Enforcement News: The Dark Web, Affinity Fraud, Ponzi-Like Schemes, False and Misleading Statements and The SEC’s Crackdown on Alleged Fraudsters

• Posted on: Mar 24 2021

March 2021 has been a busy month for the Enforcement Division of the Securities and Exchange Commission (“SEC” or “Commission”). Since our last Enforcement News article (here), the SEC has announced six enforcements proceedings and/or settlements involving some type of securities fraud. 

The type of conduct addressed by the SEC in these proceedings and/or settlements is varied and limited only by the imagination of those who perpetrated the fraud. Thus, for example, fraudsters used social media, the Dark Web, Ponzi-like techniques, and the closeness of a religious community (also known as affinity fraud) to deceive investors out tens of millions of dollars. As discussed below, the theme common to these scams is deception and personal gain at the expense of unsuspecting investors. 

We briefly examine these proceedings below. 

SEC v. Heckler

On March 9, 2021, the SEC announced (here) that it charged George Heckler (“Heckler”) for operating a decade-long investment adviser fraud through two private hedge funds, Cassatt Short Term Trading Fund LP (“Cassatt”) and CV Special Opportunity Fund LP (“CV Special”), which Heckler formed to conceal massive losses incurred by Conestoga Holdings LP (“Conestoga”), another fund controlled by Heckler.

According to the SEC’s complaint (here), Heckler, after forming Cassatt and CV Special, transferred Conestoga’s poorly performing assets to those funds and then misrepresented the funds’ objectives and performance to Cassatt and CV Special investors. The SEC alleged that, between 2009 and 2019, Heckler falsely told investors that their funds were being used to engage in very short-term equity trading and that the investments were consistently generating positive returns. In truth, claimed the SEC, a substantial amount of investors’ funds had not been invested at all or had been used to make Ponzi-like payments to prior investors. According to the SEC, Heckler raised at least $90 million in new investor capital through Cassatt, CV Special, and three other entities he controlled, of which over $32 million was used to repay or redeem prior investors. In addition, the SEC alleged that Heckler took over $1 million for his personal use, and Cassatt and CV Special suffered significant losses as a result of poor investments by Heckler. Heckler also allegedly concealed these losses from investors by providing them with false account statements showing fictitious gains.

The SEC charged Heckler with violations of the antifraud provisions of the federal securities laws. Heckler agreed to settle the SEC’s charges by consenting to a bifurcated judgment that permanently enjoins him from future violations of the charged provisions and bars him from the securities industry, with disgorgement and penalties to be resolved at a future date.

On March 9, 2021, Heckler pleaded guilty for related criminal conduct in federal court in the District of New Jersey (here).

SEC v. Fassari

On March 15, 2021, the SEC announced (here) fraud charges and an asset freeze and other emergency relief against Andrew L. Fassari (“Fassari”), a California-based trader who used social media to spread false information about a defunct company, while secretly profiting by selling his own holdings of the company’s stock.

According to the complaint (here), Fassari, using his Twitter handle @OCMillionaire, tweeted false statements about Arcis Resources Corporation (“ARCS”), a defunct Nevada company with publicly traded securities, during December 2020. The SEC alleged that, on December 9, 2020, Fassari began purchasing over 41 million shares of ARCS stock shortly before tweeting false information about ARCS to his thousands of Twitter followers, including falsely claiming that ARCS was reviving its operations, expanding its business, and being backed by “huge” investors. The SEC further alleged that, between December 9 and 21, 2020, Fassari made approximately 120 tweets that referenced “$ARCS,” dozens of which were false and misleading. 

In seeking an injunction, the SEC alleged that Fassari continued to tweet about other stocks as recently as January and February 2021.

The SEC further alleged that, over the next several days, ARCS’s share price skyrocketed, ultimately increasing over 4,000%. The SEC also claimed that Fassari made false statements about his own trading in ARCS. Between December 10 and 16, 2020, Fassari allegedly sold all his shares in ARCS for profits of over $929,000, while continuing to publish false and misleading information about ARCS and his trading in ARCS. [Ed. Note: although not stated explicitly, the description of the alleged fraud has the hallmarks of a pump and dump scheme. This Blog examined pump and dump schemes here, for example.]

