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Regulation and Compliance > Federal Regulation > SEC

Advisor Sent to Prison for Scamming Seniors: Enforcement

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A federal court sentenced a Chicago-based investment advisor to 151 months in prison in a criminal action that stemmed from a similar case with the Securities and Exchange Commission.

The U.S. District Court for the Northern District of Illinois entered judgments against Daniel Glick, his unregistered investment advisory firm Financial Management Strategies Inc., and his accounting firm, relief defendant Glick Accounting Services Inc.

The SEC charged Glick and FMS in March 2017 with misappropriating millions from elderly investors, including his in-laws, who had entrusted Glick and his advisory firm with their retirement savings. According to the SEC’s complaint, Glick and Financial Management Strategies provided clients with false account statements that hid Glick’s improper use of client funds to pay personal expenses and his improper transfers of funds to two other individuals.

The SEC’s civil action named Glick Accounting Services as a relief defendant that obtained ill-gotten funds from the fraud. The judgments include permanent injunctive relief, repatriation of assets, and orders to pay disgorgement and civil penalties in amounts to be determined by the Court.

Glick was also ordered to pay $5.2 million in restitution.

SEC Charges Additional Defendant in Fraudulent ICO Scheme

The SEC announced additional fraud charges stemming from an investigation of Centra Tech Inc.’s $32 million initial coin offering that was touted by the boxer Floyd Mayweather.

In an amended complaint, the SEC charged another of Centra’s co-founders, Raymond Trapani, in a fraudulent scheme related to Centra’s 2017 ICO, in which the company issued “CTR Tokens” to investors.

Earlier this month, the SEC and criminal authorities charged Centra’s two other co-founders, Sohrab “Sam” Sharma and Robert Farkas, for their roles in the scheme.

The SEC’s amended complaint alleges that Trapani was a mastermind of Centra’s fraudulent ICO, which Centra marketed with claims about nonexistent business relationships with major credit card companies, fictional executive bios, and misrepresentations about the viability of the company’s core financial services products. The amended complaint further alleges that Trapani and Sharma manipulated trading in the CTR Tokens to generate interest in the company and prop up the price of the tokens.

Text messages among the defendants reveal their fraudulent intent.

After receiving a cease-and-desist letter from a major bank directing him to remove any reference to the bank from Centra’s marketing materials, Sharma texted to Farkas and Trapani: “[w]e gotta get that s[***] removed everywhere and blame freelancers lol.” And, while trying to get the CTR Tokens listed on an exchange using phony credentials, Trapani texted Sharma to “cook me up” a false document, prompting Sharma to reply, “Don’t text me that s[***] lol.  Delete.”

The SEC’s amended complaint charges Trapani with violating the antifraud and registration provisions of the federal securities laws. The amended complaint seeks permanent injunctions, the return of allegedly ill-gotten gains plus interest and penalties, as well as bars against Trapani prohibiting him from serving as a public company officer or director and from participating in any offering of digital or other securities.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Trapani.

SEC Charges and Fines Company Formerly Known as Yahoo With Failing to Disclose Massive Cybersecurity Breach

The entity formerly known as Yahoo! Inc. has agreed to pay a $35 million penalty to settle charges that it misled investors by failing to disclose one of the world’s largest data breaches in which hackers stole personal data relating to hundreds of millions of user accounts, according to the SEC.

According to the SEC’s order, within days of the December 2014 intrusion, Yahoo’s information security team learned that Russian hackers had stolen what the security team referred to internally as the company’s “crown jewels”: usernames, email addresses, phone numbers, birthdates, encrypted passwords, and security questions and answers for hundreds of millions of user accounts.

Although information relating to the breach was reported to members of Yahoo’s senior management and legal department, Yahoo failed to properly investigate the circumstances of the breach and to adequately consider whether the breach needed to be disclosed to investors.

The fact of the breach was not disclosed to the investing public until more than two years later, when in 2016 Yahoo was in the process of closing the acquisition of its operating business by Verizon Communications Inc.

“We do not second-guess good faith exercises of judgment about cyber-incident disclosure. But we have also cautioned that a company’s response to such an event could be so lacking that an enforcement action would be warranted. This is clearly such a case,” said Steven Peikin, co-director of the SEC Enforcement Division, in a statement.

The SEC’s order finds that when Yahoo filed several quarterly and annual reports during the two-year period following the breach, the company failed to disclose the breach or its potential business impact and legal implications. Instead, the company’s SEC filings stated that it faced only the risk of, and negative effects that might flow from, data breaches. In addition, the SEC’s order found that Yahoo did not share information regarding the breach with its auditors or outside counsel in order to assess the company’s disclosure obligations in its public filings.

Finally, the SEC’s order finds that Yahoo failed to maintain disclosure controls and procedures designed to ensure that reports from Yahoo’s information security team concerning cyber breaches, or the risk of such breaches, were properly and timely assessed for potential disclosure.

Verizon acquired Yahoo’s operating business in June 2017.  Yahoo has since changed its name to Altaba Inc.

Investment Advisor to Pay Penalty for Defrauding Clients

A federal district court entered a judgment against Scott Newsholme, a New Jersey-based tax preparer and investment advisor, for defrauding his clients of more than $1 million to support his lifestyle and gambling habit.

In its September 2017 complaint, the SEC alleged that Newsholme fabricated account statements, doctored stock certificates and forged promissory notes as part of a scheme in which he convinced clients seeking his financial planning advice to give him their money to invest in various securities.

Instead of investing clients’ money, Newsholme allegedly cashed their investment checks at a check-cashing store and pocketed the funds while assuring clients that their assets were safe and flourishing. The complaint further alleged that Newsholme made Ponzi-like payments to certain investors who asked about their investments and he used investor money for his own purposes, including to gamble and to pay personal expenses.

The judgment orders Newsholme to pay disgorgement, prejudgment interest, and a civil penalty in amounts to be determined at a later date.

In a parallel criminal action, Newsholme pled guilty to wire fraud, aggravated identity theft, and aiding and abetting the filing of false tax returns.

SEC Obtains Judgments Against Execs in Fraudulent Bond Offering

A federal court entered judgments against former Dewey & LeBoeuf, LLP executives Stephen DiCarmine and Joel Sanders in an SEC enforcement action arising from their roles in a fraudulent $150 million bond offering.

In 2014, the SEC filed suit against DiCarmine, Sanders and others in federal district court in Manhattan.

The SEC’s complaint alleged that in 2008 and 2009, Sanders, then the chief financial officer of Dewey & LeBoeuf — in conjunction with other employees — devised a scheme that involved Sanders directing his staff to materially falsify the firm’s financial statements in order to meet lender covenants. The SEC further alleged that DiCarmine, the firm’s executive director, was aware of these efforts.

In March 2010, Dewey & LeBoeuf conducted a $150 million private placement of bonds. According to the SEC’s complaint, Sanders defrauded investors in that offering by, among other things, providing a private placement memorandum to investors that incorporated the fraudulent financial statements. The SEC further alleged that Sanders and DiCarmine participated in a conference call where the firm’s false financial information was provided to investors.

Sanders consented to the entry of a judgment, which prohibits him from acting as an officer or director of a public company. The judgment against Sanders also provides that the payment of disgorgement plus prejudgment interest, and the imposition of civil monetary penalties will be determined by the court at a later date upon motion of the Commission.

DiCarmine also consented to the entry of a final judgment, which orders him to pay a civil monetary penalty of $35,000. The settlement resolves the SEC’s case against DiCarmine.


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