged in the same conduct in respect of the issuer Arch and employed the services of the Sharp Group, the Trio and Taylor and they conducted similar activities, placing shares in the names of corporate nominees, including the repeat vehicle Morris Capital Inc. The Trio bought, via private placement, shares of Arch and used an as-yet unnamed law firm trust account to take in the subscription funds for the scheme, the SEC says. Dhillon also secretly subscribed for shares via private placement using his Panama entity, Ortivo, to pay US$250,000 for the subscription. Kaitz is alleged to have promoted this stock and did not disclose the true payor.

In respect of the proceeds from the illicit stock sales, the SEC says that Chen refunded Dhillon the US$250,000 he paid for his underground private placement, and wired it to Dhillon’s Swiss bank account, as well as US$200,000 to Dhillon’s accountant, who then wired it to a Dhillon controlled company in the US.

Taylor, the SEC alleges, made payments from illicit stock sales to Dhillon inter alia, by paying $200,000 to a Dhillon creditor and Taylor also had part of his payment from the proceeds of the illicit stock sales ($65,000) wired to the trust account of a different Vancouver law firm, again using a Vancouver law firm trust account as his laundromat, if the allegations are true.

One of the Sharp Group entities used for the circuitous transnational transactions in this round was the repeat vehicle Trius Holdings Limited.

Avtar Dillon Land / Land DocumentsThe SEC further alleges that Taylor became aware of the US government’s investigation into the conduct alleged in the SEC complaint – from whom, they did not say.

In the Spring of 2021, after learning of the investigation, the SEC says that Taylor then caused to be created legal contracts to fraudulently document an alleged agreement between he and Dhillon to buy an interest in land owned by Dhillon. The SEC did not name the Vancouver law firm that created fraudulent land documents for Taylor in respect of the Dhillon land, and did not disclose whether Dhillon participated in the alleged fraud by signing such documents, and the requisite corporate resolutions in respect thereof.

The SEC further alleges that in addition to being false, the documents were back-dated. The purpose of creating, back-dating and executing the land purchase agreement with Dhillon was, the SEC says, to provide a justification for the payments Taylor made to Dhillon that the SEC says were the proceeds of illicit stock sales. The SEC calculated that the total of the payments to Dhillon as directed by Taylor, was US$7,529,527.

It is probable that the land in question is the land Dhillon owns in Richmond, British Columbia, because of the amount involved and if that is the case, it means that Taylor brought Emerald Health Therapeutics Inc. and Emerald Health Sciences Inc. into the case. But it is only a guess on our part. Both are cannabis companies.

The only property Dhillon appears to own that is worth close to US$7 million in Vancouver, is 32 acres of land in Richmond, and Dhillon’s company Emerald Health Therapeutics Inc., entered into an agreement to pay Dhillon to lease that land for 30 years. According to one of its MD&As, Emerald Health Sciences Inc. also entered into a sub-lease to pay to occupy part of that same Dhillon land.

We are excited to introduce you to our Metro-Vancouver Facility, a fully licensed indoor and outdoor cannabis operation that is certified organic by Pro-Cert. #emerald #organic pic.twitter.com/y6K2yt4Sig

— Emerald Health Therapeutics (@emeraldhealthca) March 26, 2020
The Dhillon land under lease for 30-years (Source: Twitter profile of Emerald Health Therapeutics Inc.)Normally, therefore, for Dhillon to option, lease, sell or assign, he would have needed the written consent of Emerald Heath Therapeutics Inc, as lessor and Emerald Health Sciences Inc., as sub-lessor.

So, if Taylor’s alleged fraudulent land agreement is over any part of this land, it will conflict with the disclosure record of that issuer, including the financial statements of both entities, and would have required the written consent of those two entities.

Emerald Health Therapeutics Inc. wonky stock prices (Source: Pitchbook)Emerald Health Sciences Inc. has its own legacy criminal ties. It is or perhaps was now, the control person of the issuers Emerald Health Therapeutics Inc. and of Skye Bioscience. According to an article in a business publication, Dhillon co-founded the controlling company with a Vancouver lawyer and with his cousin in Vancouver, Yadvinder Singh Kallu, a major US felon (see news article here ).

Dhillon’s cousin, Yadvinder Singh Kallu[11] was arrested with another Vancouver man, Diven Karan Nair, by the DEA in 1998, indicted by a US federal jury and then convicted in the US in connection with importing up to 200kgs of highly potent heroin in the US from Pakistan, that originated in Afghanistan, equal to 8 million doses and worth US$84 million at the time. Some of the narcotics were in Pakistan; some had been imported to the US. In that operation, the US government said that they paid undercover DEA agents partially with counterfeit US currency for the drug deal. One can only characterize the use of counterfeit US currency as stealing from their own heroin supplier.

“It’s one of the largest heroin cases we’ve ever prosecuted,” said US Attorney’s spokesman Thom Mrozek, referring to the Yadvinder Singh Kallu et. al. case.

The plan of the Canadian drug traffickers, according to a LE affidavit filed in a US proceeding, was to make an exchange with a Colombian drug cartel with whom they were negotiating, to exchange the heroin for 800 kgs of cocaine, which the DEA said was destined for Vancouver.

Yadvinder Singh Kallu’s colleague, Ranjit Singh Cheema, was also arrested and convicted as part of that US heroin trafficking case. His case is well-known because of an unsuccessful legal battle he pursued for many years in Vancouver to avoid extradition and incarceration in the US. Cheema was one of the original Indo-Canadian gangsters from South Vancouver – he was gunned down in 2012 after he was deported from the US at the end of his prison sentence.

Ranjit Singh Cheema
Yadvinder Singh Kallu, according to provincial government records available online, was business-connected to Dhillon earlier as well – as early as 2011, as the land agent for Dhillon in respect of the land in Richmond, British Columbia.

The news article referred to above, reports that some of the defendants (Dhillon, Taylor, Sexton and Friesen), as well as some of the alleged Sharp Group vehicles allegedly used for obfuscation and laundering – Morris Capital Inc. and Trius Holdings Limited – are shareholders of Emerald Health Sciences Inc. Santos Torres LLC, another alleged Sharp Group administered entity, appears on that list as receiving shares from Dhillon.

The news article explains how Dhillon made the list of the shareholders of Emerald Health Sciences Inc. public in an affidavit he filed in a proceeding.

According to the list Dhillon decided to disclose publicly, other names include the wife of US felon Diven Karan Nair (he appears to be now possibly a home builder, here), an entity connected to the alleged co-conspirator lawyer in the US criminal proceeding, and US felon Jared Mitchell ( here) and ( here).[12] There are many others and in fact there is significantly over 50 shareholders, and by far the majority of its shareholders are American.

