Vancouver man who tried to smuggle HK$13 million worth of cannabis buds into Hong Kong, sentenced to 52 months jail

By Christine Duhaime | October 19th, 2019

A Vancouver man, Sinara Nou, was sentenced last week to 52 months in jail following a conviction in Hong Kong for attempting to smuggle in HK$13 million worth of cannabis through the Hong Kong International Airport in two suitcases.

In February 2019, Nou was arrested while attempting to smuggle cannabis buds into Hong Kong – he stashed 16 slabs of cannabis buds wrapped in towels in one suitcase and 14 slabs in the another, weighting 29 kgs combined, with a street value of close to HK$13 million (US$3.8 million).

Nou said he was on welfare in Vancouver and smuggled the drugs into Hong Kong for $25,000.

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Canadian money launderer from Vancouver loses another appeal in Hong Kong; ordered deported to India to face drug trafficking charges

By Christine Duhaime | October 19th, 2019

A Canadian man, originally from China, who is a convicted money launderer, lost a second appeal in the Hong Kong Court of Appeal two weeks ago, to prevent his deportation to India to face trial for drug trafficking.

Xie Jing Feng, whom we wrote about here, appealed decisions for his removal on the ground of non-refoulement and risk of death if deported to India, and this appeal was an appeal of those denials. He is seeking to return to Canada.

Xie was born in China and moved to Canada in 1998. He claimed refugee status, which was accepted and he became a Canadian citizen. It appears that he may have been a drug trafficker in Canada but that is unclear – whatever his business, Court decisions state that he later laundered HK$95 million in proceeds of crime through Vancouver banks and other banks in China, Macau and Singapore and used a shell company offshore. He also goes by the name David Chow. His spouse may live in Vancouver.

On a trip to India several years ago, he was arrested for drug trafficking. He was in remand for 3 years awaiting trial, during which time he escaped, made his way to Nepal then Hong Kong, where he was stopped and arrested for attempting to use a forged Malaysian passport to enter Hong Kong.

He was released pending trial for those immigration offences and was then arrested for money laundering (處理已知道或合理相信為代表從可公訴罪行的得益的財產). He had 3 Canadian passports (two that were alleged to be fake), that he used to open bank accounts at HSBC and Standard Chartered in Hong Kong, where he had laundered millions of dollars, at times using his wife’s name. He was convicted of money laundering and sentenced for a term of incarceration of 4 years and 4 months on April 23, 2013.

In this latest appeal, the Court of Appeal in Hong Kong denied his application, calling his appeals “hopeless.”

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Law firms flipping shelf and shell companies – is it the practice of law? Can it go through a bank trust account?

By Christine Duhaime | October 17th, 2019

Shell games

US law enforcement agencies recently signalled that they were stepping up enforcement, inter alia, in two ways: (a) as against professional money launderers; and (b) as against shell and shelf companies that law firms flip to clients.

Professional money launderers under scrutiny the FBI explained recently, are accountants, hawalas, lawyers and individuals, as well as banks, that wittingly or unwittingly launder the proceeds of crime. Shell and shelf companies are companies that law firms create and flip (sell) to clients. Both are often used by transnational criminal organizations and for securities fraud and are high risk for money laundering.

Law firms flip shelf and shell companies to clients for upwards of $200,000 each. They flip them sometimes as part of a financing, and sometimes because in the case of shelf companies, they give the appearance to the unsophisticated person of having longevity, and ergo legitimacy. Such companies appear to be a going concern when in reality they have just sat on a shelf for years, engaged in no real business. Shell companies are not aged like shelf companies and the advantage of paying extravagant sums for shell companies to law firms appears to be because they come ready-made with legal and beneficial owners.

When law firms flip shelf and shell companies to clients, often the payment is taken from a retainer held in a law firm’s trust account from the client or from proceeds of a financing, and may be billed as a disbursement.

It is debatable whether the business of flipping of shelf and shell companies to a client constitutes the practice of law, because its the resale of a law firm asset to a client (no different than the flipping of a condo owned by the firm to the client) except at a significant profit of close to $200,000 a pop, often more. It cost the law firm $500 to incorporate a company that is flipped to a client for upwards of $200,000.

