Articles Posted in Fraud and Misrepresentation

The below referenced FINRA Enforcement Action provides examples of what would constitute a negligent misrepresentations and omissions in any offering.  In this particular circumstance, it related to the offering of notes of the parent company of WestPark Capital.

WestPark Capital, Inc. (CRD #39914, Los Angeles, California) and Richard Alyn Rappaport (CRD #1885122, Los Angeles, California) November 22, 2021 – An AWC was issued in which the firm was censured, fined $250,000, ordered to offer rescission to customers who invested in notes of the firm’s parent company and have not yet been repaid the full amount of their outstanding principal investment that totaled $1,777,316, required to review and revise, as necessary, its policies, procedures, processes, controls and systems concerning FINRA Rule 3170, and required to extend the time during which it will comply with the requirements of FINRA Rule 3170 for an additional six months. Rappaport was fined $30,000, suspended from associating with any FINRA member in all capacities for four months and suspended from associating with any FINRA in any principal capacity for 15 months. The suspensions are to run concurrently.  Without admitting or denying the findings, the firm and Rappaport consented to the sanctions and to the entry of findings that they made negligent misrepresentations and omissions of material facts in offering documents provided to customers in connection with the sale of promissory notes issued by the firm’s parent company. The findings stated that the offering documents failed to disclose that the parent company had defaulted on a $1 million line of credit and had defaulted on successive forbearance agreements with a bank, or that the bank had sued the parent company and Rappaport. Similarly, the offering documents failed to disclose that the parent company had net operating losses each year from 2012 through 2016. In addition, the firm sent prospective investors a misleading historical analysis document, created by Rappaport, that claimed to show investors what they would have received as a return on the notes if the notes had been purchased in 2006 and held through 2010. In fact, the return displayed did not explain that the calculation was based upon hypothetical returns from distinct investments and not any actual return from the notes. The firm, through Rappaport and other firm representatives, also represented to prospective investors that they would be entitled to share in pro-rata distributions of equity and profits from the firm. In fact, the noteholders were entitled to share in pro-rata distributions of equity and profits from the parent company, not the firm, which at times had higher profits and greater equity producing opportunities than the parent company. Moreover, the firm, through Rappaport and other firm representatives, failed to disclose material conflicts of interest. The firm and Rappaport failed to disclose to prospective investors that Rappaport had sole discretion as to whether the parent company’s subsidiaries would make distributions to the parent. By virtue of the foregoing, the firm acted in contravention of Sections 17(a)(2) and (3) of the Securities Act of 1933. The findings also stated that the firm and Rappaport failed to supervise the parent company offerings. The firm, acting through Rappaport, failed to take reasonable steps to ensure that firm representatives who solicited investments in the notes understood the terms of the notes. The firm and Rappaport did not provide reasonable training to registered representatives about the notes and did not respond reasonably to questions from customers that raised red flags that customers lacked accurate information about the notes. The findings also included that the firm violated FINRA Rule 3170 (the “Taping Rule”). The firm’s recording system allowed representatives, at their discretion, to end recording at any time, including before a call was complete.  The firm became aware that a representative who sold the parent company offerings terminated at least three recordings before the calls were completed, including a recording of a call with a noteholder, yet the firm did not take any action to ensure that the representative at issue, or other firm representatives, recorded future calls in their entirety. In addition, the firm’s special written procedures concerning the Taping Rule were not reasonably designed. The special written procedures for supervisory review of calls provided no meaningful guidance regarding the review process, frequency of review, or methods of escalating information identified during review. The firm also failed to enforce the provision in its special written procedures requiring the firm to test its taping system to ensure that recordings were properly made and retained. As a result, the firm failed to detect that recordings were deleted prematurely.  The suspension in all capacities is in effect from December 20, 2021, through April19, 2022, and the suspension in any principal capacity is in effect from December 20, 2021, through March 19, 2023. (FINRA Case #2017054381603)

The Securities and Exchange Commission recently announced that it has filed an emergency action  and obtained a temporary restraining order and asset freeze against two individuals and two companies they control in connection with an alleged $6 million Ponzi scheme that defrauded at least 55 investors, many of whom are senior citizens or small business owners.

