Five Florida Residents Charged by the SEC With Insider Trading
The Securities and Exchange Commission (SEC) on September 28, 2015 charged five Florida residents, including a lawyer and an accountant with insider trading before the acquisition of Pharmasset Inc. by Gilead Sciences Inc.
The SEC filed a complaint claiming that attorneys Robert Spallina and Donald Tescher and accountant Steven Rosen illegally traded private information acquired from a mutual client who served on the board of directors of a company named Pharmasset.
According to the insider trading complaint, on November 8, 2011 during a meeting regarding year-end personal tax and estate planning, the Pharmasset board member and his advisers, including Spallina, Tescher, and Rosen, discussed the fact that the Pharmasset board was trying to reach an agreement to sell the company at a significant premium. Right after this meeting, Spallina, Tescher, and Rosen supposedly breached their duties of trust and confidence to their client by buying Pharmasset securities. Read More
SEC Charges Roger Bliss With Obstruction of Justice
The Securities and Exchange Commission (SEC) announced on September 2, 2015 that an alleged investment club fraudster whose assets were frozen in an SEC enforcement action earlier this year has now been criminally charged by a grand jury for lying and the obstruction of justice in an ongoing SEC investigation.
In a complaint filed in federal court in Utah in February, the SEC claims that Roger Bliss, of Bountiful, Utah, manned an investment club that inaccurately guaranteed returns in excess of 100% by day-trading Apple stock. In actuality, Bliss lost more than $3 million day-trading and was unable to use all of the investor capital for his stated purpose of day-trading. The SEC requested that the court impose an asset freeze against Bliss, and the Court consented.
The SEC then discovered that Bliss covered up his ownership of a catamaran sailboat and secretly transferred possession to his brother-in-law, Kevin Fortney. Read More
Spongetech Update – SEC Enforcement Attorneys
On May 5, 2010, the U.S. Securities and Exchange Commission (“SEC”) brought an action against Spongetech Delivery Systems, Inc. (“SPNG”), including CEO Michael Metter, CFO and secretary Steven Moskowitz, and certain other Spongetech officers and employees, for engaging in a scheme to increase demand for publicly traded stock in Spongetech by using false public statements to heighten awareness of the stock and company, and selling the artificially inflated shares through affiliated entities in unregistered securities transactions. These affiliated entities include RM Enterprises International, Inc., the majority shareholder of Spongetech. RM Enterprises was controlled by Metter and Moskowitz.
Spongetech was what’s known in Pennyland as a “story stock.” In 2008 and 2009 it was one of the most heavily touted OTC stocks, attracting thousands of investors ready to defend it at all costs. The company’s fans pointed proudly to the fact that SPNG, unlike many penny issuers, had a product—soap-filled sponges—that could be purchased at some convenience stores and major retailers. Read More
Publicly Traded Companies Filing Requirements – Going Public Attorneys
Companies going public become subject to the SEC’s periodic reporting requirements a number of ways including by filing a registration under the Securities Act of 1933, as amended or pursuant to the Securities Exchange Act of 1934. The SEC periodic reporting rules require that publicly traded companies disclose a wealth of information to the public. Periodic reporting also requires that these reports be written in plain English. Understanding these reports helps investors make informed decisions regarding whether to buy, sell or hold a company’s securities.
Periodic reports provide issuers with the opportunity to provide shareholders with transparency by telling their story. Companies that provide materially false or misleading statements, or omit material information that is necessary to render a report not misleading in their periodic reports are subject to liabilities arising under federal and state securities laws. Investors can obtain a company’s Form 10-K, Form 10-Q and Form 8-K filings on the SEC’s EDGAR database. Read More
SEC Charges Trinity Capital Corporation with Fraud
The Securities and Exchange Commission (SEC) announced on September 28, 2015 that Trinity Capital Corporation and its wholly-owned subsidiary, Los Alamos National Bank, have agreed to pay $1.5 million to settle accounting fraud charges.