An unanswered question that comes to mind for investors, and indeed investors of the other little issuers controlled by Emerald Health Sciences Inc., is whether they had the right to know at the onset, before anyone took their money, that they were investing in a company where the co-founder was a major US felon. Including, knowing that they would be in a Central Securities Register connected to these US felons, and in a beneficial shareholder database with them, forever linked.

Arguably, it isn’t solely the heroin related conviction, or the massive amounts of heroin involved – its the act of having, using and paying with counterfeit US currency, which speaks to a different type of crime, different criminal infrastructure involved, and a different criminal mindset that directly implicates the integrity of financial services and the financial markets.

Even anti-money laundering (“AML”) officers at banks onboarding the enterprise – did they not have a right of disclosure about the identity of beneficial owners so that bank officers could reasonably assess risks and make the decision to bank or not bank Emerald Health Sciences Inc. and the entity it controlled, Emerald Health Therapeutics Inc., or to de-risk them?

And if one looks at the public communications of the BC issuer, and its corporate tweet below, one wonders if the Canadian federal government would have consented to this photo opp related to legalized cannabis when the federal government was telling Canadians that they were protecting the integrity of the sector.

We were delighted to host the Honourable John Aldag, MP and his colleague, the Honourable Carla Qualtrough at our state-of-the-art greenhouse in Delta. This 1.1 million sq ft of production space will allow us to produce high-quality cannabis for Canadians coast-to-coast. #DeltaBC pic.twitter.com/ItJc3HbKu5

— Emerald Health Therapeutics (@emeraldhealthca) June 29, 2018
Repping a public BC cannabis company and touring federal government members of Parliament – Yadvinder Singh Kallu, 2nd from the right. Dhillon’s nephew Maheep Dhillon is 6th from the left (Source: Twitter profile Emerald Health Therapeutics Inc.)Why may the issue of whether investors, banks, lenders, and government agencies had a right of disclosure in respect of US felons Yadvinder Singh Kallu, Diven Karan Nair, and later of Jared Mitchell, be relevant? Because pursuant to YBM Magnex International Inc., the criminal associations of founding shareholders is material information, in a securities law sense, and material information must be disclosed. It is material because, among other things, it is a unique and elevated risk to an investor in respect of that company. One could argue that it’s an even more fundamental risk – namely, a risk to the integrity of the capital markets.

In the case of YBM Magnex, the founding shareholders who were tied to criminality included Semion Mogilevich and Viktor Averin, two of the most well-known leaders of Russian organized crime. Some of YBM Magnex’s directors and officers knew of the criminality from the outset since they were part of Mogilevich’s Russian circle of associates and some did not. However, they all learned of it at some point and with that knowledge, they continued to raise money from investors while failing to disclose the criminality of some of the founding shareholders. The Canadian solicitors continued to represent the company. When it became public by US law enforcement, the company was immediately cease traded and then ceased to exist as a business. According to journalist Bruce Livesey, investors lost $875 million in the primary and secondary markets, while certain directors and insiders pocketed millions of dollars in consulting payments, loans and stock options.

The directors, officers, underwriters, auditors and lawyers of YBM Magnex were sued for losses suffered by investors over a number of issues that were tied to the disclosure of criminality issue. The insurers of two law firms, two accounting firms and five underwriters paid $120 million to settle with shareholders. As for the officers and directors who were sued, they had to pay personally because although they had D&O insurance, coverage was denied because an insurance policy is void ab initio when an insured makes a false representation to obtain insurance that is material to risks being underwritten. Not disclosing the criminality of founding shareholders to the insurer voided the D&O insurance.

What’s not in the Complaint?What’s not in the amended SEC complaint is all the other details of the other prongs of the whole of the multi-pronged case – in particular, the underground payment processing aspects which, as stated earlier, involve at least one person who has pled guilty to financial crimes.

According to affidavits filed in other connected prongs, we know that the underground payment processor rented the identity of two Americans to obtain US bank accounts after they had been de-risked by AML officers at various other US banks, and that the owner of the underground payment processor lives in Russia.

Wait Russia? Yes, Russia.

Evidence from US banks shows that the underground payment processor managed to obtain banking in several countries because it lied to banks about the true nature of the services it was providing. The SEC alleges that the underground payment processor, after moving proceeds from the illegal stock sales all around the world, ultimately parking them in just a few places – one being Vancouver, Canada.

A Tiny Village in SwitzerlandOne of the more surprising aspects of the case is the role of Finhaut, Switzerland.

Finhaut is a tiny rural mountain village of 300 people, with one main street called Route du Village (literally, the village street in English). The only few businesses are cafés for tourists.

Village of Finhaut, Switzerland (Source: Vallée du Trient Tourisme SA)11 route du Village, Finhaut was the office of the fake asset manager, who also seems to have used that address as the fake registered office for some Sharp Group corporate vehicles, including the alleged Sharp administered entities Trius Holdings Limited and Morris Capital Inc.

According to a Suisse real estate agency site, 11 route du Village is a residential apartment beside a café, and apparently, a chauffeur and his wife live there.

Kudos to AML officers (and whistle-blowers) because no one, it seems, except officers at the AML intelligence units at US banks, seem to have wondered how a tiny mountain village with no financial commerce to speak of – not even one bank – could have that much brokerage business, moving hundreds of millions of dollars a year through the financial system.

While the US banks were asking questions of the payment processor, being lied to, and de-risking its accounts, one after the another, the SEC received a tip about a Canadian living in LA, engaged in a pump and dump scheme to defraud investors, using a promoter with a fake corporate address of – you probably guessed it – Route du Village 11, Finhaut, Switzerland.

The Canadian pump and dump executive was trying to raise money to pay a bribe of US$450,000 to get one of his children into Yale. To save his skin, he gave up Rick Singer, the mastermind behind the US college admissions scandal and the rest, as they say, is history.

“Operation Varsity Blues” – the college admissions scandal, revealed from a tip about a Canadian pump and dumper (Source: ABC News YouTube)The college admissions scandal investigation started in Boston, and the Boston office of the SEC, which was already looking at some of the 50 issuers involved in this case, accelerated its investigation.

And here we are.

Avtar Dhillon posted a US$1.5 million bail after his arrest, wears an ankle bracelet, and isn’t talking, having pled the 5th. In December, according to EU company records, he took on an a new role as administrator[13] of the Emerald company VivaCell in Spain, which seems to provide services to other Emerald related companies. He is not allowed to intimidate any witness or obstruct the criminal investigation, or retaliate against any witness or alleged witness, any victim (victims in this case are shareholders / investors) or informants who may have provided evidence against him or others – basically he can do nothing, directly or indirectly, harmful or threatening as against anyone involved in any of his companies or in any way connected to the case, because of the possibility that it violates his bail conditions related to obstruction of justice and lands him in jail with more charges.

