January/February 2022
NC Secretary of State’s Office Partners with CFTC and 26 State Securities Regulators to Stop $68 Million Precious Metals Scheme that Targeted the Elderly


North Carolina Secretary of State Elaine F. Marshall announced this week that NCSOS’s Securities Division is participating in a coordinated enforcement action to stop a fraudulent precious metals scheme that resulted in investments exceeding $68 million from at least 450 investors nationwide, including 23 North Carolina investors who invested $3,979,618.
 
The NC Secretary of State’s Office has joined the Commodity Futures Trading Commission (CFTC) and 26 other state securities regulators in filing a complaint in the United States District Court for the Central District of California alleging that Safeguard Metals, LLC and Jeffrey Santulan, a/k/a Jeffrey Hill solicited investors nationwide by touting precious metals at grossly inflated prices that were not disclosed.
 
The investors in this case were advised to liquidate their holdings at registered investment firms to fund investments in precious metals, bullion, and bullion coins through self-directed individual retirement accounts. Self-directed IRAs should not be confused with traditional IRAs or other retirement vehicles.
 
“It is much harder for retirees to recover from major losses to their savings, so we’re focusing our efforts on recovering as much money for these fraud victims as quickly as possible,” said Secretary Marshall.
 
The defendants are accused of failing to disclose the markup charge for their precious metals bullion products and that investors could lose the majority of their funds once a transaction was completed. In many cases, the market value of the precious metals sold to investors was substantially lower than the value of the securities and other retirement savings investors liquidated to fund their purchase.
 
“I urge all North Carolinians to call the NC Secretary of State’s Investor Hotline at (800) 688-4507 before committing to any investment to make sure the individual that’s offering you the investment opportunity is registered to sell securities in North Carolina and that the investment opportunity itself is registered,” said Secretary Marshall. “It is so important to do your research and ask tough questions before you invest. Ask about the fees, markups or spreads, risks, and potential returns. If the answers seem too good to be true or don’t make sense, put your hand on your wallet and walk away.”
 
Call the NC Investor Hotline at (800) 688-4507 if you suspect you have been targeted as part of any investment scam, including precious metals investment schemes.
Top Investor Threats for 2022
Secretary Marshall Highlights Risks of Cryptocurrency and Digital Asset Fraud
NC Secretary of State Elaine F. Marshall this month joined the North American Securities Administrators Association (NASAA) in releasing the annual list of top investor threats and urging North Carolina’s investing public to use caution before investing in popular and volatile unregulated investments – especially those involving cryptocurrency and digital assets.

“Most of the cases our Securities investigators see involve an element of a Ponzi scheme, and scam artists frequently use what’s getting buzz on social media or making headlines to lure investors. Stories of ‘crypto millionaires’ have drawn people to consider crypto-related investments, but just as it’s important to understand how any business model you invest in actually works, it is absolutely crucial to understand how any investment in cryptocurrency works.”
 
The top threats to investors were determined by surveying North American securities regulators to identify the most problematic products, practices or schemes. The following were cited most often by state and provincial securities regulators:

1.     Investments tied to cryptocurrencies and digital assets,
2.     Fraud offerings related to promissory notes,
3.     Money scams offered through social media and internet investment offers and,
4.     Financial schemes connected to Self-Directed Individual Retirement Accounts.

NASAA’s securities regulators revealed that investments related to cryptocurrencies and digital assets as the top investor threat. Secretary Marshall advised, “investments in cryptocurrency trading programs, interests in crypto mining pools, crypto depository accounts and securitized tokens should be seen for what they are: extremely risky speculation with a high risk of loss.”

Many of the fraud threats facing investors today involve private offerings, as federal law exempts these securities from federal registration requirements and preempts states from enforcing important investor protection laws. Enforcement Section Committee Co-Chair Joseph P. Borg added, “Unregistered private offerings generally are high-risk investments and don’t have the same investor protection requirements as investments sold through public markets.”

Digital assets do not fall neatly into the existing investor regulatory framework, and it may be easier for the promoters of these products to fleece the public. All investments carry the risk that some, or all, of the invested funds could be lost.
 
Follow these tips to spot and avoid investment scams:

1.     Anyone can be anyone on the Internet. Scammers are spoofing websites and using fake social media accounts to obscure their identities. Investors should always take steps to identify phony accounts by looking closely at content, analyzing dates of inception and considering the quality of engagement. To ensure investors do not accidently deal with an imposter firm, pay careful attention to domain names and learn more about how to protect your online accounts.