If the business of flipping shelf and shell companies is not the practice of law, then the proceeds of the sale cannot be run through a trust account.

To flip a shelf or shell company to a client, a law firm would need to ensure that it explains to the client what it is, how much profit the firm is making off the flip, that it can obtain the same thing (a new company) without some of its perks for $500, and because there is a conflict (the firm is the vendor of an asset flipped to its own client), those rules would need to be complied with.

There appears to be no guidance for lawyers and law firms in respect of the practice of being in the business of flipping shell and shelf companies – thus far, law regulators have not expressed concern in respect of the practice, issued guidance in respect of it, or prohibited the practice.

Law firms should be alert to allowing the firm and its reputation to be abused for financial crime through the flipping of shell and shelf companies to a client. Shelf companies identify the involvement of the firm and there is no way to remove that legacy information. Criminals and fraudsters can take a shelf corporation with the firm legacy information and represent to banks and investors that the law firm partners were part of its business. Technically, they would be right and one wonders why law firms knowingly put themselves at a reputational risk.

The SEC recently filed charges against a lawyer for selling 8 shell companies to 3 related clients and referred to it as a “shell manufacturing” operation, and it may be the first step in exerting pressure on law firms to stop the practice. Big firms in Canada and the US are typically the ones in the shelf and shell flipping business and they typically flip quite a number more than 8 shells a year for $200,000 each to clients. Small law firms tend not to be flippers because it requires a corporate maintenance department.

Lawyers as car salesmen

A New York Times story entitled Panama Papers Show How Lawyers Can Turn a Blind Eye showed how Ramón Fonseca, one of the founders of the Panama law firm Mossack Fonseca, which set up companies where its lawyers acted as beneficial owners, directors and officers for a fee, and which also was in the shell flipping business to clients, bankers and accounting firms, told a reporter that its lawyers did nothing wrong in flipping shells to clients: “we are like a car factory” the lawyer said. Precisely the point. What US law enforcement is driving home with indictments against lawyers for this activity, is are lawyers car salesmen or are they a profession? If the latter, why are they selling cars?

That firm also set up thousands of bank accounts with global banks for thousands of clients as part of the shell service, which is also not the practice of law.

In 2014, this article first called lawyers who flip shell and shelf companies, car salesmen.

It is probably fair to say that regulators may require that law firms exit the shelf and shell flipping business, and if they don’t fast enough, firms may exit that business by US law enforcement pressure or by the public denouncement of the practice. Panama Papers is three years old, though, and nothing has happened yet. Big law firms can earn significantly more money flipping shells to clients than legal services. The lawyer charged by the SEC for flipping shell companies charged the client $2 million for shells, and $200,000 for legal services.

Jail time for shell games

To learn more about the significant financial crime risks of shell and shelf companies, the FBI explains some troubling cases here where drug cartels, human traffickers, sanctions avoiders and Ponzi schemers used shells for financial crime. You can read here about a company that sold over 2,000 shell and shelf companies as a business, some of which later were traced to financial crime. You can also read here on how Canada is a facilitator of the creation of anonymous shells. And here on how what are called “service companies” act as fronts for trusts, shells and foundations. The shell games involve using an offshore country known for lax anti-money laundering law and known for tax evasion to act as the place of incorporation of shells owed by wealthy PEPs, such as Guernsey.

You can read here about an employee of the law firm Mossack Fonseca (the firm which said it was like a car factory), arrested for money laundering and extradited to Germany to face charges of facilitating clients break the law, and here, where the US charged three other employees of that same law firm in connection with criminality, including money laundering and creating sham shells, and here where the two founding lawyers of that law firm were charged. The partners have also been indicted in Brazil for flipping shells that were used to move the proceeds of crime from government corruption, and they have admitted to back-dating corporate records, a practice that they said was an “industry practice”, meaning all lawyers do it as a standard practice.

That shells are used for serious criminality and money laundering is no longer an unknown. Thus far, $1.2 billion in fines and payments from tax evasion have been collected arising from shells associated with the law firm Mossack Fonseca. That firm, however, was often acting on instructions from other law firms all over the world, including Canada. It has said that 90% of its shell business was from law firms and accounting firms – in other words, what they allege is that it was law firms and accounting firms instructing them on shells, among other things, to service clients that in cases were tied to serious criminality. There are more than 230 client files associated with those shells in Canada says the CRA, and it has already made inroads with criminal investigations in several Vancouver files.