And Fred Sharp? No one seems to know where he is; he may simply be chilling in a Vancouver mansion, content in the belief that the services he allegedly sold and warranted as being capable of keeping clients out of jail, will work as intended for his very first client – Fred Sharp.

And there may be more to come as well because we were told that LE officers say that there is an entire Bitcoin money laundering side to the case in Canada, involving organized crime in Vancouver, the underground payment processor and an OTC Bitcoin dealer in California.

With respect to the proposed amended complaint filed by the SEC, the two parties who fought for further particulars – Chen and Taylor – changed their minds and now don’t want further particulars, and are opposing the motion of the SEC to use the amended complaint even though the SEC gave them exactly what they wished for.

[1] In the case of Vancouver law firms, no doubt they are unwittingly involved – they are acutely aware from their regulator about such risks to trust accounts, and third party payors.

[2] A red flag for fraud in private company share issuances is back-dated entries in the central securities register (“CSR”) that are made when there are fraudulent or back-dated agreements, as alleged in this case. The CSR is designed to be chronologically entered and certificates are issued chronologically and numerically and behind those issuances are resolutions and bank records to match dates of payments for shares subscribed for. Out of date CSR entries (e.g., an entry in 2020 reflecting a share sale or transfer that allegedly occurred in 2018, two years earlier) means back-dating occurred of multiple corporate records. In such circumstances, one way one can receive comfort that no fraud occurred in an investigation, or in a minute book audit or review to write a closing opinion, is to line up bank records of share subscriptions with the CSR date entries. A case with more than one out-of-date CSR entry is concerning. One cannot imagine a law firm that would touch a CSR, or continue to act where the client is asking for back-dating services. That is the law firm’s red flag to de-risk the client over reputational and legal risks. Back-dating CSR and the supporting documentation of private companies was precisely one of the issues with Mossack Fonseca & Co., the law firm from the Panama Papers, that provided legal services to support criminality, and it is facing a money laundering prosecution over alleged legal services.

[3] Her company, Celtic Consultants LLC, appeared in a 2015 SEC complaint involving Panama’s Verdmont Capital SA, along with a number of entities named in this SEC complaint – Morris Capital Inc., Gotama Capital Inc. and Peaceful Lion. In that same case, BetterLife Pharma Inc. executive Sergei Stetsenko, signed a letter for the court in support of Verdmont, as a customer. BetterLife and Dhillon’s Emerald Health Therapeutics later crossed-over.

[4] In Vancouver, Canada, company service providers have inexplicably existed for decades that perform capital markets legal activities that are not tolerated elsewhere in the world as unregulated services. The Vancouver model of company service providers incorporate companies, prepare resolutions, prepare corporate maintenance documents, prepare share certificates, maintain and update corporate records and create and prepare deal documents for financings and private placements, and the issuance of securities such as warrants and options, and make regulatory and listing filings. They also draft securities law disclosure documents and are Sedar and Sedi filers. Company service providers exist elsewhere but they merely undertake incorporation, maintenance and R&R functions.

[5] A shelf company is a company that is incorporated, has no activity and its minute book sits on a shelf for many years (hence, a “shelf” and not a “shell”) that is maintained. A shelf company is, by design, a vehicle of deception – it ages like wine so that it can appear to outsiders and people who don’t know what’s going on like it has been a business for a number of years. It costs $600 – $1,000 to create a shelf company and thus one can see the return on investment for creating and selling shelf companies – you pay $600 in costs to incorporate and later sell all of the issued and outstanding shares for $500,000. For tax evasion reasons, some sellers of shelf companies, which are often law firms, often obfuscate the transaction as a “service” and charge “fees” on invoices when they sell a shelf company, instead of treating it as it is, namely a disposition of all of the shares of a corporation by the selling firm. Shelfs are used in capital markets and so are shell companies but they have material differences. Vancouver, Canada, is known as the key place to buy a shelf.

[6] In financial crime parlance, false invoicing, if that is what occurred here, to justify international financial transactions is a form of trade-based money laundering, whereby fake, fabricated, or fraudulent documents are created for international import / export purposes to avoid taxes, duties, currency controls or for international remittances to avoid currency controls or obfuscate the transactors behind transactions.

[7] It is unknown if Tao Chen is related to Zhiying Chen. Tao Chen stated he owns a company in China named Guangzhou Peace Gift Co. Ltd., and at other times, Peace Gift Co. Ltd., at 2-46 DeZhennan Rd., Suite 403, Guangzhou, Guangdong, China. We searched the corporate databases in China, and could locate neither entity as registered. Tao Chen resided in the US at 634 13th Street, Manhattan Beach, California.

[8] An opinion in this context is an opinion that a law firm prepares to close a transaction or to opine in respect of restrictive legends and requires significant due diligence to ensure that shares subscribed for and issued are authorized under corporate and securities law and consideration was received, and, if applicable, legends can be removed. A false closing opinion is one where someone did no work and wrote an opinion based on no documentary review – such a person does not know if the statements in the opinion are true or false and does not care or, is one where the documentary investigation was conducted and the person outright lies on the opinion, or the person is incompetent in corporate and securities law matters. The lawyers are unnamed in the complaint but who they are is known in Vancouver.

[9] We don’t yet know who the “buddies” are who were warranted out and if they were in the money as a result of the alleged illegal pumping of stock. Lists of warrant holders and optionees are maintained and updated by securities law firms, and provided to exchanges, but there is little other visibility on options and warrants, which makes this type of securities high risk for fraud in the capital markets when it comes to little issuers.

[10] Kaitz allegedly has been found inadmissible to enter Canada, according to one defendant.

[11] Yadvinder Singh Kallu is, or was, with an entity named Kannaba Agritech Corp. which, according to corporate records, is located or has an R&R at 409 – 221 West Esplanade in Vancouver.