An SEC investigation found that Trinity materially misstated its provision for loan losses and its allowance for loan and lease losses in its quarterly and annual filings with the SEC during 2010, 2011, and the first two quarters of 2012. Specifically, Trinity understated its reported 2011 net loss available to common shareholders by $30.5 million, reporting income of $4.9 million instead of a $25.6 million loss.
Five current or former executives also are charged in the case that involves fraudulent manipulation of the company’s financial results and failure to implement sufficient internal accounting controls over loan accounting. Read More
EPermaPave Industries Is A Ponzi Scheme – Brenda Hamilton Attorney
-Posted by Brenda Hamilton-
The Securities and Exchange Commission (SEC) announced on September 2, 2015 that U.S. District Court Judge Jed S. Rakoff has ordered that Defendants Eric Aronson, Fredric Aaron, and Vincent Buonauro must each disgorge all money received from the Ponzi Scheme and pay substantial civil penalties for their involvement in a Ponzi Scheme.
The SEC’s Complaint, filed in October 2011, stated that from 2006 to 2010, PermaPave Industries and its affiliates raised more than $26 million from the sale of promissory notes and “use of funds” agreements to over 140 investors. Eric Aronson, Vincent Buonauro, and others told investors that there was a huge demand for the product – permeable paving stones – and that investors would be repaid from the profits made by guaranteed product sales. However, there was actually little demand for the product, and defendants used their investors’ money to make “interest” and “profit” payments to previous investors and to finance management’s lavish lifestyles. Furthermore, shortly after an affiliate of PermaPave Industries obtained a majority stake in Interlink-US-Network, Ltd., Eric Aronson, Fredric Aaron, (the attorney for Eric Aronson) and the entity defendants and also an officer and director for several of the entity defendants – and others issued a press release stating that a company that had never heard of Interlink intended to invest $6 million in Interlink. Read More
SEC Charges Eldrick Woodley with Embezzlement of Client Funds
The Securities and Exchange Commission (SEC) on September 22, 1015, filed fraud charges against Eldrick Woodley, a Houston-based investment advisor, for the embezzlement of more than $147,000 in client capital.
According to the SEC’s complaint, filed in the U.S. District Court for the Southern District of Texas, Houston Division, Woodley, doing business as the advisory firm Woodley & Co. Wealth Strategies, undertook a fraudulent scheme to steal money from his advisory clients. The SEC claims that to perpetrate his scheme, Woodley submitted a series of fraudulent fee invoices to the custodian of his clients’ accounts to collect funds from various clients, allegedly as indemnity for services that Woodley implemented and investments he made on his clients’ behalf. Read More
SEC Charges Hitachi, LTD. With Violation of FCPA
The Securities and Exchange Commission (SEC) on September 28, 2015 charged Tokyo-based conglomerate Hitachi, Ltd. with violating the Foreign Corrupt Practices Act (FCPA) when it falsified documents regarding payments to South Africa’s ruling political party connected with contracts to construct two multi-billion dollar power plants.
Hitachi has agreed to pay $19 million to settle the SEC charges.
The SEC alleges that Hitachi sold a 25% stake in a South African subsidiary to a company serving as a front for the African National Congress (ANC). This arrangement gave the front company and the ANC the ability to share in the profits from any power station contracts that Hitachi secured. Hitachi was ultimately awarded two contracts to build power stations in South Africa and paid the ANC’s front company approximately $5 million in “dividends” based on profits derived from the contracts. Through a separate, undisclosed arrangement, Hitachi paid the front company an additional $1 million in “success fees” that were inaccurately booked as consulting fees without appropriate documentation. Read More
SEC Files Charges Against Ralph Pirtle and Morando Berrettini for Insider Trading
The Securities and Exchange Commission (SEC) announced on September 25, 2015 that on September 24, 2015, a jury in federal district court in Chicago, Illinois, returned a verdict finding Ralph J. Pirtle and Morando Berrettini responsible for insider trading in the stocks of three companies: Lifeline Systems, Inc., Invacare, Inc., and Intermagnetics Corporation.
