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Archive for April, 2018


Clifton Stanley Ponzi scheme charges brought by SEC

On April 6, 2018, the Securities and Exchange Commission charged two Texas companies and their principals in a $2.4 million Ponzi scheme and in a related, $1.4 million offering fraud targeting retirees.

The SEC’s complaint alleges that, from 2010 to 2017, Clifton E. Stanley ran a Ponzi scheme through his retirement planning and real estate investment business, The Lifepay Group, LLC. Stanley is alleged to have lured at least 30 elderly victims to invest approximately $2.4 million of their retirement savings with baseless promises and claims of outsized investment returns. He kept the scheme afloat for years by paying early investors with later investors’ funds and by convincing investors to roll over their investments.  The SEC further alleges that Stanley pilfered from the estate of an elderly woman’s family trust, diverting nearly $100,000 to fund the Lifepay Ponzi scheme. In addition, the SEC’s complaint alleges that, beginning in 2015, Stanley and Michael E. Watts orchestrated a second offering fraud through a company they controlled, SMDRE, LLC. Stanley and Watts allegedly used a collection of misrepresentations and empty promises to convince a group of predominantly elderly victims to invest roughly $1.4 million in SMDRE.

Stanley is alleged to have used roughly $1.3 million of the Lifepay offering proceeds for personal expenses, including country club memberships, daily living expenses, travel, and entertainment expenses. In addition, Watts and Stanley allegedly engaged in shell game transactions so they could use the vast majority of SMDRE investor funds for personal expenses and to keep the Lifepay Ponzi scheme afloat.

The SEC’s complaint charges Stanley, Watts, Lifepay, and SMDRE with violating the registration and antifraud provisions of the federal securities laws. Stanley was also charged for conduct stemming from his role as an unregistered broker.

Wells Fargo under investigation by DOJ and SEC

With Wells Fargo’s credit card and savings divisions already disciplined by the Federal Reserve over a fake account scandal during which the bank opened bogus accounts on behalf of its customers, federal officials have begun an investigation into Wells Fargo Wealth Management to determine whether Wells Fargo’s investment wing inappropriately sold clients in-house investments using tactics similar to the illicit conduct that permeated the aforementioned credit card and savings scandal.

In its investigation of Wells Fargo Wealth Management, the Department of Justice and SEC seek to determine whether the firm breached its duty to investors and used incentives that were inadequately disclosed in order to sell in-house products that were more profitable for the firm, at the expense of its clients’ interests.

According to an InvestmentNews report, as recently as in 2016, Wells Fargo incentivized its advisers through quotas and bonus pay to steer investment clients into fee-bearing loans and brokerage accounts. The report states that Wells Fargo Wealth Management’s quotas and representative incentives were similar to the illicit scheme previously employed by the credit card, savings, and banking division in the company’s prior scandal, which had produced approximately 3.5 million potentially fake or otherwise improperly opened banking accounts.

Specifically, investigators will reportedly seek to determine whether Wells Fargo made inappropriate or unsuitable recommendations involving 401(k) rollovers, alternative assets, estates, and trusts. Investigators will also look into rewards and referral incentives, such as an alleged 15%-of-first-year-revenue reward in multi-million dollar accounts offered to some retail bank employees for referring wealthy clients to the firm’s brokerage arm.

Officials expressed concern that Wells Fargo’s investment business improperly steered clients toward in-house investments that may have been more profitable for the firm, at the expense of its clients’ best interests. In addition to suitability violations, this could possibly point to a widespread breach of fiduciary duty involving Wells Fargo Advisors and other related Wells Fargo Wealth entities.

For example, a Bloomberg review indicated that Wells Fargo Advisors personnel often ran simulations through Envision financial planning software, sometimes without clients present, and by “plugging in numbers they knew would recommend investments that clients already held.”

According to one former adviser, the Envision simulations would then confirm the clients’ investment strategy at Wells Fargo, making the clients much more likely to remain Wells Fargo customers and keep funds invested in products preferred by the firm. Wells Fargo disputes that charge, claiming that Envision did not disadvantage clients.

As a historical note, the SEC and US Commodity Futures Trading Commission in 2015 charged JP Morgan Securities and JPMorgan Chase Bank with improperly marketing JP Morgan-managed mutual funds to retail customers through a Chase Bank program, failing to disclose this practice and the associated conflict of interest to its clients.

Like Wells Fargo, JP Morgan stood accused of inappropriately recommending in-house investments that were more profitable for the firm, at the expense of its customers’ best interests.

JP Morgan and Chase Bank ultimately agreed to settle the charges by paying over $300 million in penalties, disgorgement, and interest.

SEC freezes Longfin (LFIN)

The U.S. Securities and Exchange Commission obtained an emergency freeze of $27 million in trading profits involving the CEO of cryptocurrency company Longfin and three other people, the agency said in a statement Friday.

Longfin’s stock was halted on the Nasdaq as of 10:01 a.m. ET on the SEC alert after jumping more than 47 percent. Shares had been halted numerous times throughout the week for volatility. The stock was worth more than $3 billion at one point in December after the company announced a cryptocurrency-related acquisition.

“We acted quickly to prevent more than $27 million in alleged illicit trading profits from being transferred out of the country,” Robert Cohen, chief of the SEC Enforcement Division’s Cyber Unit said in the statement. “Preventing defendants from transferring this money offshore will ensure that these funds remain available as the case continues.”

The SEC claims Longfin CEO and Chairman Venkat Meenavalli had the company issue unregistered shares to the three people so they could sell them, which they did.

The financial watchdog does allow people to own a certain amount of unregistered shares without having to go through what one lawyer calls a “very long” registration process. But those shares are restricted and cannot be sold during certain time periods.

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