[12] We downloaded the Dhillon affidavit wherein he disclosed all of the shareholders of Emerald Health Sciences Inc. We first undertook to decloak corporate shareholders and then organized the Dhillon disclosed list by subscription amount, namely who paid the most to invest in Emerald Health Sciences Inc. We removed share transfers and kept only entries of the CSR where the company said that consideration in cash (as opposed to services) was received. For subscriptions in US dollars, we used the exchange rate from the Bank of Canada on the date of the share issuances. In total, Emerald Heath Sciences Inc. received $34,662,811 from subscribers for shares. The apparently rich Roland Gahler, the childhood friend of Dhillon’s partner, the naturopath Gaetano Morello, paid the most as an individual to subscribe for shares – approximately $1,000,000 in cash. Moez Kassam and the Munger Brothers paid the most as corporate subscribers through corporate entities. Cameron Clokie, a dental surgeon in Toronto who was accused of fraud, paid the most using trust vehicles – over $1.5 million in cash for his shares. Another doctor, a botox doctor in Vancouver named Jason Rivers, also subscribed for shares. Offshore, someone in Spain named Maria Rosario Molina Moran paid over $700,000 cash to subscribe for shares; the same Maria Rosario Molina Moran of VivaCell Biotechnology Espana, renamed Emerald Health Biotechnology. The number of home builders who paid to subscribe stands out as odd – a builder of luxury cottages in Muskoka, on the other side of Canada, for example, paid $641,730 in cash for shares. And a builder in Port Moody, and a local electrician subscribed and paid hundreds of thousands of dollars for shares in cash. And even some employees appear to be quite wealthy and subscribed for shares in cash, such as an employee named Riaz Bandali who paid $531,320 in cash, and then paid another large amount later for shares.

[13] A company administrator in the EU has no equivalent in the US or Canada but can be described as a position in a company that has enlarged powers such as a trustee in bankruptcy, only for non-bankrupt companies. Dhillon’s bail conditions say he needed the consent of his supervising agency to take on new employment. This may be new employment because of the enlarged role in a foreign country.

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[Glenn Petersen] Holmes’ former partner gets nearly 13 years in Theranos case Ramesh “Sunny” Bal...

Glenn Petersen — 12/8/2022 7:21:40 AM
Holmes’ former partner gets nearly 13 years in Theranos case

Ramesh “Sunny” Balwani was depicted by prosecutors as a ruthless, power-hungry figure.

By ASSOCIATED PRESS
Politico
12/08/2022 12:33 AM EST

Ramesh "Sunny" Balwani walks into federal court in San Jose, Calif., on June 24, 2022. | AP Photo/Michael Liedtke
-----------------------------

SAN JOSE, Calif. — Former Theranos executive Ramesh “Sunny” Balwani was sentenced Wednesday to nearly 13 years in prison for his role in the company’s blood-testing hoax — a sentence slightly longer than that given to the CEO, who was his lover and accomplice in one of Silicon Valley’s biggest scandals.

Balwani was convicted in July of fraud and conspiracy connected to the company’s bogus medical technology that duped investors and endangered patients. His sentencing came less than three weeks after Elizabeth Holmes, the company’s founder and CEO, received more than 11 years in prison for her part in the scheme, which has been dissected in a book, HBO documentary and award-winning TV series.

Balwani’s sentence was less than the 15 years sought by federal prosecutors, who depicted him as a ruthless, power-hungry figure. But it is substantially longer than the four to 10 months sought by his lawyers.

The scandal revolved around the company’s false claims to have developed a device that could scan for hundreds of diseases and other potential problems with just a few drops of blood taken with a finger prick.

After years of promoting the technology, Holmes and Balwani were warned that the blood tests were inaccurate, but they continued to raise money from investors, including from billionaires such as software magnate Larry Ellison and media magnate Rupert Murdoch, and deployed the technology in some Walgreens stores.

U.S. District Judge Edward Davila said the financial statements drawn up by Balwani “weren’t just projections, they were lies” and “a true flight from honest business practices.”

The case threw a bright light on Silicon Valley’s dark side, exposing how its culture of hype and boundless ambition could veer into lies.

Both Holmes, 38, and Balwani, 57, could have gotten up to 20 years in prison. Balwani spent six years as Theranos’ chief operating officer while remaining romantically involved with Holmes until a bitter split in 2016.

“Mr. Balwani is not the same as Elizabeth Holmes,” his lawyers wrote in a memo to the judge. “He actually invested millions of dollars of his own money; he never sought fame or recognition; and he has a long history of quietly giving to those less fortunate.” Balwani’s lawyers also asserted that Holmes “was dramatically more culpable” for the Theranos fraud.

But Federal prosecutors cast Balwani as a ruthless, power-hungry accomplice in crimes that ripped off investors and imperiled people who received flawed results. The blood tests were to be available in a partnership with Walgreen’s that Balwani helped engineer.

“Balwani presented a fake story about Theranos’ technology and financial stability day after day in meeting after meeting,” the prosecutors wrote in their memo to the judge. “Balwani maintained this façade of accomplishments, after making the calculated decision that honesty would destroy Theranos.”

Holmes’ former partner gets nearly 13 years in Theranos case - POLITICO

[StockDung] Financial Advice That Aged Like Milk youtu.be [youtube video]

StockDung — 12/7/2022 8:25:48 AM

[Glenn Petersen] DOJ asks for independent probe into FTX bankruptcy, a likely tactic to gather ev...

Glenn Petersen — 12/3/2022 5:03:42 AM
DOJ asks for independent probe into FTX bankruptcy, a likely tactic to gather evidence on alleged fraud

PUBLISHED FRI, DEC 2 20229:39 AM EST
UPDATED FRI, DEC 2 20227:12 PM EST
MacKenzie Sigalos @KENZIESIGALOS
Rohan Goswami @ROGOSWAMI
CNBC.com

KEY POINTS

-- FTX’s bankruptcy case demands an independent review, the Department of Justice said, because of allegations of fraud and dishonesty which could damage the entire crypto industry.

-- Andrew Vara, the U.S. bankruptcy trustee for FTX’s case, said Sam Bankman-Fried and his team mismanaged the company or potentially engaged in fraudulent conduct.

-- The DOJ is seeking an independent examiner to investigate what happened leading up to FTX’s spectacular implosion

The Department of Justice has requested that an independent examiner be appointed to review “substantial and serious allegations of fraud, dishonesty” and “incompetence” after the implosion of Sam Bankman-Fried’s crypto empire. It could be one way for the DOJ to gather evidence of alleged fraud.

In a filing in Delaware federal bankruptcy court, Andrew Vara, a U.S. bankruptcy trustee, told the court that the allegations of corporate misconduct and complete failure merited an immediate and speedy examination of the events leading up to FTX’s stunning collapse three weeks ago.

Vara said there’s a substantial basis to believe that Bankman-Fried and other managers mismanaged FTX or engaged in fraudulent conduct.

“It seems to me that the DOJ is trying to use the bankruptcy process as a way of getting evidence,” former federal prosecutor Renato Mariotti told CNBC.

“Many times, the Department of Justice and bankruptcy estates in fraud cases work together in compiling potential restitution or other types of actions to make victims whole,” he said. The DOJ “will likely be part of the asset recovery and potentially having a Victims Fund with money going to those that lost money and what the Department of Justice potentially will view as a fraud.”