2.     Beware of fake client reviews. Scammers often reference or publish positive, yet bogus testimonials purportedly drafted by satisfied customers. These testimonials create the appearance the promoter is reliable – he or she has already earned significant profits in the past, and new investors can reap the same financial benefits as prior investors. In many cases, though, the reviews are drafted not by a satisfied customer but by the scammer. Learn how to protect yourself with NASAA’s Informed Investor Advisory on social media, online trading and investing,
 
3.     If it sounds too good to be true, it probably is. Although bad actors may be impersonating real firms offering traditional investments, they often entice new investors by promising the payment of safe, lucrative, guaranteed returns over relatively short terms – sometimes measured in hours or days instead of months or years. These representations are often a red flag for fraud, as all investments carry some degree of risk, and the potential profits are typically correlated with the degree of risk. Learn more about the warning signs of investment fraud.
 
4.     Most importantly, always ask before you invest. Call the NC Secretary of State’s Investor Hotline at 800-688-4507 to find out whether the person offering you an investment opportunity is actually registered to sell securities in North Carolina and whether the investment opportunity itself is registered.
Individuals offering investments are obligated to truthfully disclose all material facts, and they must disclose the risks associated with each product. On the other hand, bad actors will often minimize or conceal risks, and use hyperbole to tout profits and payouts. Investors should pay attention to these details, as they can provide clues about the potential illegitimacy of a scam.

Bad actors may be impersonating licensed parties by using phony websites that place viruses or malicious software on victim’s computers. Investors should continue to observe best practices for cybersecurity. The FDIC has issued guidance to assist consumers in protecting themselves from cyber-attacks.
FINRA Official Testifies Before the Senate Special Committee on Aging

Gerri Walsh, FINRA’s Senior Vice President of Investor Education and President of the FINRA Investor Education Foundation, testified in front of the Senate Special Committee on Aging.

The hearing on “Financial Literacy: Addressing the Unique Just-in-Time Decisions Older Americans and People with Disabilities Face,” examined financial literacy and education on decisions for which people often seek information and support at the time of making the decision. The hearing also covered data and trends regarding financial literacy among older adults.

(Click the image below to watch the hearing.)
One Call Could Save Your Life Savings!
 
Is that individual offering you an investment opportunity licensed to sell securities in North Carolina? Is the investment opportunity itself registered? Know before you sign!
While registration in and of itself is no guarantee against fraud, not being registered is a very big red warning flag.

We urge you to take five minutes to call our NC Investor Hotline at 1-800-688-4507 to see if the person you have been dealing with – perhaps even for years – is properly registered and/or has a disciplinary history. You can also check to see if the actual investment itself is properly registered.

Pick up the phone and call us. You owe it to yourself and your family to check. And please also consider sharing the information in this newsletter with YOUR contacts or your social networks. Doing so will help keep your friends and loved ones safe, too. More information can be found at https://www.sosnc.gov/divisions/securities/for_investors.
Deep Learning: The Future of the Market Manipulation Surveillance Program

The majority of FINRA’s market manipulation surveillance patterns now use deep learning to detect misconduct in what is perhaps in what is perhaps the largest application of artificial intelligence in the RegTech space. In the most recent episode of FINRA's Unscripted podcast, we hear how this is making FINRA’s market surveillance data more digestible and increasing the efficiency and flexibility of the program.

FINRA’s Market Regulation and Technology teams recently wrapped up an extensive project to migrate the majority of FINRA’s market manipulation surveillance program to using deep learning in what is perhaps the largest application of artificial intelligence in the RegTech space to date.

(Click the image below to listen to the podcast.)
SEC Chair Addresses Expanding Cybersecurity Rules

Cybersecurity policy took center stage last week when US Securities and Exchange Commission Chairman Gary Gensler spoke at the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute.
 
Gensler announced that the SEC’s cybersecurity rules may be expanded to shore up the defenses of the financial sector, noting that “cybersecurity is a team sport” in which the private sector is a key player.
 
“The economic cost of cyberattacks is estimated to be at least in the billions, and possibly in the trillions, of dollars. Hackers have attacked broker-dealers, government agencies, meat processors, and pipelines. These attacks can take many forms from denials-of-service to malware to ransomware.

