Virginia SCC branch is on the watch in securities sales – Richmond Times-Dispatch

She did so under an agreement with the State Corporation Commission. Earlier this spring, the SCC published an official order noting she had completed the repayment.

An earlier SCC order accepted Kim’s proposal to repay the investor in order to settle allegations of the State Corporation Commission‘s Division of Securities and Retail Franchising that she violated Virginia’s Securities Act.

In a written agreement, posted on the SCC website, Kim said she “neither admits nor denies the allegations.”

The SCC securities division alleged that she had violated the Virginia Securities Act, but after she completed the repayment, the SCC commissioners dismissed the allegations.

“Sometimes, the money’s gone, but we try every time to get some money back for the investor,” said securities division investigator Keith Cook.

The division alleged that Fairfax health care worker Kim was not registered to sell shares or advise people about investments, as the Securities Act requires, according to the SCC settlement order.

The division maintains the official file of individuals and companies that have registered.

The division also alleged that EcoZenith had not registered the shares it was offering, as required by the SCC, the settlement order said.

In addition, the division alleged that Kim guaranteed that if EcoZenith failed to pay a dividend or interest, she would make up the difference up to the amount the investor spent on the shares, according to the settlement order.

That didn’t happen, the SCC order said.

Registration requires disclosing the certifications that allow a person to legally sell securities or advise on investments, as well as of any bankruptcies or criminal records, the Securities Act says.

In 2020, during the time she was repaying the investor, Kim made what turned out to be her 11th bankruptcy filing since 2007, the federal bankruptcy trustee noted in his report to the bankruptcy court.

To register securities for sale requires disclosure about who owns and runs a company, as well as basic information about debts and assets, information meant to help people weigh the risks of investing, the Securities Act says.

Fairfax based EcoZenith in 2017 stopped filing the annual reports the SCC’s clerk’s office requires to show a corporation is still active, according to the SCC clerk’s records.

Kim did not respond when asked about the settlement.

The ‘suitability’ question

In another case, also closed this spring, the issue was the Securities Act’s requirement that brokers and advisers should not sell securities that don’t fit investors’ needs.

In this case, Chesterfield County investment adviser Michael Robert Finnie agreed to pay a $20,000 fine to settle the division’s charges that he sold unsuitable securities, while neither admitting nor denying the allegations.

The division alleged that Finnie sold inexperienced, retirement-age investors risky investments that were hard to cash in, according to the SCC settlement order.

Suitability can often turn on an investor’s age – retirees might need different things from their investments than, say, a young couple starting to save for their children’s college, or their own retirement.

It can include how much an investor knows about investments and how large a share of their total assets the broker or adviser wants them to put into any particular investment.

Finnie reinvested the income that some purchasers should have received back into the securities, even when those clients asked for their promised income to be paid, according to the SCC order.

Asked about the order, Finnie said in an email that it noted he had not admitted to the allegations and “shall not affect any duty or obligation to disclose the existence or nature of this matter.”

“I look only to serve well with whom I work … and … simply desire to be afforded fair treatment in doing so,” he said in the email.

Digital assets

Most of the time, securities division investigations involve what’s said and what’s not said when selling securities – and sometimes, when what’s sold really is a security when it is pitched as something else, said Danny Taylor, the division’s deputy director and a 30-year veteran of investigating securities law cases.

Take digital assets known as cryptocurrency. Cryptocurrency coins have for years intrigued speculators who buy them, hoping to cash in on a rise in their value in dollar terms.

“The first bitcoin went to buy pizza: two hungry guys buying pizza with cryptocurrency is not an investment,” Cook said. “Buying an asset expecting a profit is.”

From 2019 to 2022, BlockFi Lending was selling “BlockFi Interest” accounts with a promise of as much as a 9.5% return on investment of up to 40,000 Tether cryptocurrency coins and 4.5% on investments of up to 1/10 of a bitcoin, the SCC’s commissioners found after reviewing the division’s finding. 

BlockFi said it would pool accounts and make loans from them – that was to be where the profits for investors came, according to an SCC order detailing the division’s finding. The SCC order directed BlockFi to pay a $943,396 fine for violating the Securities Act.

Those accounts were securities – they were sold as assets that yielded a return because of BlockFi’s management, the SCC order said.

But “BlockFi has never been registered in Virginia to offer and sell securities. In addition, BlockFi has never applied for the registration of any securities with the Division, or otherwise notified the Division of an applicable registration exemption,” the SCC order said.

In addition, BlockFi’s sales material was misleading, state securities investigators alleged, the SCC order said.

The division alleged that the pools of funds it managed and lent to institutions were backed by more collateral than the loan amounts, when more that 80% were not, the order said.

This meant that the BlockFi accounts were riskier investments than it had disclosed, the division alleged, according to the SCC order.

More than 11,570 Virginians invested a total of more than $212 million in the BlockFi accounts over a three-year period, the order said.

The company paid a total of $100 million in response to similar allegations brought by the U.S. Securities and Exchange Commission and 32 state regulators, including Virginia.