“It just shows a level of interest and attention that they’re paying to this that should be troubling to Mr. Bankman-Fried.”

Vara said an examination is preferable to an internal investigation because of the wider implications the company’s collapse may have on the crypto industry.

Another legal expert said that there could be other factors at play, too, including the extensive political donations that FTX executives were involved in with both major political parties.

There have been “campaign donations on both sides of the aisle from FTX and there have been political overtones and undertones in this case,” said Braden Perry, former senior trial attorney at the Commodities Futures Trading Commission and a Kennyhertz Perry partner.

“I think that this is just out of prudence and out of caution to make sure that whatever is happening is done at an independent level,” Perry said.

It’s not unusual to appoint a bankruptcy examiner. There was one to oversee the crypto bankruptcy process of Celsius Network, for example.

Bankruptcies above a certain size require an examiner. In this case, the U.S. trustee said that an examiner is mandatory because FTX’s fixed, liquidated and unsecured debts to customers exceed the $5 million threshold.

FTX’s November collapse left creditors reeling over the loss of hundreds of millions of dollars, in some cases, and has rocked the wider crypto world. BlockFi, a crypto lender, filed for bankruptcy protection in New Jersey last month.

Bankman-Fried did not immediately respond to a request for comment.

FTX: DOJ watchdog calls for review over crypto fraud allegations (cnbc.com)

[S. maltophilia] The Crypto Ponzi Scheme Avenger From his home in New Zealand, the YouTuber Dann...

S. maltophilia — 11/11/2022 2:22:00 PM
The Crypto Ponzi Scheme Avenger
From his home in New Zealand, the YouTuber Danny de Hek assails what he calls a dangerous and deceptive scheme, one rant at a time....

nytimes.com

[Glenn Petersen] Federal prosecutors charge ex-CEOs of MoviePass, parent company in alleged fraud...

Glenn Petersen — 11/4/2022 9:53:06 PM
Federal prosecutors charge ex-CEOs of MoviePass, parent company in alleged fraud scheme

PUBLISHED FRI, NOV 4 20225:29 PM EDT
Sarah Whitte n @SARAHWHIT10
CNBC.com

KEY POINTS

-- The former CEOs of MoviePass and its parent company have been charged with fraud, according to the Justice Department.

-- The indictment alleges that Theodore Farnsworth and Mitchell Lowe misled investors and were aware that the company’s unlimited movie offer was unsustainable at $9.95 per month.

-- The former CEOs are charged with one count of securities fraud and three counts of wire fraud. If convicted, they each face a maximum penalty of 20 years in prison.

Former executives at MoviePass and its parent company have been charged with fraud, according to a federal indictment that was unsealed Friday.

Theodore Farnsworth, 60, former CEO of Helios & Matheson, and Mitchell Lowe, 70, former CEO of MoviePass, are charged with misleading investors and making false statements about the movie subscription service to boost the stock price of its parent company, Helios & Matheson Analytics.

The indictment alleges that Farnsworth and Lowe in 2017, while describing the company’s $9.95 “unlimited” movie plan as thoroughly tested, sustainable and profitable, were aware that MoviePass’s offer was a marketing gimmick and that its parent company did not possess the technology or capability to monetize subscriber data.

Nor had the company done the rigorous marketing testing that it claimed to have completed, the Justice Department said.

MoviePass skyrocketed to popularity in 2017 because of its seemingly too-good-to-be-true unlimited movie pass that initially offered customers one movie voucher per day for $30 to $40 a month. The hope was that most subscribers wouldn’t actually use the service regularly, in the same way that gyms are able to offset cheap monthly fees because of no-show subscribers.

However, many MoviePass subscribers began to use the service too frequently and the company started to lose money quickly. In an effort to stay afloat, MoviePass began limiting the number of titles available among other restrictions. The service underwent several iterations of price and offerings before shuttering.

Without the backing of movie theaters, which had balked at MoviePass’ business model and intrusion into the industry, the company was forced to dismantle in September 2019.

Co-founder Stacy Spikes regained ownership of the company in late 2021, but a new version of MoviePass has yet to make its official debut. The company is currently planning beta tests in several cities including Chicago. The expectation is that the new subscription will offer three pricing tiers for $10, $20 and $30, respectively, with each level having a certain number of credits that can be used towards redeeming movie tickets.

Lowe and Farnsworth do not appear to be connected to the new iteration of MoviePass.

According to the DOJ document, the pair also allegedly knew that the price of MoviePass’ unlimited plan would not be enough to offset losses. The plan was to grow new subscribers, inflate Helios & Matheson’s stock and attract new investors, the indictment said.

The news of the indictment comes after the Securities and Exchange Commission in September accused Lowe, Farnsworth and another former MoviePass executive, Khalid Itum, of making false statements and falsifying records.

“The indictment repeats the same allegations made by the Securities and Exchange Commission in the Commission’s recent complaint filed on September 27th against Mr. Farnsworth, concerning matters that were publicly disclosed nearly three years ago and widely reported by the news media,” said Chris Bond, a spokesman for Farnsworth in a statement. “As with the SEC filing, Mr. Farnsworth is confident that the facts will demonstrate that he has acted in good faith, and his legal team intends to contest the allegations in the indictment until his vindication is achieved.”

Representatives for Lowe did not immediately respond to request for comment.

On Friday, the Justice Department said Farnsworth and Lowe are alleged to have falsely claimed that the number of tickets MoviePass subscribers were purchasing as part of their subscription was declining over time. Instead, the pair had directed employees to implement tactics to prevent subscribers from using their unlimited service, according to prosecutors.

The former CEOs are charged with one count of securities fraud and three counts of wire fraud. If convicted, they each face a maximum penalty of 20 years in prison.

cnbc.com
\

[StockDung] THE FINAL DEATH OF FINDEX.COM 23 YEAR LATER ===================================...