The SEC charged Fassari with violating the antifraud provisions of the federal securities laws, and seeks a permanent injunction, disgorgement, prejudgment interest, and a civil penalty from Fassari.

In addition, on March 2, 2021, the SEC issued an order (here) temporarily suspending trading in the securities of ARCS.

[Ed. Note: this Blog previously wrote about the settlement of an SEC enforcement action against Elon Musk and Tesla Inc. (“Tesla”) relating to Musk’s tweet about taking Tesla private (here). As we noted in that article, “truth, candor and accuracy of corporate communications are necessary regardless of the medium in which they are made. Thus, corporate officers and directors who use social media, without the oversight, review, and scrutiny attendant to communications issued through more traditional means, risk scrutiny from the SEC if their communications are alleged to be materially false and misleading.”]   

SEC v. Levine

On March 18, 2021, the SEC announced (here) that it charged Seth P. Levine (“Levine”), a New Jersey resident, with defrauding investors in connection with their investments in real estate. Most of the investors were members of the Orthodox Jewish community. [Ed. Note: This Blog has written about affinity fraud on numerous occasions, including here and here.]

In its complaint (here), the SEC alleged that Levine sold membership interests in limited liability companies that purchased and owned apartment complexes.  According to the SEC, from at least February 2015 through August 2019, Levine raised millions of dollars from more than 60 investors, including family, friends, and other investors, many of whom belonged to the Orthodox Jewish community.  In offering the interests, Levine allegedly used false and misleading statements that masked the underlying financial problems of Norse Holdings, LLC (“Norse Holdings”), a real estate investment and management company that Levine owned and operated, and its inability to pay promised returns without using new investor monies or proceeds from a related mortgage fraud. The SEC alleged that Levine provided investors with documents reflecting false and inaccurate information concerning the profitability of the apartment complexes; sold overlapping ownership interests to investors using false operating agreements and, at times, forged signatures; frequently commingled investor funds to prop up real estate holdings that were struggling; and paid investors with fake profits generated by the mortgage fraud Levine conducted using the same properties.      

The SEC charged Levine with violating the antifraud provisions of the federal securities laws.  Levine agreed to settle the charges against him.  The settlement, which is subject to court approval, will permanently enjoin Levine from violating the charged provisions of the federal securities laws and provides for the disgorgement of ill-gotten gains and the payment of prejudgment interest and civil penalties at a later date, as decided by the court. 

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced (here) criminal charges against Levine in connection with certain of the conduct underlying the SEC’s action.

SEC v. Richman et ano.

On March 18, 2021, the SEC announced that it charged Jessica Richman (“Richman”) and Zachary Apte (“Apte”), co-founders of uBiome Inc. (“uBiome”), a San Francisco-based private medical testing company, with defrauding investors out of $60 million by falsely portraying uBiome as a successful start-up with a proven business model and strong prospects for future growth.

In its complaint (here), the SEC claimed that Richman, uBiome’s CEO, and Apte, its Chief Scientific Officer, raised funds from investors – millions of dollars of which went to Richman and Apte – by falsely portraying uBiome as a rapidly growing company, which Richman told investors was “inventing the microbiome industry” and making “products that improve people’s lives.” According to the SEC, Richman and Apte lulled investors into believing that the company had a strong track record of receiving health insurance reimbursement for its clinical tests, which purportedly could detect microorganisms and assist in diagnosing disease. The SEC maintained that these claims were false and misleading because uBiome’s purported success in generating revenue depended on the individual defendants’ ability to convince doctors into ordering unnecessary tests and engaging in other improper practices that Richman and Apte directed, which, if discovered, would have led to insurers refusing to reimburse uBiome. According to the SEC, Richman and Apte concealed the improper practices from investors and insurers, including directing uBiome employees to provide insurers with backdated and misleading medical records to substantiate the company’s prior claims for reimbursement. Ultimately, Richman and Apte’s efforts to conceal the practices unraveled, said the SEC, which led to uBiome suspending its medical test business and declaring bankruptcy. According to the SEC, Richman and Apte were each enriched by millions of dollars through selling their own uBiome shares during the fraudulent fundraising round.