This video here highlights the harm the law firm did playing shell games, with the harm ranging from human trafficking, medical fraud and the Syrian refugee crisis, which displaced 30 million people.

FI concerned about the risk of banking a shelf or shell company that was flipped to a second set of owners, and of the heightened risks for financial and organized crime associated therewith, can adjust due diligence processes to ask clients about the origin of an entity and if they paid money to acquire it (as opposed to normal fees to incorporate a new company). There are 200,000 corporate entities tied to Mossack Forseca still in existence with bank accounts. Mossack is the son of a Nazi SS officer. The SS were responsible for the so-called final solution of the Jewish population and created and operated the Nazi death camps.

There is an argument to be made by legislators that the more lawyers stray from the practice of law and sell goods, like shell and shelf companies to clients, or open bank accounts for them, they undo the argument that lawyers ought to be exempt from anti-money laundering law reporting.

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SEC obtains emergency order against Telegram’s ICO, which raised $1.7 billion from investors

By Christine Duhaime | October 11th, 2019

Ex parte injunction

The Securities and Exchange Commission (“SEC“) announced today that it filed an emergency application ex parte in US Federal District Court in Manhattan, and after a hearing, obtained a temporary order over the initial coin offering (“ICO“) launched by Telegram Group, Inc. (“Telegram“), the messaging application, which raised $1.7 billion from investors around the world thus far.

According to the SEC, Telegram and its subsidiary, TON Issuer Inc., started to solicit money from investors for its ICO commencing in January 2018 to finance its operations, and its fund-raising activities were global and included the solicitation of funds from US investors. In January 2018, Telegram represented it was creating its own Blockchain called the Telegram Open Network. It is alleged to have sold 2.9 billion units to 171 investors, which in the ICO world translates into 2.9 billion digital currency tokens which were called Grams. Over 39 of those investors were resident in the US.

Part of the representation to investors, alleges the SEC, was the delivery of the Gram tokens to investors in a digital currency wallet by October 2019, ergo, the promise of liquidity and control of the investment, similar to a representation that an investor’s funds would be used to purchase shares that were liquid and tradable.

No registration of securities

Telegram allegedly did not register the offering or the sale of its ICO with the SEC. Part of the requirement of selling investments to the public, subject to an exemption, includes disclosing to investors the information they need to make informed decisions such as risk factors, the legality of the offering, the financial condition of the issuer, the expertise and experience of its management and information in respect of insiders, as well as any material information.

The white paper for the TON ICO is here.

It promises investors that with their investment, the issuer will create a multitude of Blockchains, and like EOS, it will approve limited validators to validate transactions on the Blockchain, thus making it, like EOS, not decentralized. It controls the validation participants and process. One of the applications of the TON is payments, and the TON is providing payments services globally using digital currencies. Holders of the Gram ICO would earn commissions (or dividends) from transactions, according to the White Paper. Page 132 of the White Paper confirms that Telegram considered its ICO an “investment.”

The SEC’s co-director of the SEC’s Division of Enforcement, Steven Peikin, said that “issuers cannot avoid federal securities laws by labeling products a token.”

BVI jurisdiction

TON Issuer Inc. is a BVI company whose directors are two relatives, Pavel Valerievich Durov, also the director of Telegram the app, and Nikolai Durov. In an SEC filing, they represent both to be resident in the BVI with a resident address at a law firm in the BVI, the same place the BVI corporate entity resides. It is the same address that appears in the Panama Papers for various entities. The filing for corporate purposes of residence in the BVI in respect of one director of the app, Telegram, is an attornment to the jurisdiction of BVI of that one director.

The SEC is seeking a permanent injunction, disgorgement of the proceeds of the ICO sales and civil penalties against the two corporate defendants.

The SEC’s investigation is being conducted by Daphna A. Waxman, Morgan B. Ward Doran and John O. Enright of the SEC’s Cyber Unit, and supervised by Carolyn Welshhans, Acting Chief of the SEC’s Cyber Unit and Lara Shalov Mehraban, Associate Regional Director of the New York Regional Office. The SEC’s litigation will be led by lawyers Jorge G. Tenreiro and Kevin McGrath.