The SEC’s first amended complaint, which was filed in March 2010, alleged that Pirtle, the former Director of Real Estate for a subsidiary of Royal Philips, NV, (“Philips”), tipped his friend and business associate, Morando Berrettini, about Philips’ plans to acquire the three separate companies in late 2005 and early 2006. On each occasion, following the tip, Berrettini purchased shares in the companies. According to the SEC’s complaint, Berrettini made profits of approximately $240,000 on his trades. Read More
SEC Charges GenAudio and CEO With Fraudulent Stock Offerings
The Securities and Exchange Commission (SEC) filed a civil injunctive action on September 25, 2015, in the United States District Court for the District of Colorado relating to the fraudulent offer and sale of stock in GenAudio, Inc. The SEC charged GenAudio, Inc. (“GenAudio”), a Colorado corporation, its corporate successor in interest, Astound Holdings, Inc. (“Astound”), a Delaware corporation, and GenAudio’s founder and chief executive officer, Taj Jerry Mahabub, a resident of Broomfield, Colorado, with the fraudulent and unregistered offer and sale of more than $6.8 million in GenAudio stock.
According to the SEC’s complaint, from approximately March 2010 through April 2012, GenAudio raised more than $4.5 million in two private placements of its common stock based in large part on representations that Apple, Inc. (“Apple”) planned to acquire GenAudio or enter into lucrative licensing agreements to incorporate its technology across Apple’s products worldwide.
The SEC’s complaint alleges that GenAudio and Mahabub told prospective investors that Apple’s senior management advocated acquiring GenAudio’s technology, and that a third party had valued GenAudio’s technology at more than $1 billion. However, according to the SEC allegations, GenAudio had only demonstrated its technology and had technical discussions with mid-level Apple personnel, none of whom had indicated that Apple was interested in a transaction with GenAudio. The SEC further claims that during the scheme, Mahabub falsified documents and pocketed more than $2.3 million through his offer and sale of his personal stock in GenAudio. Read More
SEC Charges Six in Securities Fraud Scheme
On September 24, 2015 the Securities and Exchange Commission (SEC) charged six men, including a father and three sons, with securities fraud associated with Gerova Financial Group Ltd., whose shares once traded on the New York Stock Exchange. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against the six regarding the fraud. Those charged are Jason Galanis, his father John Galanis, brothers Derek Galanis and Jared Galanis, along with Gerova president and chairman Gary Hirst and investment adviser Gavin Hamels. Jason Galanis is a securities fraud recidivist who was charged by the SEC in 2007 and his father, John Galanis, has been a defendant in several SEC enforcement actions dating back to the early 1970s, including actions that involved securities fraud.
The SEC complaint alleges that in early 2010, Jason Galanis and Hirst orchestrated a scheme to secretly issue $72 million of unrestricted Gerova shares to a Galanis family friend in Kosovo. According to the complaint, Jason Galanis, his father, and his brothers directed sales of the shares from the Kosovo friend’s brokerage accounts and had the proceeds wired to them and their associates who collectively realized at least $16 million in illicit earnings. Read More
$32 Million Amber Mining Pyramid Scheme Halted by the SEC
On October 1, 2015, the Securities and Exchange Commission (“SEC”) announced it had frozen the assets and filed fraud charges against the operator of a worldwide pyramid scheme who falsely promised investors that they would profit from a venture allegedly backed by the company’s enormous amber holdings.
The SEC’s complaint stated that California resident Steve Chen and 13 California-based entities, including USFIA Inc. (“USFIA”), are at the center of the purported scheme. According to the complaint, since at least April 2013, USFIA and Chen’s other entities have raised more than $32 million from investors in and outside the United States. Allegedly, Chen and his companies misled investors about claims to own or control amber deposits worth billions of dollars in a lucrative initial public offering for USFIA that never happened.
