An irreverent Wall Street Blog
UPDATE:Brokerage CEO Sentenced to Prison in Net Capital Case
February 19, 2016
This is an UPDATE of "Net Capital Violations Become Federal Criminal Case" (BrokeAndBroker.com Blog, November 12, 2015)
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When I was a much younger man and doing two stints
as a lawyer with Wall Street self-regulatory organizations, I would find in my
in-box matters involving alleged Net Capital violations. As best I can explain
it, ya got yer sexy regulatory matters like insider trading, unsuitability, and
elder fraud; and then ya got yer bone-numbing, boring regulatory matters like
Books-And-Records and Net Capital. The sexy stuff is, relatively speaking, fun
to handle. The bone-numbing stuff, as the term suggests, tends to elicit an
"oh crap" response and little more than unhappy resignation to find
yourself investigating and perhaps prosecuting such violations. Given those
factors, some SEC regulators and federal prosecutors sort of lucked out when a
combination Books-And-Records and Net Capital matter mushroomed into a criminal
case replete with the oddball facts that could only put a smile on the face of
a hardened regulator and
prosecutor.
Case In
Point
On August 8, 2014, Charles J.
Moore, 62, the Chief Executive Officer and sole principal of Angelic Holdings
LLC and its registered broker-dealer affiliate Crucible Capital Group, Inc.,
was charged in a criminal Complaint in the Southern District
of New York ("SDNY") with:
- obstructing a Securities and Exchange Commission ("SEC") examination,
- making false statements to SEC examination Staff, and
- falsifying and failing to keep required books and records of a broker-dealer.
If convicted, Moore faced a
maximum prison sentence of 20 years each on the obstruction and falsifying
records counts; and 5 years on the false statement charge. United
States of America, Plaintiff, v. Charles J. Moore a/k/a
"Chuck" Defendant (Complaint,
SDNY, 17 MAG 1739, August 7, 2014).
The Net Capital
Exam
The Complaint
alleged that in the fall of 2013, the SEC had opened a regulatory examination
of Crucible and, among other issues, scrutinized the accuracy of the firm's net
capital reporting. In furtherance of its examination, the SEC demanded the
production of all 2013 invoices to Angelic for Crucible-related
expenses
The Complaint
asserted that during the relevant times, Crucible held itself out as boutique investment bank helping small
businesses raise capital and financing. Under
the terms of the Net Capital Rule, Crucible was required to
maintain at least $5,000 in Net Capital and to file monthly FOCUS reports
disclosing its net capital status. Further, Crucible was required to preserve
and archive business-related emails for SEC review upon request.
A Shared Experience
The Complaint
asserted that Angelic and Crucible shared employees (Angelic employees were all
employees of Crucible), office space, and expenses - the expense sharing
agreement called for Crucible to pay to Angelic a monthly fee, and Angelic
would pay certain service-providing vendors on behalf of both entities. As explained in
the
Complaint:
12. At all times relevant to this Complaint, Crucible was required to make a record reflecting each expense incurred relating to its business and any corresponding liability, regardless of whether the liability was joint or several with any person and regardless of whether a third party had agreed to assume the expense or liability. . . . SEC regulations permitted Crucible to have an expense-sharing agreement with a third party pursuant to which the third party would assume the responsibility to pay expenses related to Crucible's broker-dealer business and Crucible would pay the third party a regular fee. However, the fee payable by Crucible under any such agreement had to correspond to the proportion of expenses reasonably allocable to Crucible's business. Moreover, according to SEC guidance issued in or about 2003, Crucible was required to treat the third party's expense liabilities as Crucible's own for net capital computation purposes unless, among other things, Crucible could demonstrate that the third party had adequate resources independent of Crucible to pay the liability or expense.
Falsified
Invoices
In response to the SEC's 2013
invoice production demand, the Complaint alleged that Moore
directed a Crucible employee to take original invoices that had been sent to
Crucible personnel and create altered versions of those invoices that omitted
references to large, unpaid debts appearing on the originals. Further, the Complaint
asserted that Moore caused that employee to produce the falsified invoices to
the SEC.
During the approximate period
from February 2013 through September 2013, the Complaint alleged
that certain large debts nominally owed by Angelic were still required to have
been incorporated into Crucible's Net Capital computation, and if those debts
were fully reflected, they would have caused a reportable Net Capital
deficiency for much of that year. Apparently aware of that detrimental issue,
Moore purportedly caused Crucible to file false FOCUS reports that failed to
account for the debts at issue. The Complaint contended that Moore's goal in implementing this
subterfuge was to overstate Crucible's Net Capital so that the brokerage firm
falsely appeared to be over the regulatory capital threshold. In fact, during
the relevant times, Crucible had fallen below Net Capital
requirements.
The Email
Gambit
The Complaint
alleged that in 2013, Moore attempted to hide Crucible's actual Net Capital
status and the firm's outstanding debts by implementing a policy by which all
correspondence with professionals involved in Crucible's and Angelic's finances
wa diverted to Moore's and employees' personal email accounts - such
communications should have transpired through the broker-dealer's email
accounts. By way of example, the Complaint asserted
that the invoices purportedly falsified at Moore's direction were directed to a
Crucible employee's personal Gmail account.
