Category: Fraud

A Step Up in Fraud From the Nigerian Prince

In this case, the “prince” was a well established financial adviser. Chibuzo Augustine Onyeachonam, Stanley Chidubem Asiegbu, and Chukwuebuka Martin Nweke-Eze created websites using the the names of real US-based financial professional.

For example assuming I was known financial professional and wanted to impersonate me they would create dougcornelius.com and send an email from doug @ dougcornelius.com. Then lure them in with chats and linkedin comments and Youtube videos. Finally convince the victims to send money, purported to be invested.

Of course, the money was stolen instead. Often using bitcoin.

Protect yourself. Do you own your name domain? That’s a cheap and easy way to control and prevent. Do you have a Google Alert on your name? https://www.google.com/alerts

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Before and After Reg BI

The case against PHX Financial caught my attention because it involves actions of the firm before and after the compliance date of Regulation BI.

During the Pre-Reg BI Period, PHX failed reasonably to supervise Representative 1, within the meaning of Section 15(b)(4)(E) of the Exchange Act, with the view to preventing and detecting Representative 1’s violations of Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Further, during the Reg BI Period, PHX violated the Reg BI Care Obligation, Exchange Act Rule 15l-1(a)(2)(ii), when Representative 1 recommended a series of transactions to retail customers without a reasonable basis to believe that the recommended transactions, even if in the customers’ best interests when viewed in isolation, were not excessive and in the customers’ best interests when taken together in light of the customers’ investment profiles.

The actions were the same. A PHX registered representative recommended a short-term, high-volume investment strategy to at least eight of PHX’s retail customers . The customers each lost money in their PHX brokerage accounts while PHX and the Representative made over $400,000 in commissions and fees.

PHX had a a process for identifying accounts with what appeared to be excessive trading. The procedures fell apart when trying to address and manage the issue.

The SEC order characterized the problem in the Pre-BI period as fraud and supervisory failure. While after BI it’s a violation of the Care Obligation under Reg BI.

Post Reg BI, the SEC appears to hang its hat on the accounts having cost-to-equity ratios in excessive of 40% and turnover rates from 7 to 53 in the affected accounts.

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The One Without the Magic in the Mushrooms

Was Robert Shumake a shaman or a securities fraudster? Or Both?

On one hand he was the shaman of Soul Tribes in Detroit that was trying to “safe and sacred space for individuals to explore the healing benefits of sacred plants.” That apparently included storing over 99 pounds of mushrooms believed to be psilocybin and over 120 pounds of “material believed to be marijuana” from the church. Shumake claimed he was protected under the Religious Freedom Restoration Act. Detroit claimed it was a distribution center for unlawful controlled substances, poorly masquerading as a church. (Soul Tribes was apparently not a licensed marijuana dispensary.)

On the federal side, the Securities and Exchange Commission and the Department of Justice claim that Shumake was running a securities fraud on Minerco. The company claimed to be “first publicly traded company focused on the research, production and distribution of psilocybin mushrooms.”

Minerco was largely defunct company in 2019. According to the SEC complaint, Mineco got his hands on old debt owed by the company that was convertible into Minerco stock. That conversion of stock gave Shumake and his co-conspirator control of the company, gave control of the company to them and the power to issue more shares.

Then they had Minerco issue a bunch of press releases and advertising to pump up the value of the company. The company claimed that it had been reviewed by a third-party and was worth $1 billion.

At the start of the scheme, Minerco’s stock closed at $ 0.000001. Four months later Minerco’s stock closed at $0.0127, a 1,269,900% increase. Trading volume likewise skyrocketed from approximately 22 million shares to nearly 3 billion shares.

During the Relevant Period, Defendants’ pump-and-dump scheme inflicted pecuniary harm on investors who traded Minerco shares. Investors who bought Minerco stock in reliance on the public announcements that were either misleading or false, or that created a false appearance of fact, were duped. They paid a higher price than the shares were worth, and they suffered losses when they tried to sell their shares. Moreover, Minerco’s issuance of one billion additional shares diluted existing stockholders’ equity.

During this time, Shumake and his co-conspirator sold the stock they had acquired for at least $7 million.

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The One With Pig Butchering

What’s with the fake profiles on Facebook, Instagram, or your social networking platform of choice reaching out to you? It’s likely the first step in a “relationship investment scam” or “pig butchering.” The scammer starts with casual conversations, try to build trust, maybe even a little romance. After building some trust/relationship over an extended period of time, they introduce an investment tip. Usually a crypto. Money doesn’t go your new friend, its just a tip. You move the money and then its gone.

The SEC charged two outfits NanoBit and CoinW6 with fraud involved pig butchering.