FINRA Expels Halcyon Cabot Partners
The Financial Industry Regulatory Authority (FINRA) announced today that it has expelled Halcyon Cabot Partners, Ltd., and barred Chief Executive Officer Michael Morris and Chief Compliance Officer Ronald Heineman from the securities industry, for securities fraud, sales practice abuses, and widespread supervisory and anti-money laundering failures. FINRA found that Halcyon, Morris and Heineman engaged in a scheme to conceal a kickback of private placement fees.
FINRA’s investigation found that Halcyon, Morris and Heineman, along with a previously barred registered representative, Craig Josephberg, agreed to conceal the discount the issuer provided to a venture capital firm when it purchased a private placement in a cancer drug development company. The scheme was effected through a bogus placement fee agreement that was entered into after the venture capital firm had already agreed to purchase the entirety of the offerings. Halcyon did not perform any work, as there was already a buyer in place, but rather returned almost all of its $1.75 million placement fee to the investor through sham consulting agreements. This fraudulent scheme allowed the drug company to conceal that it was selling its shares at a discount. Read More
SEC Settles Aiding and Abetting Charges Against Joseph Apuzzo
On September 8, 2015, Judge Alvin Thompson of the U.S. District Court for the District of Connecticut entered a judgment against Joseph Apuzzo, former Chief Financial Officer of Terex Corporation. Apuzzo consented, without admitting or denying the allegations in the SEC’s complaint, to be permanently enjoined from violation of Sections 10(b) and 13(b)(5) of the Securities and Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rule 13a-1 thereunder, and to pay a penalty of $100,000.
Upon motion by the SEC, Judge Thompson will determine whether to impose an officer and director bar against Apuzzo. Apuzzo, who was a Certified Public Accountant at the time of the alleged fraudulent conduct, has further agreed to the entry of an SEC order suspending him from appearing as an accountant before the SEC, with a right to apply for reinstatement after five years. The SEC issued such an Order on September 16, 2015. Read More
Anthony Knight Barred, Enjoined, and Fined for Unregistered Securities
On Thursday, September 3, 2015, United States District Court Judge Denis R. Hurley of the United States District Court for the Eastern District of New York issued an order and judgment imposing relief against Defendant Anthony Knight, the former Chairman of failed Long Island-based internet startup, iShopNoMarkup.com, Inc.
Judge Hurley ordered Knight to pay $2.3 million in disgorgement, over $2.5 million of prejudgment interest, and a $330,000 civil penalty. Read More
Consultant Charged With Insider Trading
On September 23, 2015, the Securities and Exchange Commission (SEC) charged a consultant and his friend with insider trading in the options of P.F. Chang’s China Bistro based on nonpublic information about an impending acquisition offer.
The SEC claims that Richard G. Condon, a consultant to Panda Restaurant Group, tipped Jonathan Ross with confidential details about the bidding process for P.F. Chang’s that he learned while providing executive coaching services to Panda’s top management executives. Panda was involved in the bidding process, but did not ultimately make a tender offer for P.F. Chang’s. Read More
SEC Announces New Resource – Going Public Attorneys
Posted By the Going Public Attorneys
On September 24, 2015, the Securities & Exchange Commission (SEC) announced a new resource on its website that is designed to enhance transparency by providing information about the SEC proposals and rulemaking in a single location. The SEC’s new online resource will streamline information making it easier for investors and market participants to follow specific rules or rulemaking programs.
The SEC’s new page provides links to releases concerning SEC rulemaking activity, including concept releases, proposed rules, final rules, interpretive releases, and policy statements. It also links to announcements concerning SRO rulemaking, PCAOB rulemaking, instructions for Exchange Act Exemptive Applications, other SEC notices, and public petitions for rulemaking submitted to the SEC. Read More
Former Fannie Mae Executives Resolve Subprime and Reduced Documentation Disclosure Case with SEC
The Securities and Exchange Commission (SEC) announced on September 22, 2015 that the Honorable Paul A. Crotty of the United States District Court for the Southern District of New York has entered an Order approving a stipulation and agreement between the SEC and defendants Enrico Dallavecchia, the former Chief Risk Officer of Fannie Mae, and Thomas Lund, Fannie Mae’s former Senior Vice President and head of its single-family guarantee business.