Plea
Following the filing of
an Indictment on September 20, 2014, Moore pled guilty on
November 9, 2015 to one count of obstruction of a regulatory examination, which
carries a maximum sentence of 20 years in prison. Bill
Singer's CommentCompliments to the SDNY United States Attorney's Office for presenting a credible and cohesive case.For a parallel proceeding brought by the SEC, see: In
the Matter of Crucible Capital Group,Inc. Charles Moore, Respondents
(Order Proceedings,
SEC, '34 Act Rel. 72797; Invest. Co. Act Rel. 31201; Admin. Proc. File 3-16008
/ August 8, 2014) . For starters, an SEC Staff
Attorney from the New York Regional Office fell afoul of the notice
requirements under the SEC's Rules of Practice; see:
December
8, 2014 Letter from SEC New York Regional Office Attorney Enright to ALJ
Grimes
In pertinent part, we learn of
this:
I joined the Division of Enforcement in November 2013 and this is my first Administrative Proceeding. At the time I issued these subpoenas, I was not aware of Rule 230(g)' s requirement that I promptly inform Your Honor and Respondents when such subpoenas are issued. I acknowledge that my ignorance of Rule 230(g) is no excuse and that I should have but did not properly apprise myself of the relevant rules. However, my delay in providing this notice was not intentional and I issued the subpoenas in a good faith effort to investigate the culpability of parties other than the Respondents. I have since carefully reviewed the Commission's Rules of Practice as they pertain to Administrative Proceedings and I assure the Court that I will closely consult with my supervisors in connection with any further actions taken in this proceeding.
Alas, that was not the
end of the procedural miscues in this matter. Not to be outdone by their SEC
colleagues, the SDNY U.S. Attorney's Office tripped over a different issue,
apparently invoking the ire of an SEC Administrative Law Judge. As set forth In the
Matter of Crucible Capital Group,Inc. Charles Moore, Respondents
(Order Extending Stay,
SEC, Admin Proc. Rulings Rel. 2097; Admin. Proc. File 3-16008 / December 14,
2014):
[I] previously granted the Application to Intervene and Motion to Stay by the U.S. Attorney for the Southern District of New York. Crucible Capital Group, Inc., Admin. Proc. Rulings Release No. 1714, 2014 SEC LEXIS 2989 (Aug. 20, 2014). I also ordered a telephonic prehearing conference for December 5, 2014, but clarified that the prehearing conference would be canceled if the U.S. Attorney files a written notice before that date providing reasons why the stay should remain in effect. Id. Today, by email, I received a letter from the U.S. Attorney's Office submitting that the public interest continues to support a stay of this proceeding.While this letter does substantively support that the stay should remain in effect pursuant to 17 C.F.R. § 201.201(c)(3), the letter is procedurally deficient. All substantive filings must be submitted in hardcopy to the Commission's Office of the Secretary and include a certificate of service, in compliance with 17 C.F.R. §§ 201.151, 152. Also, it is important that no party or non-party in this proceeding email me directly, as doing so risks contravention of rules against ex parte communications, see 5 U.S.C. § 557(d), 17 C.F.R. § 201.120. It is however acceptable, and often helpful, to send courtesy copies of filings properly filed with the Office of the Secretary to alj@sec.gov and the attorney-adviser assigned to this matter.Accordingly, in anticipation of a procedurally compliant filing, it is ORDERED that the stay in this proceeding will stay in effect for another four months, or until April 6, 2014. A 2 telephonic prehearing conference is ordered for April 6, 2014, at 11:30 a.m. EDT; if the U.S. Attorney properly files a written notice by April 1, 2014, asking that the stay remain in effect and providing reasons why the stay should remain in effect, the telephonic prehearing conference will be canceled and the stay continued.James E. GrimesAdministrative Law Judge
UPDATE: February 2016
On February 18, 2016, Defendant Moore was sentenced to six month in federal prison.
Also on February
18, 2016, in response to the OIP but without admitting or
denying the findings, Respondent Moore submitted an Offer of Settlement, which
the SEC accepted. In
the Matter of Crucible Capital Group,Inc. Charles Moore, Respondents
(Order Making Findings And Imposing Remedial Sanctions And A Cease-And-Desist Order As To Respondent Moore;'34 Act Rel. 77176; Invest. Co. Act Rel. 31998; Admin. Proc. File 3-16008 / February 18, 2016). In accordance with the Offer of Settlement, the SEC ordered the imposition of the following sanctions:
A. Respondent Moore cease and desist from committing or causing any violations andany future violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-1 thereunder, and Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(2), 17a-4(b)(3), 17a-4(j), 17a-5(a), and 17a-11(b)(1) thereunder.B. Respondent Moore shall be, and hereby is:barred from association with any broker, dealer, investment adviser,municipal securities dealer, municipal advisor, transfer agent, or nationallyrecognized statistical rating organization;C. Any reapplication for association by the Respondent will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against the Respondent, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order.prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter; andbarred from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.