The Scheme Participants contacted prospective investors through social media platforms, such as LinkedIn and Instagram, and then pursued romantic relationships with them over the messaging platform, WhatsApp. After developing online romantic relationships with prospective investors, the Scheme Participants introduced the investors to so-called “cryptocurrency,” claiming that they had earned hundreds of thousands of dollars through crypto asset products that CoinW6 offered and sold on its websites through an online crypto trading platform (“CoinW6 Platform”). The CoinW6 Platform promised two to three percent passive returns per day from crypto asset staking, mining, or yield farming products that the Defendant purportedly operated.

Of course, it was all fictious and the money disappeared.

The scams slap financial fraud onto a catfishing scam.

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SEC Brings AI Washing Cases

Back in December, Chair Gensler gave a speech to an AI Summit and warned about companies overstating their use artificial intelligence tools. From there, you can see the SEC approaching the concerns as part of fundraising fraud and marketing fraud. Chair Gensler probably knew that the Securities and Exchange Commission was actively working on two enforcement cases that got announced this week.

  • “the first investment adviser to convert personal data into a renewable source of investable capital”
  • “uses machine learning to analyze the collective data shared by its members to make intelligent investment decisions”
  • “turns your data into an unfair investing advantage”
  • “put[s] collective data to work to make our artificial intelligence smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else”
  • “expert AI driven forecasts”
  • “first regulated AI financial advisor”
  • “the models are outperforming IMF forecasts by 34%, and the platform keeps improving”

These are quotes from the marketing materials for Delphia (USA) Inc. or Global Predictions Inc.

Section (a)(2) of the Marketing Rule says that an advertisement may not:

(2) Include a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission;

When asked by SEC examiners to substantiate those claims.

They could not. These appear to be the first cases by the SEC against investment advisers for AI-washing. And two of the few cases under the Marketing Rule.

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    The One with the Fake WeWork Bid

    The Securities and Exchange Commission brought charges against Jonathan Larmore, his real estate investment company ArciTerra and its affiliate Cole Capital, based in Phoenix. According to the charges, Mr. Larmore was siphoning million of dollars from his investors in the ArciTerra funds to pay for his lavish lifestyle.

    The SEC discovered this fraud because Mr. Larmore made a bid to purchase WeWork on the Friday before WeWork filed for bankruptcy. It was an attempt at stock manipulation.

    Mr. Larmore had purchased call options for over 7 million shares in the days prior, with strike prices between $2 and $5 that were scheduled to expire at 4:00 on Friday November 3. The stock was then trading around $1. Those call options would be worth $0 if the share price of WeWork did not rise about the strike prices on Friday.

    On the morning of November 3, Mr. Larmore sent Schedule TO to the SEC indicating that he intended to make a tender offer for WeWork at a price of $9. He also tried to publish a press release through the business wire service that morning.

    “We have consulted with God, legal, financial and other advisors to assist us with this transaction. We stand ready to proceed timely.”

    Larmore was not ready to proceed timely. He and Cole Capital did not have the financial resources to acquire the shares. Nor did they have any prospects for securing capital to proceed.

    Larmore also did not know how to release a press release on the wire service. It had been rejected for formatting issues and other irregularities. It wasn’t fixed and released until 5:12 pm on November 3. That was after the public markets had closed and after his call options had expired.

    He botched his stock manipulation and opened himself to further SEC inquiry which highlighted his other misdeeds.

    It’s not clear how much of the SEC’s case outside of the stock manipulation is coming from its own inquiries. There are several lawsuits and accusations of fraud against Mr. Larmore and his real estate company. Mrs. Larmore noted in an April filing in her divorce from Mr. Larmore that “there appears to be some sort of SEC investigation in process, potentially against the entities or Jon.”

    More Reading:

    Twitter Pump and Dump

    It should be obvious that some random twitteratti handing out investment advice is going to be a shady character. Right? There are lots of them. I’m not sure any get dragged before the Securities and Exchange Commission on charges.

    @AlexDelarge6553 made thousands of tweets encouraging his numerous followers to buy stocks. No surprise that the man behind @AlexDelarge6553 held a bunch of those stocks he encouraged his followers to buy. The SEC named Steven M. Gallagher as the man behind the twitter handle. He bought a bunch of the stock, encouraged his followers to but the stock. The price went up and @AlexDelarge6553 sold out of positions as the price rose.

    Classic pump and dump scheme or scalping scheme. Of course the stocks involved were penny stocks at tiny prices and tiny volumes. That made it easier to manipulate the stock price.

    Kudos for the SEC for bringing the case. Bigger kudos to @AlexDelarge6553’s broker who tried to shut him down and, I assume, alerted the SEC to the problem.