It’s not just the economic cost, of course. Cybersecurity is central to national security. The events of the past couple of weeks in Russia and Ukraine have once again highlighted the importance of cybersecurity to our national interest.”

Gensler described the three key components of the SEC’s cybersecurity policy as “cyber hygiene and preparedness; cyber incident reporting to the government; and in certain circumstances, disclosure to the public.”
 
You can read Chairman Gensler’s speech in its entirety here.

The Cybercrime Support Network's Cyber Resource Catalog is a great resource to shore up your personal cybersecurity. The catalogue allows you to search for helpful information to protect yourself from cybercrime by type of threat (e.g. Identity Theft, Phishing), target audience (e.g. Small and Medium Businesses, Seniors, and Military), and keyword.



News from the Regulators
SEC Proposes Amendments to Include Significant Treasury Markets Platforms Within Regulation ATS

The Securities and Exchange Commission has proposed rules to better protect investors and enhance cybersecurity by bringing more Alternative Trading Systems (ATS) that trade Treasuries and other government securities under the regulatory umbrella. The proposal builds upon a 2020 proposal and public comments received in response to that proposal. It would extend Regulation ATS to include systems that offer the use of non-firm trading interest and provide protocols to bring together buyers and sellers for trading any type of security. These Communication Protocol Systems would be required to either register as exchanges or register as broker-dealers and comply with Regulation ATS. 

“In 2020, the Commission put out a request for comment on a proposal to enhance transparency and oversight over ATSs that trade government securities,” said SEC Chair Gary Gensler. “Today's proposal includes the core elements of the 2020 proposal, including registration of certain interdealer brokers (IDBs) in the Treasury markets. It would bring Treasury trading platforms with significant volume under Regulation Systems Compliance Integrity (SCI), a rule that protects for the resiliency of technology infrastructure. It also would require these platforms to comply with the Fair Access Rule, which provides for fair access to platforms and would prohibit platforms from making unfair denials or limitations of access. Beyond that, today’s amendments build upon the 2020 proposal and on feedback from the public.”

With ATSs becoming increasingly important to government securities trading, the proposal would expand the investor protections of Regulation ATS to those that trade government securities or repurchase and reverse repurchase agreements on government securities. Additionally, the proposal would expand Regulation SCI to government securities to help increase investor protections and address technological vulnerabilities while improving the SEC’s oversight of the core technology of key entities in the markets for government securities.  

The proposal will be published in the Federal Register. The public comment period will remain open for 30 days after publication in the Federal Register. Click here for more information,
Kristen Hutchens Named NASAA Director of Policy and Government Affairs

The North American Securities Administrators Association, Inc. (NASAA) has announced that Kristen Hutchens has been promoted to director of policy and government affairs, and policy counsel. In this role, Hutchens will lead NASAA’s Policy and Government Affairs department and execution of NASAA’s state and federal policy agenda. In her interactions with congressional staff, investor groups, industry associations, and other stakeholders, Hutchens will advance NASAA’s longstanding efforts to protect investors and promote responsible capital formation.

“Kristen is an effective advocate who brings a combination of depth of knowledge of the capital markets and policy experience to NASAA’s policy and government affairs department,” said Joseph Brady. “She played a key role in securing the recent introduction of bipartisan legislation, the Empowering States to Protect Seniors from Bad Actors Act. This legislation would establish a federal grant program for state securities and insurance regulators that want to enhance their longstanding efforts to protect senior investors and policy holders from financial fraud.”

Hutchens joined NASAA in May 2021, and prior to her promotion, was serving as Deputy Director of Policy and Government Affairs, and Policy Counsel.

“On behalf of NASAA’s Board of Directors, I congratulate Kristen and look forward to working closely with her in advancing NASAA’s investor protection mission,” said Melanie Senter Lubin, NASAA President and Maryland Securities Commissioner.

Hutchens brings deep knowledge of securities law and broad experience in policy, law, and education to this role. Prior to joining NASAA in May 2021, she worked at the Municipal Securities Rulemaking Board, in private practice, and at the U.S. Senate Committee on Banking, Housing, and Urban Affairs. Hutchens earned a Juris Doctor from Washington and Lee University School of Law, a Master of Science for Teachers from Pace University, and a Bachelor of Science in Foreign Service from Georgetown University. Before law school, she was a public school teacher in New York City.


