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Major Fraud (And "Broken Windows") Alert 

This week has brought more aggressive securities law enforcement from the Justice Department and the SEC, as well as notable press on these developments in both professional blogs and newspapers of general circulation. What seems particularly striking to us is the SEC Enforcement Division's continuing push to "do it all," i.e., bring enforcement cases against both predators/recidivists as well as technical violators, the so-called "Broken Windows" approach. Thus, Wednesday's Wall Street Journal reported two stories, one about yet another alleged Ponzi Scheme, and the other yet another case involving alleged micro-cap abuse. Both of these stories focus on what many would interpret to be schemes perpetrated by "bad actors," i.e., those with the venality sufficient to be guests of the federal government without a second thought. However, that same day, the SEC brought enforcement cases against approximately 34 companies and individuals, all involving the type of violations previously thought to be relatively unlikely to be charged, i.e., failure to timely file ownership reports under the Securities and Exchange Act of 1934.


This week's developments:


1)  "The Curious Case of an 'Oxford' Man," by Maria Armental of the Wall Street Journal (west coast ed., p. C-1), discusses the alleged brazen affinity/charity-related Ponzi Scheme by Steven Wessel, reported to be a convicted felon who charmed his way into getting hold of the assets of persons attending the Oxford-Cambridge Boat Race Dinner in New York. The article cites a recent study by the Association of Certified Fraud Examiners, and notes that, while large-scale frauds like Madoff and Stanford have dominated the news for the last few years, the majority of financial frauds are on a much smaller scale. However Kurt Stake, a CFE with SingerLewak in Irvine, says that most people don't need an expert like him to connect the dots ahead of time: "What I recommend is, step back from the warm and fuzzy feeling that you get at a nice charity or social or church event, and simply do your own due diligence on the internet and social media; then, if you find something weird, ask; if you find nothing where there should be something, ask about that too."


The Curious Case of an 'Oxford' Man.    By:  Maria Armental. 


2)  "Six Charged in Alleged Stock Scheme," by Christopher M. Matthews of the Wall Street Journal (west coast ed., p. C-3), reports the simultaneous criminal and civil enforcement actions relating to an alleged 5-year-running money-laundering scheme orchestrated by Robert Bandfield and Andrew Godfrey, who, according to the SEC, as reported by the Journal, "ran" an entity named IPC Corporate Services. The article states that the scheme appears to include the utilization of layers of off-shore-based entities to enable various confederates to conceal their true identities in connection with the alleged illegal penny stock manipulations. Although the article is silent regarding involvement of any U.S.-based broker-dealers, it is highly likely that one or more such firms were somehow involved.


This is yet another example of an increasingly more frequent string of micro-cap fraud cases brought by the Justice Department and the SEC. This alleged scheme is reported to have involved Cannabis-Rx, Inc., which, according to the Wall Street Journal, is a company which "catered to the real estate needs of the regulated cannabis industry in the U.S."


Six Charged in Alleged Offshore Stock Scheme. By: Christopher M. Matthews.  


3)  Recall also Direct Access Partners a year and a half ago. These companion criminal/civil enforcement cases were directed against defendants allegedly involved in a multi-year scheme, which involved at least one Venezuelan state-owned entity, where it appeared that the beneficial ownership of various broker-dealer customer accounts were intentionally obfuscated. The headline news then was in the AML area. However a key question then, and now, is, at least relating to broker-dealers, "where were the OBA cops [FINRA Rule 3270]---at the regulators, in-house, and at outside provider gatekeepers---year after year after year? 


The conduct alleged in the above-referenced cases, if true, falls into the "bad actor" bucket. However, Thursday's New York Post reports that Enforcement Division Director Andrew Ceresney is clearly sending the message that the Commission will pursue all violators who come to their attention:


Ceresney to Apply 'Broken Windows' to SEC Enforcement.  

By:  Kevin Dugan. 


4)  A good discussion of the cases filed by the SEC on Wednesday is found in Tom Gorman's blog, which also has recent commentary on the alleged Bandfield-driven money-laundering scheme noted above. According to Mr. Gorman, "the volume of cases filed yesterday gets the SEC good statistics, but it seems doubtful that such approach contributes to effective enforcement."


Our thoughts exactly. Former SEC Enforcement attorney Dennis Stubblefield, in our firm, has long advocated for a bifurcated approach to securities law enforcement, i.e., a scorched-earth, fully-funded push to wipe out predators, but a more even-handed and temperate approach to dealing with fundamentally good actors who make mistakes, even really stupid, and sometimes grossly negligent, mistakes. While integrity of system and process is fundamental to securities compliance, no system is perfect. For technical violations, the Commission ought to use discretion to bring enforcement cases primarily where the conduct at issue reveals a defective process, not just one-off violations. The approach really ought to be called "Broken Process," not "Broken Windows." For example, various failure-to-supervise cases brought by the Commission over the years reveal such broken processes, and the SEC should be commended for its efforts to ensure integrity within our regulated entities. However, the Enforcement Division should not neglect aggressive enforcement against smaller, fraudulent private placements either. There are likely scores of issuers and promoters right now preparing to charge forward with raising private capital, increasingly utilizing the liberalized rules on general solicitation under rule 506. We fear that too many of these entrepreneurs may not have a clue as to what Section 5 of the '33 Act says, and/or may be arrogant enough to believe that they are God's gift to their business space, and investors should be grateful, thank you very much, for the privilege of being part of their deal. 


In short, let's truly have common sense, effective enforcement.


Dennis Stubblefield, Erwin Shustak and the team at Shustak & Partners, P.C. focus on securities enforcement defense, litigation and arbitration for broker-dealers, investment advisers, funds and others involved in the retail delivery of financial products and services.  Visit our website, www.shufirm.com, for more information.  



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