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SEC, FINRA Fine Brokerages With AML Violations: Enforcement

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The Securities and Exchange Commission settled charges against broker-dealers Chardan Capital Markets LLC and Industrial and Commercial Bank of China Financial Services LLC (ICBCFS) for failing to report suspicious sales of billions of penny stock shares.

In a related action, the Financial Industry Regulatory Authority fined ICBCFS $5.3 million for systemic anti-money laundering compliance failures, including its failure to have a reasonable AML program in place to monitor and detect suspicious transactions, as well as other violations, including financial, recordkeeping and operational violations.

The SEC’s orders found that Chardan and ICBCFS violated the Exchange Act and an SEC financial recordkeeping and reporting rule and that Chardan’s AML officer, Jerard Basmagy, aided and abetted and caused the firm’s violations. The SEC also found that ICBCFS failed to produce documents promptly to SEC staff.  Without admitting or denying the SEC’s findings, the parties agreed to settlements requiring Chardan to pay a $1 million penalty, ICBCFS to pay $860,000, and Basmagy to pay $15,000.

Broker-dealers are required to file Suspicious Activity Reports (SARs) for transactions suspected to involve fraud or with no apparent lawful purpose. According to the SEC, from October 2013 to June 2014, Chardan, an introducing broker, liquidated more than 12.5 billion penny stock shares for seven of its customers and ICBCFS cleared the transactions.

Chardan failed to file any SARs even though the transactions raised red flags, including similar trading patterns and sales in issuers who lacked revenues and products. The SEC found that ICBCFS similarly failed to file any SARs for the transactions despite ultimately prohibiting trading in penny stocks by some of the seven customers.

“As gatekeepers to the securities markets, brokerage firms, including clearing firms, must take their anti-money laundering obligations seriously,” said Marc P. Berger, director of the SEC’s New York Regional Office. “The failure to file SARs in the face of numerous red flags is unacceptable.”

According to FINRA, ICBCFS failed to have in place a reasonably designed AML program to detect and cause the reporting of potentially suspicious transactions, particularly those involving penny stocks.

FINRA found that prior to June 2014, ICBCFS had no surveillance reports that monitored potentially suspicious penny stock liquidations, and did not require its employees to document their review of the surveillance reports it did have in place.

FINRA further found that ICBCFS lacked systems and procedures to monitor whether certain business activities were unusual for any given customer, despite the firm’s written AML procedures specifically identifying such items as red flags requiring monitoring.

Susan Schroeder, FINRA executive vice president for the Department of Enforcement, said, “Member firms are obligated to implement an AML program that is reasonably designed to address the unique money laundering risks posed by their business.  Firms that engage in high-risk activities such as penny stock clearing are the gatekeepers to the market and must establish a reasonable supervisory system to detect and report suspicious trading activity.”

SEC Charges California Investment Advisor in Multimillion-Dollar Fraud

Investment advisor William Jordan of Orange County, California, has settled charges with the SEC for perpetrating a multimillion-dollar fraud on his clients.

The SEC’s complaint alleges that, from 2011 until 2016, as he raised more than $71 million from approximately 100 advisory clients, Jordan lied to investors about how their funds would be invested, about their investments’ performance, and about his own disciplinary history.

Jordan is alleged to have overstated the value of the assets in several of his 16 private investment funds, and then to have used those inflated values and unrealized “profits” on other investments to overpay management fees and bonuses to himself and his entities.

The complaint further alleges that the 16 funds were never audited, despite Jordan’s promises to investors. The open funds, along with other Jordan-affiliated entities, sought bankruptcy protection in May 2017 and are under the control of an independent chief restructuring officer.

The appropriate amount of disgorgement, prejudgment interest and civil penalties will be determined by the federal district court in Orange County.

Rep, Advisor Indicted for Scheme to Defraud Investors

Leon Vaccarelli, a defendant in an ongoing SEC litigation, was indicted on multiple counts of mail fraud, wire fraud and money laundering in connection with a scheme to defraud investors by representing that he would invest their money in various investment opportunities. Instead, he used the money to pay his own business and personal expenses.

The criminal charges against Vaccarelli alleged in the indictment arise from the same conduct alleged in the SEC’s complaint against Vaccarelli, individually and doing business as Lux Financial Services, and his company, LWLVACC LLC, filed in federal court in Connecticut on Aug. 31, 2017.

According to the SEC’s complaint, Vaccarelli fraudulently persuaded several elderly customers to invest with him. Instead of investing the customers’ money in such things as conventional brokerage accounts and so-called separately managed accounts as promised, Vaccarelli allegedly deposited customer funds into his personal and business bank accounts.