Enforcement News

The NC Department of the Secretary of State Securities Division is responsible for administering and enforcing the state’s securities laws. To read our latest enforcement actions, please visit https://www.sosnc.gov/divisions/securities/admin_action.
  • On November 15, 2021Joshua Matthew Houchins, 36, of Raleigh, NC, was sentenced to ten years in prison on charges of Wire Fraud, in violation of Title 18, United States Code, Section 1343, and Possession of a Firearm by a Felon, in violation of Title 18, United States Code, Section 922(g). The defendant was also ordered to serve three years of supervised release and to pay restitution to victims in the total amount of $1,771,382.25. According to court documents and arguments made in court, Houchins, owner of various Raleigh real estate development companies, carried out a Ponzi scheme upon numerous local real estate investors. Houchins also possessed a rifle and several rounds of ammunition after having been convicted of a felony. For more details, see the related story in this newsletter and this press release.

  • On July 29, 2021, the North Carolina Department of the Secretary of State, Securities Division entered into a Final Consent Order ("Order") with Tannin Capital, LLC. The Order states that Tannin Capital was ineligible for an exemption from state registration as an investment adviser from October 2019 through on or about April 2020. Pursuant to the Order, Tannin Capital agreed to immediately cease and desist from violating any provision of the North Carolina Investment Advisers Act and any related administrative rules, to pay a civil penalty and reimbursement of the costs of investigation. The North Carolina Department of the Secretary of State thanks the U.S. Securities and Exchange Commission, Atlanta Regional Office for their assistance in this matter. For more information on this Order, click here.

  • On May 21, 2021, the North Carolina Department of the Secretary of State, Securities Division entered into a Final Consent Order (“Order”) with Roy Neil Carlson. The Order states that Carlson violated North Carolina law during the last two years by transacting business in North Carolina as an investment adviser representative without a valid registration pursuant to the North Carolina Investment Advisers Act. Pursuant to the Order, Carlson agreed to immediately cease and desist from violating any provisions of the North Carolina Investment Advisers Act and any related administrative rules, to pay a civil penalty, and cost of investigation. For more information, click here.

  • On April 5, 2021Anthony Wayne March, 49, of Wake Forest, NC, was sentenced to 135 months imprisonment for wire fraud and ordered to pay $6,040,965.00 in restitution. (See the full story above.) The Internal Revenue Service Criminal Investigation Division (IRS-CI), and the North Carolina Secretary of State, Securities Division conducted the investigation in this matter. The Office of the U.S. Bankruptcy Administrator for the Eastern District of North Carolina provided substantial assistance. Assistant United States Attorney Ethan Ontjes, Special Assistant United States Attorney Brian Behr, and Special Assistant United States Attorney Kevin Harrington represent the United States.

  • On March 26, 2021, the Securities Division of the North Carolina Department of the Secretary of State issued a Temporary Cease and Desist Order to Respondents, Roy Neil Carlson and Carlson Financial Services, LLC. The order found Respondents were transacting business in the State of North Carolina in violation of the North Carolina Investment Advisers Act. The Temporary Order to Cease and Desist ordered each Respondent and any person, employee, officer, director, entity or independent contractor under the direction or control of Respondents, to immediately cease and desist from violating the anti-fraud provisions of the Investment Advisers Act, soliciting or providing investment advice to any prospective or current advisory clients, making or causing to be made any misleading filing to the Administrator and otherwise holding itself out to be or engaged in the business of an investment adviser or investment adviser representative. The Temporary Order to Cease and Desist gives Respondents 30 days in which to request a hearing. If no such request is made during that time, the Temporary Order to Cease and Desist shall become final. For more information, click here.

  • On March 15, 2021, Charles Gilbert Murphy, a serial fraudster from Apex, NC, was sent back to federal prison to serve 75 months for an investment scam involving impersonation of a mayor, professor, and a government agency. The investigation was conducted by the Federal Bureau of Investigation, the Internal Revenue Service Criminal Investigation, and the North Carolina Secretary of State's Securities Division. For more information, see this press release.

  • On January 7, 2021, the Temporary Cease and Desist Order entered on November 9, 2020 (below) against Claybourne Glenn Bass and Claybourne Glenn Bass, LLC (the "Bass Respondents") became final, permanently barring the Bass Respondents from among other things, soliciting for purchase, offering or selling securities in North Carolina until such time as they become fully compliant with North Carolina's securities laws. For more information, click here.