The Order resolves the SEC’s case against defendants Dallavecchia and Lund deriving out of the respective parts each had in Fannie Mae’s disclosure of its exposure to subprime and reduced documentation mortgage loans between December 6, 2006 and August 8, 2008. Read More
SEC v. Two Men Who Defrauded Investors
On September 21, 2015 the Securities and Exchange Commission (SEC) charged two men behind a scheme that defrauded investors in YaFarm Technologies Inc., a company that purported to provide stem cell therapy.
The SEC’s complaint filed in federal court in Boston charged Frank Morelli III, of Florence, Colorado, and Louis Buonocore, of Woburn, Massachusetts, for their roles in the alleged scheme. In a parallel case, the U.S. Attorney’s Office for the District of Massachusetts filed a criminal information against Buonocore on September 21, 2015.
According to the SEC’s complaint, Morelli and Buonocore concealed their ownership of virtually all of YaFarm’s stock, secretly controlled its operations, and paid stock promoters in 2013 to tout it as a legitimate company with growing operations. The SEC also alleges that the two caused YaFarm to issue materially false and misleading information about business developments that did not exist, including a March 2013 press release announcing an insinuated partnership with the Integrative Stem Cell Institute. Read More
SEC Charges Penny Stock Company and CEO with Fraud and Issuing a False Press Release
On September 15, 2015, the Securities and Exchange Commission (SEC) charged a microcap issuer, The Mobile Star Corporation, and its CEO George Ivakhnik, with defrauding investors by issuing false press releases about the company’s business and prospects.
The SEC claims that shortly after Ivakhnik became CEO of the company in the spring of 2012, he began concocting and issuing press releases that had no factual basis. These press releases portrayed a company with considerable financial acumen and resources actively engaged in a wide variety of business ventures including: a ski resort, the manufacture of karaoke booths, the funding of an “event center” in Long Beach, California, and an agreement with a “major higher education institution” to provide financial consulting expertise” and to help “restructure and secure financing.” Read More
SEC Obtains Final Judgement Against Julio Cruz for Targeting Latino Communities with Pyramid Scheme
On September 17, 2015, the Securities and Exchange Commission (SEC) announced that on September 16, 2015, the federal court in Boston, Massachusetts, entered a final judgment against defendant Julio Cruz of Duluth, Georgia, a defendant in a previously-filed actio. On February 2015, the (SEC) charged two Portuguese companies operating under the name Wings Network, plus three company officers and 12 promoters of Wings Network, including Cruz, with carrying out an international pyramid scheme targeting Latino communities in the U.S.
In settling the SEC’s charges, Cruz confessed that he was a promoter of defendants Tropikgadget Unipessoal LDA and Tropikgadget FZE, which operated under the name Wings Network, appearing in promotional videos on the internet and traveling to several states, including Texas, during 2014 to present at Wings Network promotional events. Cruz also confessed that while in Texas he solicited friends to attend a Wings Network presentation given by Wings Network principal Carlos Barbosa, who lauded the Wings Network opportunity. Barbosa is also a defendant in the SEC’s enforcement action. Read More
James Meagher Enjoined in Penny Stock Case
The Securities and Exchange Commission (SEC) announced on September 16, 2015 that Chief Judge Gregory M. Sleet of the United States District Court for the District of Delaware entered a final default judgment against Defendant James Meagher on September 14, 2015 in SEC v. Dynkowski, et al., Civil Action No. 1:09-361, a penny stock manipulation case the SEC filed on May 20, 2009.