    “Despite repeated, written warnings from his brokerage firm (“Broker A”) that he appeared to be engaged in manipulative trading in violation of securities laws and regulations, Gallagher continued to engage in manipulative trading and scalping. On September 9, 2021, Broker A informed Gallagher that it was closing his trading account effective October 9, 2021, and that it would immediately prevent him from making new stock purchases, restrict his account to just liquidating transactions, and not allow him to open a new account in the future.”

    Of course, since he was still allowed to liquidate his holdings, he could keep flogging his followers to buy as he sold out of his positions.

    The fun part for the SEC is they have the transaction data from @AlexDelarge6553’s broker and his public tweets. It’s really easy to match the timing of the tweets to the timing of the transactions.

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    The One with Trading in Foreign Currency when There is No Money

    Minnesota residents Jason Dodd Bullard and Angela Romero-Bullard raised millions from investors, mostly friends and family, and said it would be used to trade foreign currencies. Instead, the Securities and Exchange Commission claims that the two diverted the money to other uses and falsified account statements. In the classic Ponzi scheme fashion, they used new investors’ money to pay redemptions by earlier investors.

    The two produced false account statements for over 14 years. Although the account statements showed good returns, in reality the two had suffered large losses. In October, the two sent an investor a statement showing a balance of over $1.4 million. Unfortunately, the two only had $30,000 in the trading accounts.

    The two told some investors that they were not required to be registered with any government agency. They told other investors that they were registered. In response to one investor’s redemption request they told the investor that the withdrawal request had to be approved by regulators. FYI: redemption requests do not have to be approved by government financial regulators.

    Instead of investing in foreign currencies, the SEC claims that the two diverted the cash to other businesses they owned, including a horse racing stable, a limousine service and a fitness studio.

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    The One with the “Dealmaker”

    It’s one thing to make a deal. It’s another to execute on the business plan agreed to in the deal you make. Matthew Skinner calls himself a deal maker. The Securities and Exchange Commission says that he didn’t execute on his deals.

    Mr. Skinner was building a real estate empire, developing residential properties in southern California, an apartment building in Arizona and unidentified multifamily real estate. It looks like some of the deals went sideways. There was litigation over property rights and cost overruns. Problems happen. You tell your investors and move forward. Looks like Mr. Skinner did not.

    This is real estate, so why is the Securities and Exchange Commission involved? Mr. Skinner was selling securities to fund his real estate empire. He was purported to be using the Rule 506 option for fundraising. According the the SEC, Mr. Skinner and his funds were “engaged in general solicitation for each offering, broadly targeting members of the public with whom they had no preexisting relationship.” According to the complaint, at least some of the investors were not accredited and Mr. Skinner did not take steps to determine their status as accredited investors.

    The other key part of fundraising is identifying the use of proceeds. In particular, how much, if any, is going to the sponsor of the fundraising. Mr. Skinner’s fundraising documents listed certain fees to which he was entitled. However, the SEC has accused him of taking much more than was detailed in the fundraising documents.

    The last thing that caught my eye was using COVID as an excuse. I think we’ll start seeing more of this in fraud cases. Mr. Skinner “falsely cited economic dislocation caused by the COVID-19 pandemic as the reason why he could not pay [his investors] and would need to defer distributions.”

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    The One with King, Trout, and Legacy

    Randy King, his son Matthew King, and Andrea Trout founded and ran The Legacy Group, Inc. a real estate investment firm based in Colorado Springs. The firm’s business model was to provide mezzanine loans to real estate projects. These Legacy mezzanine loans would be junior to the secured mortgage loans on the project. 

    Legacy raised its capital to make these mezzanine loans from over 200 investors in dozens of states. The investors would purchase notes that were tied to a specific project.  

    Unfortunately, as some projects would run into financial difficulty, Legacy would use the proceeds from selling the notes to help fund those projects, in addition to the projects the notes were intended to fund.

    In some instances, Legacy mislead investor about the status of the projects. In one case, Legacy failed to tell incoming investors that project was in the middle of foreclosure proceeding with the senior lender. There are other instances where Legacy failed disclosed that there were other investors and loans in the ownership structure of an investment that would affect the investment.  

    The notes did not say that funds from the notes could be used to make payments to the Kings and Trout, but Legacy paid hundreds of thousands of dollars to them. The firm also paid over $400 thousand in undisclosed origination fees to King and Trout when closing on an investment.  

    The case shows the importance of (1) only putting investor funds into items allowed by the investment documents and (2) not paying fees to affiliates that are not permitted by the investment documents.

    The defendants have consented to the judgements.