StockDung — 10/24/2022 3:23:18 PM
THE FINAL DEATH OF FINDEX.COM 23 YEAR LATER

========================================

UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 96058 / October 13, 2022
Admin. Proc. File No. 3-20972
In the Matter of
FINDEX.COM, INC.
ORDER TO SHOW CAUSE
The Securities and Exchange Commission (“Commission”) issued an Order Instituting
Proceedings (“OIP”) on August 17, 2022, pursuant to Section 12(j) of the Securities Exchange
Act of 1934, against FINDEX.COM, INC. (“Respondent”).1
On September 22, 2022, the Division of Enforcement filed a Declaration of Sandhya C.
Harris, which established that, pursuant to Commission Rule of Practice 141(a)(2)(ii),2
service of
the OIP was made on Respondent on August 19, 2022.
As stated in the OIP, Respondent’s answer was required to be filed within ten days of the
service of the OIP.3
As of the date of this order, Respondent has not filed an answer. The
prehearing conference and hearing are thus continued indefinitely.
Accordingly, Respondent is ORDERED to SHOW CAUSE by October 27, 2022, why
the registration of its securities should not be revoked by default due to its failure to file an
answer and to otherwise defend this proceeding. When a party defaults, the allegations in the
OIP will be deemed to be true and the Commission may determine the proceeding against that
party upon consideration of the record without holding a public hearing.
If Respondent fails to respond to this order to show cause, it may be deemed in default,
the proceeding may be determined against it, and the registration of its securities may be

1 FINDEX.COM, INC., Exchange Act Release No. 95517, 2022 WL 3500113 (Aug. 17,
2022).
2
17 C.F.R. § 201.141(a)(2)(ii).
3 FINDEX.COM, INC., 2022 WL 3500113, at *2; Rules of Practice 151(a), 160(b), 220(b),
17 C.F.R. §§ 201.151(a), 201.160(b), 201.220(b).

[StockDung] Modern day Springtime for Hitler and Germany (The Producers) ==================...

StockDung — 10/12/2022 9:45:38 AM
Modern day Springtime for Hitler and Germany (The Producers)

============================

SEC Obtains Court Order to Enforce Investigative Subpoenas Against Two Principals of Broadway Musical FundLitigation Release No. 25556 / October 11, 2022Securities and Exchange Commission v. Cronin and Joseph, No. 22-mc-00248 (S.D.N.Y filed September 1, 2022)
On September 29, 2022, the Hon. Jesse Furman, United States District Judge for the Southern District of New York, granted the Securities and Exchange Commission's application to enforce subpoenas for production of documents and testimony issued to Curtis Wayne Cronin ("Cronin") and John Joseph ("Joseph"), both Managing Partners of Broadway Strategic Return Fund, LP (the "Fund"), a fund that invests in securities related to theatrical productions.

If a person or entity refuses to comply with a subpoena issued by SEC enforcement staff pursuant to a formal order of investigation, the Commission may file a subpoena enforcement action in federal district court seeking an order compelling compliance.

According to the SEC's filing, the SEC is investigating whether Cronin and Joseph or others violated the federal securities laws by, among other things, making materially misleading statements to existing or prospective investors concerning the valuation of the Fund assets, and whether, after the SEC had begun a formal investigation of the Fund, they falsely represented in due diligence questionnaires disseminated to actual or prospective investors that there have not been any investigations of the Fund or the Fund's general partner. As stated in the filing, SEC staff served both Cronin and Joseph with investigative subpoenas requiring the production of certain documents and compelling their testimony. According to the filing, however, and despite numerous attempts to secure compliances with the subpoenas, Cronin and Joseph refused to produce documents and failed to comply with the testimonial obligations.

The SEC's application sought a court order directing Cronin and Joseph to comply fully with the subpoenas. Following a hearing on September 14, 2022, the court granted the SEC's application and ordered the respondents to produce non-privileged responsive documents to the Commission's subpoena and to appear for testimony. The Court's order also states that in the event Cronin and Joseph do not produce the documents and appear for testimony, the Court may hold them in civil contempt. The SEC is continuing its fact-finding investigation and, to date, has not concluded that any individual or entity has violated the federal securities laws.

The SEC's investigation is being conducted by Christopher Castano, Christopher Mele, and Steven G. Rawlings of the SEC's New York Regional Office under the supervision of Sheldon L. Pollock. Richard Primoff, Victor Suthammanont, and Mr. Castano litigated the subpoena enforcement action.

[StockDung] Three charged in $100M New Jersey deli fraud scheme By Thomas Barrabi Septembe...

StockDung — 9/27/2022 11:08:07 PM
Three charged in $100M New Jersey deli fraud scheme

By Thomas Barrabi
September 26, 2022 | 4:12pm

Three men allegedly conspired to artificially boost the company's stock price.Google Maps

Three men linked to a company that mysteriously drew a $100 million valuation despite only operating a single New Jersey deli were charged for their roles in a securities fraud and market manipulation scheme on Monday.

Prosecutors slapped the three men — James Patten, 63, of Winston-Salem, North Carolina; Peter Coker Sr., 80, of Chapel Hill, North Carolina; and Peter Coker Jr., 53, of Hong Kong — with 12 federal charges for allegedly boosting shares prices of Hometown International Inc. and E-Waste Corp.

“From 2014 through September 2022, Patten, Coker Sr., and Coker Jr. conspired to enrich themselves through a scheme to manipulate securities prices via a pattern of coordinated trading, which injected inaccurate information into the marketplace, creating false impressions of supply and demand for these securities,” the feds said.

Hometown International’s only asset was “Your Hometown Deli” in Paulsboro, New Jersey — a small sandwich shop with minimal sales. The firm raised eyebrows by drawing a nine-figure market cap despite its humble holdings.
The Justice Department announced a sweeping indictment against the three men connected to the deli fraud scheme.BRENDAN SMIALOWSKI/AFP via Getty ImagesHometown International first drew widespread scrutiny in April 2021 after well-known short-seller David Einhorn detailed the bizarre situation while criticizing regulators in a note to clients.

Einhorn noted the company and its single deli earned only $13,976 the previous year but had a market cap of $113 million.

“The pastrami must be amazing,” Einhorn quipped. “Small investors who get sucked into these situations are likely to be harmed eventually, yet the regulators — who are supposed to be protecting investors — appear to be neither present nor curious.”

The feds said Patten and Coker Sr. were arrested Monday and were slated to appear in a federal court in North Carolina. Coker Jr. is still at large.

SEE ALSO

NYC woman fakes her grandma’s signature to steal home: lawsuit

All three face a 12-count indictment on charges of conspiracy to commit securities fraud, securities fraud, and conspiracy to manipulate securities prices. Patten faces several additional charges, including wire fraud and money laundering.

The three men are alleged to have given shares of the company to “family members, friends, and associates,” then traded the shares through accounts they controlled to create an artificial impression of hot demand for the companies on the over-the-counter marketplace.

“Unbeknownst to the deli owners, almost immediately after Hometown International was formed, Patten and his associates began positioning Hometown International as a vehicle for a reverse merger that would yield substantial profit to them,” the Justice Department release said.

“These tactics artificially inflated the price of Hometown International and E-Waste’s stock by giving the false impression that there was a genuine market interest in the stock,” the release added.