Joint statement by SEC, CFTC and FinCEN

At the same time, the SEC, CFTC and FinCEN issued a joint statement in respect of the anti-money laundering and counter terrorist financing obligations of entities that engage in the business of money transmission (whether registered or not), including activities of accepting currency, funds or value, or selling securities, or providing exchange services, including ICOs that transmit and accept digital currencies on behalf of others as their business.

The way ICOs work is that no AML, CTF and sanctions vetting takes place at the time of the investment. That’s because investors, let’s say 20,000 of them, each send Ether or Bitcoin from their wallet, an exchange or a Trezor, to the pooled wallet of the ICO. Technology-wise, the ICO does not need to open an account and onboard each person that sends it digital currencies to invest before the financial transaction takes place. Legally they may have to, but as a matter of technology, they don’t and there is no correspondent bank like in banking, in the middle to gate-keep the system.

Most ICOs wouldn’t have the manpower to onboard for AML purposes, 20,000 people in a few days or even a few weeks. And they typically will not invest in being AML compliant. So they accept the investment via digital currencies into their wallet, not knowing from where it comes or who made the financial transaction, whether it is from a prohibited person or country, and even whether it is proceeds of crime and thus ICOs that have the promise of liquidity are high risk for financial crime, money laundering and terrorist financing.

There is no visibility on who the transactors are behind any of the transactions. Later, when an ICO has closed, some ICOs attempt to obtain and verify the ID of the transactors behind the transactions but they are few and far between.

This digital currency exchange, which has a trust charter with New York State and a BitLicence, both with fairly onerous financial crime and integrity compliance requirements, surprisingly agreed to list Telegram’s ICO but it’s unclear how that is possible if the digital currency is an unauthorized issuance of a securities. Trust charters, issued by bank regulators, require that financial institutions uphold the integrity of the financial system, including by not supporting activities under their licences or charters that are not legal and which could negativity impact integrity or the public’s perception of the rule of law. The concern is that digital currency exchanges take in digital currencies into their pooled wallet and keep it there, and on the administrative accounting side, all they do is ledger an individual account with its holdings. That means that when an exchange takes on an ICO that may be tainted, or be the proceeds of crime, it brings those proceeds into its pooled wallet and co-mingles it.

In the case of TON, the combination of the ICO and the offering of a global payments service in the absence of registration of any kind, and in the absence of any AML, CTF, sanctions processes in place, would have been of concern to any government regulator, considering the reach of the Telegram app, the countries in which it operates (such as Iran), and the anonymity with which it operates on the surface. Areas at high risk for terrorism would be of additional concern because of the real potential that the new digital currency payments function within the app could be used in theory for terrorist financing.

This article a few days before the injunction says that the TON ICO was not on the radar of any regulator.

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Supreme Court Judge in Mexico Resigns over Money Laundering Query

By Christine Duhaime | October 6th, 2019

A Judge of the Supreme Court of Mexico has resigned amid questions in connection with a money laundering inquiry involving his finances stemming from the US. Justice Eduardo Medina Mora was appointed in 2015 by the President of Mexico. Previous to that, he was the Ambassador to the US, and Attorney General of Mexico. The Supreme Court is Mexico’s highest court.

As a Judge, Mora is a politically exposed person in anti-money laundering law, which means he is at higher risk for corruption and to launder money compared to the general population according to the FATF. Politically exposed persons including judges, politicians, heads of NGOs, members of the military and business associates of any of the foregoing.

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Indicted US lawyer who resold and flipped multiple shell companies for whopping profit, and wrote false closing opinion for Canadian entity, settles with SEC

By Christine Duhaime | October 6th, 2019

SEC Settlement

A New Jersey lawyer, Gregg Jaclin, entered into a settlement agreement with the US Securities Exchange Commission (“SEC“) earlier this fall in respect of several allegations, including over the practice of the creation and resale and flipping of what are called “shell” companies, flipped to clients for hundreds of thousands of dollars and in respect of false statements made in a closing opinion. As part of the settlement, Jaclin is prohibited as a lawyer from appearing before the SEC.