The SEC’s complaint alleged that Meagher engaged in a market manipulation scheme involving the stock of Xtreme Motorsports of California, Inc., which made about $257,000 in illegitimate earnings. Read More
SEC Charges Robert Milligan With Securities Fraud
The Securities and Exchange Commission (SEC) announced on September 18, 2015 charges against Robert DeWayne Milligan, who was president of a California-based business known as America’s Natural Energy (“ANE”), for engaging in the fraudulent offering of unregistered securities.
According to the SEC’s complaint filed in the U.S. District Court for the Central District of California, from at least May 2010 through May 2014, Milligan raised over $1.3 million from approximately 39 investors in multiple states for ANE, which he represented to be a business engaged in oil and gas exploration in the Williston Basin of North and South Dakota. According to the complaint, ANE was, in reality, primarily a scheme that Milligan used to fund his personal lifestyle, which included cash withdrawals, gambling, travel, and shopping. Read More
Eric McPhail Sentenced in Insider Trading Action
The Securities and Exchange Commission (SEC) announced that, on September 18, 2015, Eric McPhail was sentenced to 18 months in prison and two years of supervised release for his role in an insider trading ring that traded inside information about Massachusetts-based American Superconductor Corporation. McPhail had previously been found guilty by a jury of criminal charges of conspiracy and securities fraud for his conduct. The criminal charges against McPhail arose out of the same conduct that is the subject of a civil insider trading action filed by the SEC against McPhail and others in July 2014.
The U.S. Attorney’s Office for the District of Massachusetts indicted McPhail and another defendant, Douglas Parigian, in a Superseding Information dated May 11, 2015, related to the insider trading ring. The Information charged that McPhail had a history, pattern and practice of sharing confidences with an individual who had material, nonpublic information concerning American Superconductor’s quarterly earnings and other business activities (the “Inside Information”). This individual provided McPhail with the inside information with the understanding that it would be kept confidential. Read More
SEC Order Imposes Fine On Ditto Holdings For $3.7 Million Unlawful Offering
On September 8, 2015, the Securities and Exchange Commission (“SEC”) initiated public cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) against Ditto Holdings, Inc. (“Ditto Holdings”). In anticipation of the institution of these proceedings, Ditto Holdings submitted an Offer of Settlement (the “Offer”) which the SEC accepted.
Ditto Holdings owns 100% of Ditto Trade, Inc. (“Ditto Trade”), which purports to be a “first-of-its-kind social brokerage firm.” Since July of 2010, Ditto Trade has been registered with the SEC as a broker-dealer pursuant to Section 15 of the Exchange Act.
From April 2009 to September 2013, Ditto Holdings raised approximately $10 million from more than two hundred investors located throughout the United States through a series of common and preferred stock offerings which were purportedly exempt from the SEC’s registration provisions.
SEC Charges Florida Based CPA For Bogus Audit Opinions
On September 17, 2015 the SEC imposed sanctions against a Florida based CPA for producing deficient and fraudulent audits and quarterly reviews for eight publicly traded companies, issuing false and misleading audit opinions on the companies’ annual financial statements.
Terry L. Johnson, of Casselberry, Florida, agreed to settle the SEC charges on fraud and will be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.
During the investigation, the Commission discovered that following his release from prison, convicted felon and former certified public accountant Stephen P. Corso, of Encinitas, California, served as the Chief Financial Officer of several publicly-traded companies, including Primco Management, Inc., one of Johnson’s audit clients. Corso signed Primco’s annual and quarterly financial reports and certifications filed with the SEC using the alias names “Steven J. Corso” or “Steven John Corso”. Corso was barred in 2009 from appearing and practicing before the SEC as an accountant due to his felony conviction for wire fraud and attempted tax evasion. Corso is also alleged to have solicited business on the false pretense that he was an “SEC Consultant and Attorney.” Corso acquired more than $460,000 in illegal profits generated from his violation of the prior SEC order.