He allegedly commingled the funds with his own money and used them for his own purposes, and in some instances he used customer funds to pay returns to earlier investors.

According to the SEC’s complaint, Vaccarelli asked one customer to sign an agreement that she would not provide certain information to FINRA or the SEC. Vaccarelli also allegedly sold more than $450,000 in securities that were held in trust for the care and maintenance of a beneficiary and used some of the proceeds to pay business and personal expenses.

The SEC’s litigation against Vaccarelli and his company continues.

SEC Files Charges in International Manipulation Scheme

The SEC charged four individuals for their roles in a fraudulent scheme that generated nearly $34 million from unlawful stock sales and caused significant harm to retail investors.

According to the SEC’s complaint, the defendants manipulated the market for and illegally sold the stock of microcap issuer Biozoom Inc. As part of the alleged scheme, the defendants hid their ownership and sales of Biozoom shares by using offshore bank accounts, sham legal documents, a network of nominees, anonymizing techniques, and other deceptive practices. The defendants also allegedly directed a wide-ranging promotional campaign and employed sophisticated, manipulative trading techniques to artificially inflate Biozoom’s share price. The alleged scheme culminated in the defendants’ illegal sales of Biozoom, which netted them nearly $34 million in unlawful proceeds.

The SEC’s complaint charges Francisco Abellan Villena, Guillermo Ciupiak, James Panther Jr. and attorney Faiyaz Dean with violating antifraud and registration provisions of the federal securities laws. The complaint seeks monetary and equitable relief.

The SEC previously obtained a judgment against Abellan for his role in another market manipulation scheme. In separate actions, the SEC charged two registered representatives for their roles in the unregistered sales of Biozoom stock and a brokerage firm for supervisory and recordkeeping failures.

SEC Charges Owner of Alternative Investment Firm in Belize Airport Financing Scam

The SEC charged the owner of a Manhattan-based alternative investment firm with misappropriating close to $6 million in investor funds earmarked to finance the construction of an international airport in Belize.

The SEC’s complaint alleges that between 2014 and 2017, Brent Borland sold more than $21 million of promissory notes to dozens of investors, promising that the funds would be used as bridge financing for development of an international airport in Placencia, Belize, and that the investments would be protected by pledges of real estate as collateral.

Borland marketed and sold the notes through two companies, Borland Capital Group LLC, which purports to be active in “alternative investment,” and Belize Infrastructure Fund I, LLC, which purports to be in the business of construction finance.

The complaint alleges that Borland used millions of dollars of investor funds for personal expenses and unrelated business expenses, including mortgage and property tax payments on his family’s Florida mansion, multiple luxury automobiles, private school tuition for his children, $36,000 for his family’s beach club membership, and almost $2.7 million to pay off credit cards.  Borland also allegedly deceived investors by pledging the same collateral to multiple investors.

The SEC’s complaint charges Borland, Borland Capital Group and Belize Infrastructure Fund with violating the antifraud provisions of the federal securities laws. The SEC seeks asset freezes, an accounting of investor assets, disgorgement, and civil penalties.

The complaint also names as relief defendants Borland’s wife, Alana LaTorra Borland, and a corporation controlled by Borland and his wife, Canyon Acquisitions LLC. The SEC seeks to recover investor proceeds that Borland transferred to the relief defendants.

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

SEC Charges Three Former Health Care Executives With Fraud

The SEC announced fraud charges against three former Constellation Healthcare Technologies Inc. executives who falsified financial and other information they provided to a private firm in the course of negotiating the private firm’s acquisition of a majority stake in Constellation. Houston-based Constellation filed for bankruptcy in March, a little more than a year after the January 2017 acquisition.

According to the SEC’s complaint, the executives convinced a private firm to acquire a majority of Constellation’s equity and provided fake information, including financial statements for three fictitious subsidiaries supposedly acquired for more than $62 million.

The complaint alleges that the former executives funded the sham acquisitions with stock sales in London and then diverted the proceeds to themselves.

The complaint charges former Constellation chief executive Parmjit (Paul) Parmar, former chief financial officer Sotirios (Sam) Zaharis, and former company secretary Ravi Chivukula.  In September 2017, amid concerns about Constellation’s financial condition, Parmar resigned and Zaharis and Chivukula were put on administrative leave.

The SEC’s complaint charges Parmar, Zaharis, and Chivukula with violating the antifraud provisions of the federal securities laws. The SEC is seeking permanent injunctions, return of allegedly ill-gotten gains plus interest, civil penalties and officer-and-director bars against Parmar, Zaharis and Chivukula.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced criminal charges against Parmar, Zaharis and Chivukula.

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