The SEC charged Richman and Apte with violating the antifraud provisions of the federal securities laws. The SEC is seeking court orders, including officer and director bars, to prevent Richman and Apte from engaging in future fraud, as well as orders requiring them to disgorge their ill-gotten gains from the violations and pay civil penalties.

In a parallel action, the U.S. Attorney’s Office for the Northern District of California announced (here) criminal charges against Richman and Apte.

SEC v. Chatfield PCS LTD. et al.

On March 18, 2021, the SEC announced (here) that it filed charges and obtained an asset freeze and other emergency relief to stop an alleged fraudulent offering and the misappropriation of investor assets by Tra Jay Scarlett (“Scarlett”), a Colorado Springs resident, using two entities under Scarlett’s control, Chatfield PCS Ltd. (“Chatfield”) and GO ECO Manufacturing, Inc. (“GO ECO”).

In its complaint (here), the SEC alleged that since approximately March 2016, Scarlett, through Chatfield, raised at least $3.2 million from investors in two securities offerings by GO ECO, which was represented to be an environmentally-friendly drink bottling and manufacturing company. The SEC alleged that Scarlett and Chatfield told investors that GO ECO made or bottled “the number one protein shot beverage in the world,” that investments in GO ECO would be used to expand the company’s existing business, and that the investments were expected to generate annual returns of 20% to 25%. According to the SEC, GO ECO never manufactured or bottled any beverages, never opened a bank account, and never operated in any way at all. Instead, said the SEC, Scarlett misappropriated hundreds of thousands of dollars of investor funds to buy, among other things, jewelry and precious metals, and to make a down payment and mortgage payments on his home. The SEC also alleged that defendants made other false and misleading statements to GO ECO investors about GO ECO’s business operations, management team, and relationship with its supposed key customer.

The SEC charged defendants with violating the antifraud provisions of the federal securities laws, and seeks a permanent injunction, disgorgement, prejudgment interest, and a civil penalty from each of them.

SEC v. Jones

On March 18, 2021, the SEC announced (here) that it charged James Roland Jones (“Jones”), a/k/a “MillionaireMike”, of Redondo Beach, California, with perpetrating a fraudulent scheme to sell “insider tips” on the dark web.  [Ed. Note: The dark web allows users to access the internet anonymously and, as such, has often been used to host websites and marketplaces that support or promote illegal activity.]  This is the SEC’s first enforcement proceeding involving alleged securities violations on the dark web. 

In its complaint (here), the SEC alleged that, in late 2016 and 2017, Jones accessed various dark web marketplaces, including a website claiming to be an insider trading forum, in search of material, nonpublic information to use for his own securities trading.  According to the SEC, in order to gain access to the insider trading forum, Jones lied about possessing material, nonpublic information. By doing so, Jones allegedly gained access to the insider trading forum for a short period, but was unsuccessful in obtaining valuable material, nonpublic information.  

Thereafter, alleged the SEC, Jones devised a scheme to sell purported insider tips to others on the dark web. The SEC alleged that, in the spring of 2017, Jones offered and sold on one of the dark web marketplaces purported “insider tips” that he falsely described as material, nonpublic information from the insider trading forum or corporate insiders. According to the SEC, several users purchased the tips and ultimately traded based on the information Jones provided. 

The SEC charged Jones with violating the antifraud provisions of the federal securities laws.  Simultaneous with the filing, Jones agreed to a bifurcated settlement that, subject to court approval, permanently enjoins him from further violating these provisions, and reserves the determination of disgorgement and civil penalties for a later date.

In a parallel action, the U.S. Attorney’s Office for the Middle District of Florida filed criminal charges against Jones (here).