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Regulation and Compliance > Federal Regulation > SEC

Former Wells Fargo Broker Indicted on 128 Felony Counts: Enforcement Roundup

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A former Wells Fargo broker was indicted on 128 felony counts related to securities fraud from his work as a financial advisor.

According to a the prosecuting attorney of Montgomery County, Ohio, John Greg Schmidt stole money from investment accounts in order to cover for stolen money in other investor’s accounts — a Ponzi scheme.

The Montgomery County Grand Jury indicted Schmidt on 124 counts of forgery; two counts of theft from an elderly or disabled adult of more than $150,000; one count of telecommunications fraud over $150,000 but under $1 million; and one count of fraud or deceit by investment advisor of more than $150,000.

According to Prosecuting Attorney Mat Heck Jr., Schmidt created and falsified financial statements to investors in an effort to cover for the missing investments. Schmidt also sold securities without the knowledge or authorization of the investors and the defendant received commissions on those transactions of nearly $250,000.

“For years, this defendant defrauded a number of investors, many of them elderly or with dementia. He had to keep stealing from more investors in order to cover for the thefts from other investors,” Heck said in a statement.

A federal civil lawsuit has also been filed by the Securities and Exchange Commission. The SEC brought charges against Schmidt in September.

According to the SEC’s complaint, Schmidt sold securities of at least seven of his customers and secretly transferred more than $1 million in proceeds to 10 other customers to cover shortfalls in their accounts.

“From at least 2003 through 2017, Schmidt betrayed his customers’ trust by perpetrating a classic fraudulent scheme: He robbed Peter to pay Paul,” the complaint states.

Schmidt, who operated Schmidt Investment Strategies Group in Ohio, was employed by Wells Fargo for 10 years until he was discharged from the firm in late October 2017, according to BrokerCheck. In addition, the Financial Industry Regulatory Authority barred Schmidt from association with any FINRA member in any capacity as of March 2018.

Wells Fargo said in a statement that the firm holds “all advisors to the highest ethical standards.”

“We fully cooperated with all regulatory and law enforcement investigations regarding this formerly affiliated advisor,” according to the bank.

SEC Fines Lightyear Capital for Overcharging Clients

Lightyear Capital agreed to pay a $400,000 fine and reimburse clients for overcharging fund investors over a 16-year period.

According to the SEC, Lightyear Capital — a registered investment advisor that manages “flagship” private equity funds and employee funds and is the primary owner of the independent broker-dealer Advisor Group — did not proportionally allocate broken deal, legal, consulting, insurance, and other expenses to co-investors and employee co-investment funds, thereby overcharging investors in their flagship funds.

The SEC said the firm also paid portfolio company consulting fees to co-investors, which resulted in lower fee offsets to the detriment of flagship fund investors.

Lightyear also failed to adopt written policies and procedures reasonably designed to prevent violations of the Advisers Act or its rules in connection with how it allocated fees and expenses until May 2017.

In determining the sanctions, the SEC noted that Lightyear Capital voluntarily agreed to reimburse investors for the expenses and the fees following discovery of the misconduct during a 2016 SEC exam.

SEC Files Subpoena Action in Possible Market Manipulation Scheme

The SEC filed a subpoena enforcement action against three penny-stock companies and their CEO — Cherubim Interests Inc. (CHIT), PDX Partners Inc. (PDXP), Victura Construction Group Inc. (VICT), and Patrick Jevon Johnson.

The SEC seeks an order directing them to comply with investigative subpoenas for documents.

According to the SEC’s application, the regulator is investigating a potential pump-and-dump scheme in the stock of CHIT, PDXP and VICT.

The SEC suspended trading in those companies’ securities on Feb. 15, 2018, for 10 business days amid questions surrounding similar statements they made about the acquisition of cryptocurrency and blockchain technology-related assets.

Based on its ongoing investigation, the SEC has reason to believe that each company issued false public statements in January 2018 to “pump” their stock price, claiming that it had acquired hundreds of millions of dollars of “AAA-rated” assets, even though each company appeared to have few to no assets.

After the stock price and trading volume for each company increased as a result of the news, an entity associated with the companies may have “dumped” their overvalued shares for significant profits.

In May 2018, the SEC issued subpoenas to CHIT, PDXP, VICT, and Johnson for the production of documents. According to the SEC’s application, the companies and Johnson produced a limited number of documents. All of them refused to produce key documents responsive to the subpoena about matters relevant to their participation in the conduct being investigated.

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