Jaclin was also indicted in May 2017, by the US  government (here) for similar activities and a forfeiture order upon conviction was sought against him for $2.25 million from the proceeds derived from flipping shell companies to clients.

Ran a Shell Company Mill

According to the indictment, Jaclin’s law firm under his direction, signed off on a closing opinion for a Canadian company and he then filed the closing opinion which contained material false information that was relied upon by investors and the regulator. The indictment also states that he assisted with the creation of 10 shell companies, eight of which were resold and flipped to clients for over $2 million and used for reverse take-overs in the public markets, and that the law firm trust account was used to receive the proceeds of the resale and flipping of the shell companies. Jaclin also billed over $200,000 for legal fees to those clients for, inter alia, shell company flipping services.

A co-accused, Imran Husain, has admitted assisting with the shell creation and re-sale, flipping scheme and with the filing of material false information to the government regulator. This week, he asked for a lenient sentence from a court in the US.

Shelf & Shell Companies are Flipped and Resold for Hundreds of Thousands of Dollars

Law firms create shelf and shell companies but they are not the same thing.

A shelf company is unlike a shell company in that it is created and parked on a shelf to age so that it gives the illusion of longevity. Its directors and incorporator are one or more lawyers of the firm. The more it ages, like wine, the more valuable it becomes. The sole purpose of creating and maintaining shelf companies is to flip them to clients down the road, like how real estate is flipped in Vancouver. When clients buy those shelf companies, they may pay upwards of hundreds of thousands of dollars for each of them. Law firms create multiple shelf companies for the sole purpose of re-selling and flipping them to clients for astronomical returns (e.g., a profit of sometimes upwards of $200,000 for each).

A shelf company has different characteristics: it is not new; its corporate filings are in perfect order; its original legal owners are lawyers or staff at the law firm that created it or a numbered company owned by the law firm.

Both shelf and shell companies may have subsequent beneficial ownership structures to obfuscate the legal owner and so whether a company is a shelf or shell company is not indicative of whether it will have obfuscated ownership to defeat the rule of law.

The practice described above by Jaclin is not similar to, and should not be confused with, the normal situation where a law firm is hired, arms length, to incorporate a new company for a client, and it bills the client its fees for such services and disbursements associated with incorporation.

Why is the Jaclyn case important? One can surmise that it is important because securities lawyers and their firms are gate-keepers in a securities law sense. The filing of a false closing opinion and the creation of multiple shell companies that were resold with obfuscated information as in this case, for use in the public markets, allows companies’ securities to trade publicly when technically they do not qualify for trading and investors may be defrauded. This seems to be a statement from the US government that the practice of reselling and flipping shell and shelf companies by lawyers to their clients for outrageous profits is not appropriate and they intend to step in.

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Mexican national with alleged ties to money laundering, is fighting to re-enter Vancouver

By Christine Duhaime | September 22nd, 2019

The Vancouver Sun has an interesting story here about an immigration case in the Federal Court of Canada involving alleged money laundering of a politically exposed person (“PEP”) with ties to the leader of a Mexican political party called the National Action Party.

Sergio Antonio Reyes Garcia, a Mexican national, arrived in Vancouver on March 3, 2019, and was denied re-entry to Canada. The CBSA alleges that he made a misrepresentation on his application to visit Canada by making a false statement.

The CBSA alleges moreover, that Reyes Garcia was affiliated with a company registered in Vancouver that was used to launder millions of dollars to banks in Switzerland.

The company, Kross Investments Ltd., is allegedly tied to another Mexican foreign national who appears to be in Vancouver, named Manuel Barreiro Castañeda.

Cellular communications between the two men appear to connect them to a money laundering investigation in Mexico and Kross Investments Ltd. in British Columbia, and contain evidence of financial transactions involving money sent from Mexico through the BC corporate entity’s bank account to a Swiss bank. Allegedly, over $2 million was moved.

Reyes Garcia appears to have confirmed that Barreiro is his business partner, and said that when he first came to Vancouver in 2018, Barreiro was living in Vancouver and they shared an apartment. Barreiro is apparently listed in the corporate records of Kross Investments Ltd. This article says he entered into a plea agreement with Mexico in respect of an investigation and that he has corporate entities not only in Canada but also in Gibraltar, a well-known tax haven. Barreiro is also a PEP.