The feds said the trio’s tactics succeeded in “artificially inflating Hometown International’s stock by approximately 939 percent and E-Waste’s stock by approximately 19,900 percent.”

The SEC also filed suit against the three men in a separate action.

What do you think? Post a comment.

“We allege that the defendants’ brazen schemes resulted in the artificial inflation of the stock price of two publicly traded companies with little to no annual revenues,” said Scott A. Thompson, associate director of enforcement in the Philadelphia Regional Office.

“Such manipulative schemes diminish the trust investors must have in the integrity of the markets, and we will pursue those who engage in such wrongdoing.”

OTC Markets Group, the exchange where shares of Hometown International were traded, delisted the company in April 2021 shortly after Einhorn’s letter surfaced. The exchange had also added a “Buyer beware” warning on shares that spur suspicions of questionable activity

[Glenn Petersen] How state regulators supplanted the feds in policing crypto markets Joe Borg, A...

Glenn Petersen — 9/21/2022 2:44:53 PM
How state regulators supplanted the feds in policing crypto markets

Joe Borg, Alabama’s chief financial watchdog, has emerged as a captain of a state-led push to protect investors from crypto fraud

By Tory Newmyer

The Washington Post
September 20, 2022 at 7:00 a.m. EDT

MONTGOMERY, Ala. — The dozy capital of a state where roughly a fifth of the population lacks internet access seems like an unlikely hub for crypto regulation. And Joe Borg is an unlikely captain of that effort.

The 69-year-old director of the Alabama Securities Commission, in the job since 1994, looks more like a small-town lawyer with his trim, white mustache and boxy suits than an enforcer canny enough to outwit a brash new breed of billionaire tech moguls.
Yet Borg, along with a handful of other state financial watchdogs, is at the vanguard of policing the trillion-dollar digital asset market, raising questions about where the industry’s Washington minders have been.

While federal regulators took no action, Borg and his counterparts in Texas, New Jersey, Kentucky and Vermont targeted the operations of two key crypto players at the heart of this summer’s crypto meltdown, Celsius and Voyager, filing cease and desist orders against them months before the self-styled crypto banks declared bankruptcy.

The state financial watchdogs also were way ahead of the feds in the summer of 2021 when they issued cease-and-desist order against BlockFi, another rapidly growing crypto bank, leading to a $100 million, first-of-its-kind settlement for securities law violations. The Securities and Exchange Commission, the federal agency most often thought of as the crypto watchdog, joined talks between the two sides only as they neared a deal, state regulators say.

Now, Borg and his fellow state regulators are working to help hundreds of thousands of Celsius and Voyager customers recoup billions of dollars worth of assets from frozen accounts. Again, federal regulators are either largely silent or late to the action. The Federal Reserve and the Federal Deposit Insurance Corporation only wrote Voyager demanding it drop “false and misleading” marketing claims three weeks after it had declared bankruptcy.

“I didn’t anticipate we would end up in the driver’s seat,” said Borg’s counterpart in Texas, Joe Rotunda, the enforcement director at the Texas State Securities Board who estimates roughly 100,000 Texans invested in Celsius and Voyager. “There’s a lot of money on the table, these are very complex cases, and it would be the job of the national regulator. I don’t know why the SEC isn’t out there in these areas right now.”

SEC chair Gary Gensler rejects the notion that his agency hasn’t done enough. “We’ve worked well with the states,” Gensler said in a recent call with reporters. “I think the firms could have done a lot more to protect the public. I think the firms could do a lot more still to protect the public. And that’s why I continue to say, come in, work with us, find a path to registration, comply with the laws.”

Others say the states deserve credit, and Washington criticism, for the way crypto has been addressed. “The states were on very solid ground, acting courageously and swiftly, and the SEC should have really followed those footsteps as fast as they could,” said John Reed Stark, a crypto critic who formerly headed the SEC Office of Internet Enforcement.

Borg chalks up state regulators’ successes to a nimbleness not shared by the SEC. If the federal agency pivots at a battleship’s pace after each change of administration, “the states are kind of like PT boats that can zip in and out.” Plus, with the SEC, “there are political considerations from Congress.” Borg, whose agency is financed by industry fees, does not have that problem.

“Should they move faster? That’s not my call to make,” he said. “I can only work with them as fast as they’re willing to work with us.”
A ground-level view

On a recent weekday morning, Borg walked into the Farmers Market Cafe, a diner in downtown Montgomery, and spotted some familiar faces in the corner. The breakfast regulars gathered around the table included former state lawmakers and retired lawyers, and when Borg approached to greet them, the traces of his native Queens, N.Y., accent melted into a mellifluous Alabama drawl.

“Y’all be good,” he said, walking away. Later, chatting with one of them at the cash register, the man mentioned he had information that might be helpful for an investigation Borg was conducting unrelated to crypto. Borg told him to find time to stop by his office, a few blocks away.

Borg said the ground-up approach he and other state regulators take to monitoring the markets gives them a potential edge over their federal counterparts in spotting emerging threats in digital assets. “Chances are, from the retail market, we’re going to see it first,” he said.

That was the case back in early 2014, when Borg’s office started fielding complaints from customers of a Tokyo-based bitcoin exchange called Mt. Gox who were having trouble getting their funds from the platform. Borg said he tried to reach the administrators of the exchange, at the time the largest of its kind in the world, and they did not respond. “Those are all red flags, especially when they don’t talk to regulators,” he said.

Mt. Gox announced in early February that year that it was temporarily halting customer withdrawals to get a “clear technical view” into what it described as a programming flaw. Hours before it collapsed a few weeks later, Borg issued the first of what would become a series of warnings about the dangers of investing in crypto. “The risk of using Bitcoin may be off the charts!” he said in the alert. “When using Bitcoin for investing, it is difficult to seek any protection or recourse for losses due to fraudulent schemes.”

Looking back, he said, Mt. Gox’s implosion provided “the first wake-up call” that what was going on in the crypto world was likely going to affect mom-and-pop investors.

Developments over the next few years confirmed the hunch, as a wave of start-ups began raising money from the public through what became known as initial coin offerings, or ICOs. The method allowed companies to avoid the rigorous disclosures the SEC requires of firms that sell stock to raise capital, even though regulators argued many were effectively doing the same thing. Others turned out to be frauds.

By 2018, coin-issuing ventures had raised $6.9 billion through ICOs. Borg, then serving as president of the North American Securities Administrators Association — the group representing state and provincial financial regulators in the United States, Canada and Mexico — launched a coordinated campaign to crack down on the offerings. “Operation Cryptosweep,” as the watchdogs dubbed it, kicked off 330 probes of ICOs, from Vancouver to Atlanta, resulting in 85 enforcement actions.