U3 Halt of SWK Holdings Explained by FINRA, and Lifted Quickly
We recently wrote about a bungled dividend distribution made by Calissio Resources Group, Inc. (CRGP) that resulted in the imposition of a U3 “extraordinary event” trading halt by the Financial Industry Regulatory Authority (“FINRA”). The halt was lifted two weeks later. FINRA offered no explanation for the action. U3 halts are rare for domestic issuers, and usually have to do with problems, actual or potential, with clearance and settlement.
On September 16, 2015, FINRA applied a U3 halt to another OTC issuer, SWK Holdings Corporation (SWKH). The action came a little more than 20 minutes into the trading session, at 9:53 a.m. Once again, shareholders were left wondering what had happened, but they didn’t have to wonder for long: FINRA quickly furnished a UPC advisory addressing the reasons for the halt. The regulator stated that it had been brought “because of issues related to perceived post-split trading and subsequent price adjustments,” adding that “members are reminded to observe Ex-Dividend dates announced by FINRA on the Daily List.”
While that may have seemed opaque to some, a quick look at recent SEC filings made by SWKH clarified what the regulator meant. More than two hours before the bell, the company posted a Form 8-K to Edgar, in which it explained that “the previously disclosed 1-for-100 reverse stock split of its common stock, immediately followed by a 10-for-1 forward stock split of its common stock was executed effective as of 5:00 p.m. on September 15, 2015. Beginning with the opening of trading on September 16, 2015, the Company’s common stock will trade on OTC Markets on a post-split basis…” Read More
FINRA’s Disclosure Requirements In EB-5 Offerings
FINRA Rule 2040 became effective late last month and has the potential to provide increased transparency in EB-5 Offerings. Rule 2040 requires broker-dealers who sell securities in EB-5 offerings to disclose finder’s fees paid to non-registered foreign persons and receive written acknowledgement from the investors that such fees were disclosed to them. FINRA Rule 2040 also limits the circumstances under which a foreign person may be paid a finder’s fee.
FINRA only permits broker-dealers to pay transaction based compensation to non-registered foreign finder if the finders’ activity is limited to an initial referral, and the broker-dealer complies with the following requirements:
- the broker-dealers has assured itself that the finder who will receive the compensation is not required to register in the U.S. as a broker-dealer nor is subject to a disqualification as defined in Article III, Section 4 of FINRA’s By-Laws, and has further assured itself that the compensation arrangement does not violate applicable foreign law;
- the finder is non U.S. citizen or foreign entity domiciled outside the U.S.;
- the investors are non U.S. citizens or foreign entities domiciled abroad transacting business in either foreign or U.S. securities;
- investors are given a disclosures, similar to those required by Rule 206(4)-3(b) of the Investment Advisers Act of 1940, that disclose what compensation is paid to finders;
- investors provide written acknowledgment to the broker-dealers of the existence of the finder’s fee agreement and the acknowledgment is retained by the broker-dealer and made available for inspection by FINRA;
- records reflecting payments made to finders are maintained on the broker-dealer’s books, and written agreements between the broker-dealers and the finder are available for inspection by FINRA; and
- the confirmation of each investment indicates that a finders fee is being paid pursuant to the written agreement between the finder and the broker-dealer.
Investor Alert – Messaging Apps & Pump and Dump Scams
On September 2, 2015, the Financial Industry Regulatory Authority (FINRA) issued an investor alert warning about investor relations activity and stock promotions sent through popular messaging applications (Apps) such as WhatsApp. These messaging Apps allow users to almost instantly exchange messages which makes them appealing tools for scammers engaged in pump and dump schemes seeking to trick investors.
According to FINRA’s investor alert, scammers use messaging apps to transmit spam messages that promote penny stocks or microcap stocks. They used spam activity disseminated over WhatsApp as an example. Recently, WhatsApp users were flooded with text messages touting Avra, Inc. (AVRN), a penny stock. The App messages appeared to be sent from individuals at well-known brokerage firms. Using only a first name (“Hi it’s Will at XYZ firm…”), the text would talk up the stock. One WhatsApp message claimed AVRN was “going to double in the next few days.” Another said it “is going up 300% next week.”