The CBSA alleges that Reyes Garcia is the subject of a complaint in Mexico that involves alleged laundering money.

Money from Mexico would have been flagged through the financial system and stopped, hence the gamble from an anti-money laundering perspective, of going through banks in Vancouver.

Reyes Garcia’s defence is that he did not commit a misrepresentation on his application to enter Canada and did not launder funds through Canada from Mexico.

This article from Mexico dated February 2018, says that Barreiro “fled to Canada” and a Juan Carlos Reyes Garcia (different first two names but could be the same person) is mentioned with him in a complaint filed by the government of Mexico in connection with the alleged use of fake companies in Canada by Barreiro, which have a connection to real estate acquired for an innovation park in Mexico tied to the former presidential candidate Ricardo Anaya Cortés. A case against the presidential candidate over alleged money laundering was dropped.

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American ICO lawyer with ties to Canadian Blockchain entities, arrested by FBI for alleged extortion

By Christine Duhaime | September 19th, 2019

The FBI arrested Steven Nerayoff, a US lawyer known for his work on advising ICOs, including the Canadian ICO Ethereum, yesterday and he was charged  with extortion by the DoJ in the Eastern District of New York.

According to a complaint unsealed yesterday, Nerayoff is alleged to have threatened to destroy a company launching an ICO in Seattle if they did not pay him millions of dollars.

Nerayoff was retained by the company to assist it to launch an ICO for commission of 22.5% of all funds raised and 22.5% of all of the coins issued pursuant to the ICO. Just before the ICO was to launch, Nerayoff allegedly told his client it would have to pay him almost double the commission (equal to $8.75 million back then) or he would destroy the company and sabotage the ICO.

The client paid the additional funds. Nerayoff did not perform additional legal or other services for the increased commission.

Nerayoff introduced a guy named Michael Hlady to the company who alleged he was a member of the secret service and had taken down a head of state. Subsequently, they both allegedly threatened the company with its destruction unless they paid them more money. Hlady was associated with Alchemist.

Part of the alleged extortion involved a course of conduct whereby Nerayoff and Hlady undertook searches to find out the name and location of the child of one of the startup’s founders who was a woman and looked up her previous employment history and let her know that they had that information; then they asked for large sums of money including an incident where Hlady allegedly woke the woman co-founder up from sleep one night to tell her that if the startup did not give him $10 million, he would destroy her and harm her company.

Nerayoff runs a Blockchain company called Alchemist which allegedly advises the Toronto ICO called AION. The bio of Nerayoff says he created the concept of ICOs, and says that he co-owns CasperLabs, a proof of stake startup, through a parent company.

Nerayoff has other Canadian connections besides Ethereum and AION – he says he is the chairman of a TSXV listed company called Global Blockchain (now Global Gaming) Technologies, a reporting issuer in British Columbia. In its investor disclosure, it promised investors that their investment would be used to make Global Blockchain Technologies become the SWIFT of Blockchain, which has not yet happened. Here Global Blockchain is pumped as the “world’s first publicly traded stock that invests in top-tier Blockchain and digital currency innovations.” And Nerayoff also says he is an advisor for the ICO of Toronto-based Polymath; the latter confirms he is their advisor. Polymath represented that Nerayoff is the co-founder of Ethereum.

Global Blockchain Technologies, in its public disclosure documents, disclosed that it paid US$2 million to Kodak to buy all of the pre-ICO Kodak coins in 2018, and owns 12.8% of Toronto based Hyperion Crypto Exchange Inc., which it says is licensed by the SEC. It also disclosed that it invested $5 million into Hyperion Crypto Exchange Inc., and that the Exchange was launching in association with a major government.

Hyperion Crypto Exchange Inc. appears to be the same entity as Hyperion Technologies, also based in Toronto. The CEO is the same and its CFO was the CFO of Global Blockchain Technologies. According to this article, Hyperion acquired assets from the Canadian ICO company Vanbex, which like Nerayoff, also was hired by Polymath in connection with its ICO in Canada. In August 2018, Hyperion (the exchange entity) said it was licensed in the US as an ATS (alternative trading system) and had a positive relationship with the OSC. Entities registered with the SEC as an ATS are here – Hyperion does not appear to be on the list.