Nearly all of the projects violated the law, Borg said, because they failed to register with the SEC or state financial regulators. His argument rests on a seemingly technical matter that has taken on central significance in the debate over how the crypto economy is regulated: the legal interpretation of what counts as an investment contract.

Advocates of stricter crypto oversight point to a standard the Supreme Court established in a 1946 case involving Florida fruit. Back then, a businessman named William John Howey sold parcels in citrus groves he owned outside Orlando to investors on the understanding he would lease the land back from them, grow and sell the produce, then share the profits.

The court found the arrangement was legally equivalent to a stock sale, and Howey violated securities law by not registering it with the SEC. The decision gave rise to what became known as the Howey test, handing securities regulators jurisdiction over any deal in which investors pool money in a project managed by others with the expectation of a profit.

Crypto entrepreneurs who argue they are developing breakthrough technology to fundamentally transform the financial system bristle at the suggestion they are hawking the digital version of stakes in a citrus farm. But Borg and his counterparts contend most crypto projects meet the definition, including the lending platforms they began raising alarms about last year, starting with BlockFi. The company was not registered as an investment company or a bank, though it was offering retail customers annual yields as high 9.25 percent on deposited crypto the firm then lent to institutional traders willing to pay a premium for it.

“That’s no different from a security,” Borg said. More ominously, with no regulators peering into the company’s books, it was not clear to whom the firm was lending, on what terms, and what collateral it held to back up customer deposits in the event it ran into trouble. BlockFi declined to comment for this story.

Wolves at the door

Borg had seen it before. He first made his name as a regulator going after another financial juggernaut that recruited amateur investors with promises of outsize returns. In 1995, he was a year into the job as Alabama’s top financial cop when the office started getting calls from locals with stories about getting defrauded by penny-stock peddlers at a firm called Stratton Oakmont, later memorialized in “The Wolf of Wall Street.”

The operation functioned by paying brokers commissions to cold-call people across the country and sell them shares in all-but-worthless companies. That gave states securities regulators jurisdiction over what turned out to be a corner of the financial market that was too lightly overseen by the SEC. Borg stepped in, spearheading the formation of the multistate task force that ultimately shut the firm down.

Like Stratton Oakmont chief executive Jordan Belfort (played by Leonardo DiCaprio in the Hollywood version), Borg hails from Queens and demonstrated an entrepreneurial instinct early. Born to Maltese immigrants who fled the tiny European island in the wake of World War II, he supported himself through City College and Hofstra Law School with a floor-cleaning business. But he also pursued public service, landing an internship in law school with New York attorney general Louis Lefkowitz, a glad-handing moderate Republican who became known as “the people’s lawyer” and held the job for a record 22 years.
After law school, Borg joined a small law firm in Manhattan. One client, a truck axel manufacturer, was based in Montgomery, bringing Borg south on work trips. When he realized he could afford both a place on nearby Lake Martin and another on the Gulf Coast for the cost of his New York rent, he moved down for good in 1977 and went to work for the business.

Borg did another in-house stint, for an Alabama bank, then joined a local law firm, at one point securing a settlement for a couple who lost money investing with a Stratton Oakmont spinoff called Biltmore Securities. His performance in that case caught the eye of state authorities looking to breathe new life into Alabama’s financial watchdog, and they convinced Borg to take the challenge.

Borg set about building momentum and concentrating power. By enforcing licensing requirements on financial professionals, he grew the office’s dedicated funding stream, so it no longer needed appropriations from the state legislature. Successful prosecutions of fraudsters brought in more money, and good press, which helped keep elected officials from meddling. Wins begot wins: He added staff, including veteran federal prosecutors, and hashed out arrangements with law enforcement allowing his agency to bring its own criminal cases in court, an unusual privilege.

The regulator last year returned roughly $14 million to the state’s general fund and slightly more in restitution to victims of financial crimes. And Borg now counts 62 employees in his office, up from 13 when he arrived. For comparison, roughly 4,500 people show up to work at the SEC every day.

Rotunda’s agency in Texas, meanwhile, counts 76 staffers. Yet only 29 of them work in enforcement, meaning he has roughly one person policing financial crime for every 1 million people in his state. For the last five years, those regulators have been disproportionately focused on crypto. It has been “the single biggest product subject to investigation by our agency” in that period, Rotunda said. “I’ve been in securities regulation for 17 years, and I’ve never seen anything like it.”

For Rotunda, the ability of the crypto lending platforms to spread rapidly into every corner of the state hit home when his office began probing them, and he learned one of his staffers had invested with Celsius. He hived off the employee from the investigation, but the discovery underlined the stakes. “If you can get a securities regulator to invest in something like this, you can really get anybody,” he said.

Once BlockFi reached its settlement deal in February, with a roster that had grown to include 32 states and the SEC, Celsius and Voyager seemed bound to follow suit. “There was discussion along that line,” Borg said. “The impression we got from them and their lawyers was, ‘Let’s see how we can go about getting this settled.’”

Instead, in May, the collapse of the TerraUSD stablecoin sparked a wider crypto market crash. Both Celsius and Voyager maintained customer deposits were safe as fallout from the downturn spread. But the reckoning revealed the companies had lent too much to institutional borrowers while maintaining too little collateral to back it up. Both froze accounts and then declared bankruptcy in July in the face of a wave of customer demands for withdrawals.

Now, the states are getting creative to secure relief for devastated depositors. Texas regulators have officially joined the bankruptcy proceedings for both companies, a move Rotunda said gives his office an opportunity to advocate in the process. And Borg said he is exploring the possibility that customers could be eligible for payouts from a finance industry-funded nonprofit that helped victims of the Bernie Madoff fraud.

The state regulators are also investigating the twin collapses to reconstruct precisely what happened and who may need to be held accountable. They hold a weekly conference call, typically on Thursdays, to coordinate efforts.

The state watchdogs are also looking into other crypto companies, probes they so far cannot discuss. Borg may not see all of them through. He said he is planning to retire next year and hand the reins over to his chief deputy, Amanda Senn. In the meantime, he said the market downturn “may be the shakeout that brings a better system down the road, but a lot of folks are going to get hurt.”

washingtonpost.com

[S. maltophilia] More Nikola stuff: A Dubious Truck, a Whistleblower Army, and Inept Spies: Insi...

S. maltophilia — 9/14/2022 5:48:44 PM
More Nikola stuff:

A Dubious Truck, a Whistleblower Army, and Inept Spies: Inside the Very Weird Nikola Saga
Trevor Milton looked like the next Elon Musk—and may end up the next Elizabeth Holmes. As the first of his several trials gets under way, the people who exposed him reveal how it all went down.

bloomberg.com