According to the SEC’s complaint, Neil Burkholz of Boca Raton, Florida, and Frank Bianco, of Pembroke Pines, Florida, through their companies Palm Financial Management LLC and Shore Management Systems LLC, solicited investors by falsely representing that their proprietary options trading strategies were highly profitable. In reality, as alleged in the complaint, defendants invested less than half of investor funds, and those investments resulted in near-total losses. The complaint alleges that defendants misappropriated the remaining funds by using them to repay other investors and by transferring approximately $880,000 of investor funds to themselves and their spouses for personal use. According to the SEC’s complaint, the defendants sent false reports to investors to conceal their fraudulent conduct and give the investors the false impression they were generating positive returns.

The SEC’s complaint, filed in federal court in Miami, Florida on Nov. 14, and unsealed Monday, Nov. 18, charges the defendants with securities fraud and seeks certain emergency relief, as well as permanent injunctions, return of allegedly ill-gotten gains with prejudgment interest, and civil penalties. The complaint names Burkholz’s wife, Rhoda Burkholz, and Bianco’s wife, Suzanne Bianco, as relief defendants.

Recently, the Securities and Exchange Commission charged a South Florida attorney with aiding and abetting, through the issuance of fraudulent opinion letters, a previously-charged $322 million fraud allegedly perpetrated by a now bankrupt Florida-based cash advance company, 1 Global Capital LLC, its former CEO, and its former CFO on 3,600 retail investors. The SEC also previously charged an unregistered broker for his allegedly unlawful sale of 1 Global securities.

According to the SEC’s complaint, filed in federal district court in Miami, Jan D. Atlas, while a partner at a Fort Lauderdale-based law firm that was acting as outside counsel to 1 Global, drafted two opinion letters in which he knowingly falsified or omitted important facts and offered the opinion that 1 Global’s notes likely were not securities. The complaint alleges that 1 Global used the opinion letters to falsely represent to a network of external sales agents that its notes were not securities and that its offering did not have to be registered with the SEC. 1 Global then allegedly induced thousands of retail investors to invest hundreds of millions of dollars in its notes. According to the complaint, Atlas received a percentage of the commissions generated on the sale of 1 Global’s notes, which totaled more than $600,000.

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SEC Charges Two Kentucky Men in Oil-And-Gas Offering Fraud

SEC v. Scott Stacy Phelps and James Michael Harper, United States District Court for the Western District of Kentucky (Bowling Green), Case No. 1:18-cv-122

On August 30, 2018, the Securities and Exchange Commission charged two Bowling Green, Kentucky-area men with defrauding investors in oil-and-gas securities offerings. The SEC’s complaint, filed in federal court in Bowling Green, Kentucky, alleges that Scott Stacy Phelps and James Michael Harper raised approximately $611,000 by selling securities to nine investors between February 2015 and March 2016. Although they told prospective investors that the investment proceeds would be used to drill for oil in Kentucky, the main goal of the offering was to enrich Phelps and Harper. They spent the vast majority of the investor funds on themselves and their families, paying themselves generous six-figure salaries, and using the investor funds for rent, vacations, consumer goods, dating and adult websites, entertainment, golf, and hotels. They used a small amount to drill two wells. Neither well was commercially viable. Despite knowing this, the complaint alleges that Defendants continued soliciting additional funds from investors, purportedly to drill for oil in both wells.

Securities and Exchange Commission v. Rudden, et al., No. 18-cv-01842 (D. Colo. filed July 19, 2018)

The Securities and Exchange Commission recently announced the unsealing of fraud charges against a group of companies and their principal who allegedly bilked at least 150 investors in a $55 million Ponzi scheme. The SEC obtained an emergency asset freeze and other relief.