BlockFi neither admitted nor denied the division’s allegations, and waived any right to appeal the order and the division’s allegations, the order said.

Simple question sparks big case

Earlier, a simple question from a new holder of a franchise that purported to refer patients to dentists sparked one of the biggest securities cases in Virginia.

The question: Is it normal that a franchisee not have to work in order to make money from the business?

When securities division investigators looked into this investor’s question, it found a Virginia Beach firm, Dominion Investment Group, had marketed “absentee-owned fully managed” franchises. Dominion’s marketing material said the Dental Support Plus franchises had “a five-year track record producing annual profits up to 40% or more,” according to the federal criminal complaint that came as a result of the state investigation.

Dominion said the franchisees would receive 16.5% of the charges dentists collected from franchise-referred patients, without the franchisee doing anything at all, according to the criminal complaint filed in the U.S. District Court in Norfolk.

The company’s founder, Daryl Bank, was convicted in federal court of securities fraud, conspiracy to launder money and using money received from illegal activity. He was sentenced to a 35-year prison term.

The company’s operations director, RaeAnn Gibson, was convicted of mail fraud and money laundering and was sentenced to 10 years. 

Bank, who had been barred from the securities business in 2010, told investors that the franchises would provide at least $200 a month per $25,000 “franchise unit,” the criminal complaint said.

He also promised that if patient referrals did not generate enough, Dental Support would pay the sum, the criminal complaint said.

Some investors, many of them at or near retirement age, bought several units, the complaint said.

Bank and Gibson also offered securities in a firm they called DSPF Group. It proposed to pool investor funds to buy Dental Support Plus franchise units, the complaint said.

One Chesapeake woman invested $40,500, half her 401(k) savings into DSPF, but it didn’t go there, court records show. Bank and Gibson used this money to pay an investor in the original franchise units, the complaint said.

In all, more than 20 investors put some $892,500 into the new venture, prosecutors said.

Dominion was also selling unregistered securities in three entities – Janus Spectrum, Spectrum 100 and Prime Spectrum, that promised returns from holdings in the 800Mhz radio spectrum, the ban used by police agencies, the complaint said.

More than 130 investors put about $10.1 million into these securities, the complaint said. 

Bank and Gibson immediately took out $6.3 million for themselves, the complaint said.

Another security that Bank and Gibson marketed brought in about $4.1 million from more than 60 investors, court records show.

Bank and Gibson transferred more than $1 million of these funds to companies Bank controlled, according to the federal criminal complaint.

Two years after the two started selling these securities, they ran out of funds to make promised interest payments, the criminal complaint said. Even after using proceeds from their continued securities sales and sales of stock in yet another firm, “weMonitor,” to make these promised payments, according to the criminal complaint.

Proceeds from yet another unregistered security, PLI Group, which raised $500,000 from 18 investors, also went to other ventures the two organized, according to the complaint.

As SCC investigators pursued the case, they found a Norfolk investment adviser named Roger Odell Hudspeth sold DSPG, weMonitor and Janus Spectrum securities.

The SCC judgment order in the case said Hudspeth and his firm admitted violating the state securities act on 146 occasions. The order levied a $1 million fine.

But the order said the SCC would not insist on collecting the fine if Hudspeth was able to make restitution to 58 clients in an amount that exceeded $1 million, “with the understanding that the Division [of Securities) has evidence of the sale of approximately $7 million in unregistered securities.”

“I am sorry for my involvement in this matter,” Hudspeth wrote to the SCC, shortly before the commission issued its order.

In this letter, he said that his agreement to settle the case “did not include a requirement to make restitution” within the 12 months the order set. “That would not be possible due to my financial situation,” his letter said.

After the commission ordered the restitution, federal prosecutors filed criminal charges.

Hudspeth pleaded guilty to one count of investment adviser fraud and one count of conducting unlawful monetary transactions. A federal judge sentenced Hudspeth to a 12-1/2-year prison term on these charges. 

The SCC believes he has not paid restitution to any investors.

Want to know more?

Taylor said there’s lots of help available.

The State Corporation Commission’s Division of Securities and Retail Franchising has a series of general information books on investing in stocks, bonds and mutual funds, as well as how to get help with investments, and has links to these on its website. https://www.scc.virginia.gov/pages/SRF-Publications-Resources

It also has links to specialized advice for seniors, people in the military and teachers and students, as well as resources that focus on fraud and red flags to watch out for.

You can check to see if a brokerage or investment advisory firm is registered at https://www.scc.virginia.gov/pages/Consumer-Investments while you can check individual brokers at https://www.scc.virginia.gov/RegSearches and investment advisers at https://adviserinfo.sec.gov/

“Investigate,” Taylor said. “Don’t be afraid to ask.”

Cook noted: “If you’re at one of those seminars where everyone is signing up, (and) you ask if you can take things home and think about it, but the guy says, ‘no, you’ve got to buy now or the opportunity’s going away,’ that’s a big red flag.”