SEC Charges 2 More Brokers for Unsuitable Trades: Enforcement

The Securities and Exchange Commission continued its crackdown on brokers who defraud customers, charging two New York-based brokers with making unsuitable trades that were costly for customers and lucrative for the brokers.

The case follows similar charges of excessive trading by brokers brought in January, April and September.

The SEC's complaint alleges that Zachary Berkey of Centerreach, New York, and Daniel Fischer of Greenwich, Connecticut, conducted in-and-out trading that was almost certain to lose money for customers while yielding commissions for themselves.

According to the complaint, 10 customers of Four Points Capital Partners LLC – where Berkey and Fischer previously worked – lost a total of $573,867. Meanwhile, Berkey and Fischer received approximately $106,000 and $175,000, respectively, in commissions.

"We're intensifying our focus on unscrupulous brokers and their harmful practices," said Sanjay Wadhwa, senior associate director of the SEC's New York Regional Office, in a statement. "As alleged in our complaint, Berkey and Fischer did grave harm to their customers by providing unsuitable recommendations and siphoning money in the form of high commissions and costs."

According to the SEC's complaint, since the customers incurred significant costs with every transaction and the securities were held briefly, the price of the securities had to rise significantly for customers to realize even a minimal profit. The complaint also alleges that Berkey and Fischer churned customer accounts and concealed material information from their customers, namely that the costs associated with their recommendations, including commissions and fees, would almost certainly exceed any potential gains on the trades.

The complaint further alleges that Fischer engaged in unauthorized trading.

Without admitting or denying the SEC's allegations, Fischer consented to a final judgment that permanently enjoins him from similar violations in the future and orders him to return his allegedly ill-gotten gains with interest and pay a $160,000 penalty. The settlement is subject to court approval. Fischer separately agreed to an SEC order barring him from the securities industry and penny stock trading. The SEC's litigation against Berkey will proceed in federal district court in Manhattan.

SEC Halts a Fast-Moving Initial Coin Offering Scam

The SEC obtained an emergency asset freeze to halt a fast-moving initial coin offering (ICO) fraud that raised up to $15 million from thousands of investors since August by falsely promising a 13-fold profit in less than a month.

The SEC filed charges against a recidivist Quebec securities law violator, Dominic Lacroix, and his company, PlexCorps. The complaint alleges that Lacroix and PlexCorps marketed and sold securities called PlexCoin on the internet to investors in the U.S. and elsewhere, claiming that investments in PlexCoin would yield a 1,354% profit in less than 29 days.

The SEC also charged Lacroix's partner, Sabrina Paradis-Royer, in connection with the scheme.

The SEC obtained an emergency court order to freeze the assets of PlexCorps, Lacroix and Paradis-Royer.

The SEC's complaint charges Lacroix, Paradis-Royer and PlexCorps with violating the antifraud provisions, and Lacroix and PlexCorps with violating the registration provision, of the federal securities laws. The complaint seeks permanent injunctions, disgorgement plus interest and penalties. For Lacroix, the SEC also seeks an officer-and-director bar and a bar from offering digital securities against Lacroix and Paradis-Royer.

These charges are the first filed by the SEC's new Cyber Unit, which was created in September to focus the Enforcement Division's cyber-related expertise on misconduct involving distributed ledger technology and initial coin offerings, the spread of false information through electronic and social media, hacking and threats to trading platforms.

Digital Display Ad Firm & Execs Bilk $2 Million From Investors to Pay Rent on Mansion

The SEC charged a Seattle-area outdoor digital signage advertising company and two of its senior executives with stealing more than $2 million from retail investors.

According to the SEC's complaint, Digi Outdoor Media Inc.'s former CEO Donald MacCord Jr. and chief financial officer Shannon Doyle raised nearly $4.5 million in promissory notes by claiming they would use investor money to construct and install digital signs for commercial advertising around Washington, D.C.

Instead, the complaint alleges that MacCord and Doyle secretly diverted millions of dollars of investor money for their own personal use, including MacCord's luxury cars, $20,000-per-month rent on a Southern California mansion, nanny and housekeeping services, and private school tuition for his children, while Doyle diverted several hundred thousand dollars to his other unrelated businesses.

The SEC's complaint further alleges that MacCord and Doyle tried to hide their theft by creating fake invoices and sham loans to justify the money they took. They then encouraged investors to convert their promissory notes to common stock, provided forged leases to Digi's independent auditor, and filed false financial statements with the SEC in an attempt to take the company public rather than pay off their outstanding debt to their investors.

The SEC's complaint charges MacCord, Doyle and Digi with violations of the antifraud provisions of the federal securities laws and seeks disgorgement of allegedly ill-gotten monetary gains plus interest and penalties, permanent injunctions, and officer-and-director and penny stock bars.

In a separate action, the U.S. Attorney's Office for the Northern District of California filed criminal charges against MacCord for conspiracy to commit wire fraud; submitting false writings to a government agency; obstruction of official proceedings; and destruction, alteration or falsification of records in federal investigations, and against Doyle for conspiracy to commit wire fraud and obstruction of official proceedings.

Former Company Insider Earns More Than $4.1 Million for Whistleblower Tip

The SEC awarded more than $4.1 million to a former company insider who alerted the agency to a widespread, multiyear securities law violation and continued to provide important information and assistance throughout the SEC's investigation.

The whistleblower is the third awarded by the SEC in the past week.

The SEC's whistleblower program has now awarded more than $179 million to 50 whistleblowers since issuing its first award in 2012. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.

Advisor Settles Charges for Defrauding Private Equity Fund Investors

Former financial advisor James Tao agreed to settle charges with the SEC that he defrauded investors in his private equity fund Presidio Venture Capital by making material misstatements in offering documents and misappropriating investor funds.

Tao and his former partner, Donna Boyd, also settled charges for violating broker-dealer registration requirements by soliciting sales of interests in the funds, which were securities not offered by the brokerage firm with which they were associated at the time.

According to the SEC's complaint, while working as financial advisors associated with an RIA and broker-dealer, Tao and Boyd formed private equity fund PVC LLC — which did business as Presidio Venture Capital — in 2013 primarily for the purpose of investing in technology startups in the Houston area.

The SEC's complaint alleges that Tao and Boyd raised approximately $860,000 for the fund between January 2013 and July 2016 by soliciting investments from their advisory clients, some of whom were also brokerage clients, and from other personal and business contacts.

According to the SEC, Tao falsely claimed investor funds would be held in escrow and returned unless $2.5 million was raised. The complaint further alleges that while some of the money PVC raised was invested in arms-length transactions that fit the fund's stated business model, Tao failed to timely or adequately disclose that the fund was also investing in companies he owned or in which he had a personal stake, which was a clear conflict of interest.

In addition, as alleged in the complaint, Tao used investor funds to apply for a loan to increase his interest in the fund, cover other expenses not in line with the use of funds disclosed in PVC's offering materials, and make a Ponzi-style payment by using new investor funds to buy out a disgruntled investor. The complaint also alleges that Tao ignored fund redemption restrictions and bought out Boyd, who severed ties with the fund in 2013, and at least three other investors with cash from the sale of one of PVC's early investments.

Tao and Boyd agreed to settle the SEC's charges without admitting or denying the allegations.

Tao agreed to injunctions and to pay disgorgement of $155,970, interest of $7,965, and a penalty of $150,000. Boyd has agreed to an injunction and to pay a $10,000 penalty. The settlement is subject to court approval.

— Perkins Coie Hires Former SEC Fintech Examiner Didiuk