According to the SEC’s complaint, Daniel B. Rudden and a group of companies operating under the name Financial Visions, which issued promissory notes to fund its operations in short-term financing for funeral services and related expenses, defrauded as many as 150 investors after promising them annual returns of 12% or more. The complaint alleges that since 2010 or 2011, Rudden used new investor funds to pay interest and redemptions to existing investors and concealed the Financial Visions companies’ true financial performance and condition. The complaint also alleges that Rudden continued to represent the business as successful to existing and prospective investors when he knew that he was running a Ponzi scheme.

Securities and Exchange Commission v. John C. Maccoll, No. 2:18-cv-12473-SFC-DRG (E.D. Michigan filed August 9, 2018)

The Securities and Exchange Commission recently charged a former registered representative with defrauding his brokerage customers out of nearly $4 million in a long-running investment scam.

According to the SEC’s complaint, John C. Maccoll, who was affiliated with the Birmingham, Michigan branch of a nationwide registered broker dealer and investment adviser, used high pressure sales tactics to solicit at least 15 of his retail brokerage customers to invest in what he described as a highly-sought-after private fund investment. Most of the injured customers were elderly and retired and invested through their retirement accounts. Maccoll told his customers that the purported fund investment would allow them to diversify their portfolios, receive annual investment returns as high as 20%, and give them investment growth potential that was better than the growth they received in their brokerage accounts. As alleged in the complaint, Maccoll’s statements to his customers were false – he did not invest the customers’ money but stole it for his own personal use. In total, the customers invested nearly $4 million in the fraudulent scheme. To conceal the scheme, Maccoll allegedly instructed his customers not to tell others about the purported fund investment, provided some of his customers with fake account statements reflecting fictitious returns, and paid over $400,000 in Ponzi-like payments to certain of the customers to keep the scheme alive.

The Securities and Exchange Commission recently announced fraud charges against a Ukraine-based trading firm accused of manipulating the U.S. markets hundreds of thousands of times and the New York-based brokerage firm and CEO who allegedly helped make it possible.

The SEC’s complaint alleges that Avalon FA Ltd touted itself to traders as a destination to engage in layering, a scheme in which orders are placed but later canceled after tricking others into buying or selling stocks at artificial prices, resulting in illicit profits. Avalon allegedly made more than $21 million in the layering scheme involving U.S. stocks during a five-year period. According to the SEC’s complaint, Avalon also made more than $7 million in illicit profits through a cross-market manipulation scheme in which the firm bought and sold U.S. stocks at a loss in order to manipulate the prices of the stock and its corresponding options so that it could then profitably trade at artificial prices. Avalon allegedly used traders in Eastern Europe and Asia to conduct its trading, and the firm kept a portion of the profits and collected commissions from the traders.

The SEC’s complaint also describes fraud charges against Avalon’s named owner Nathan Fayyer and Sergey Pustelnik, who allegedly kept his controlling interest in Avalon undisclosed and embedded himself at Lek Securities as a registered representative, using his position to facilitate the schemes.

Richard G. Cody – South Florida, including Boca Raton, Boynton Beach, Lake Worth and West Palm Beach, Elder Financial Abuse and Breach of Fiduciary Duty Litigation and Arbitration Attorney Russell L. Forkey, Esq.

Securities and Exchange Commission v. Richard G. Cody, et al., Civil Action No. 16-cv-12510-FDS (D. Mass., filed Dec. 12, 2016)

SEC Charges Investment Adviser with Defrauding Massachusetts Retirees

Ross McLellan – South Florida Unauthorized and Fraudulent Mark-Up FINRA Arbitration and Litigation Attorney

Securities and Exchange Commission v. Ross McLellan, Civil Action No. 16-cv-10874 (D. Mass. filed May 13, 2016)

SEC Charges Former Executive of Massachusetts-Based State Street Corporation with Defrauding Investors

Gregory Jones – South Florida Fraudulent Offering Documents Litigation and Arbitration Attorney

Securities and Exchange Commission v. Gregory G. Jones., Civil Action No. 4:15-CV-438-A (NDTX)

Court Orders Nearly $2 Million Judgment from Attorney Who Defrauded Investors

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