Recently, Polymath and Nerayoff joined forces on an Alchemist accelerator to advise Blockchain startups, and Nerayoff is listed as a key advisor with many other Toronto-based Blockchain related companies, many of whom appeared with him at a Canadian ICO Conference held in 2018, below, in which Nerayoff was featured.

In the video, below, on YouTube, Nerayoff is interviewed at a Canadian organized Polymath sponsored event, in which he describes his role as an inventor of what he calls “token ICOs” and promotes Polymath’s ICO.

The Canadian ICO Conference organizer posted Nerayoff’s photo on social media at the event with the following words: “The SEC tried to spook the market with subpoenas – don’t let big brother get you down – the truth shall prevail!” 

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SEC charges another lawyer with issuing false closing opinion

By Christine Duhaime | September 17th, 2019

The SEC and the US DoJ have both charged another lawyer, Jan D. Atlas from Florida, in connection with issuing closing opinions that allegedly contained false information in connection with the raising of more than US$322 million from 3,600 investors in a company called 1 Global Capital LLC.

In May 2016 and in August 2016, as external securities counsel, Atlas wrote two closing opinions for 1 Global Capital in which he opined, allegedly based on false information, that the securities issued by 1 Global Capital did not qualify as securities. In addition to acting as external counsel, the SEC alleges that Atlas was paid commission for the sale of the securities and earned US$627,000 from the financings.

The SEC alleges that 1 Global Capital raised funds in violation of securities legislation, of which US$32 million was allegedly used by its founder to fund his luxurious lifestyle, and that by issuing false closing opinions, Atlas assisted in investor fraud. Despite raising US$322 million, 1 Global Capital ran out of money in two years and filed for bankruptcy.

Closing opinions by lawyers in securities law serve a gate-keeping function to protect the integrity of the capital markets because brokers, regulators and investors rely solely on closing opinions to close a financing.

You can read here for a more lengthy summary of the gate-keeping function of closing opinions written by law firms.

This appears to be the fourth case in as many months where the SEC goes after securities lawyers for false closing opinions – thus far, they have charged two Canadian lawyers and two US lawyers in respect of closing opinions that contributed to securities law fraud which harmed the public.

This prosecution is slightly different than the others in that while the opinion by the lawyer was a closing opinion and not a legal opinion, it contained opinions in respect of whether the issuance of securities was the issuance of securities, which may be relevant for the initial coin offering space where numerous lawyers in the US issued similar opinions as to whether the issuance of digital currencies were securities and triggered securities legislation.

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Eagle Scout who became a Bitcoin multi-millionaire by selling fentanyl-laced pills on Canadian darknet site, found guilty of super kingpin charges

By Christine Duhaime | September 16th, 2019

$1.2M in proceeds of crime in sock drawer of Shamo.

Super kingpin fentanyl dealer

Aaron Shamo, who was an Eagle Scout and a Mormon, was found guilty at the end of August in Utah of continuing a criminal enterprise on the darknet and selling fake oxycodone pills laced with fentanyl. He is expected to be sentenced to life imprisonment under the “super kingpin” laws, similar to the sentence given to Ross Ulbricht, the founder of Silk Road, similarly for being a super drug kingpin.

Shamo was convicted of several other charges, including money laundering.

The super kingpin charges are used for drug lords, such as El Chapo, where there is evidence established that the person was the principal organizer or administrator of a drug enterprise. The statute requires a term of life imprisonment upon conviction.

Shamo distributed more than 12,000 grams of drugs including fentanyl ordered from China, paid for with Bitcoin.

In addition to distributing drugs, he manufactured pills that he advertised as oxycodone which were in fact fentanyl, and sold them on the darknet using the Canadian illegal marketplace called AlphaBay. He shipped his fentanyl laced pills to various states in the US over the course of over a year.

In addition to fentanyl, Shamo sold rape drugs, MDMA, magic mushrooms and cocaine online and was paid in Bitcoin.

On AlphaBay, his user name was “Pharma-master” and he was in the top 1% of drug traffickers by volume in the world, which means that the Canadian site AlphaBay assisted the trafficking of the largest volume of illegal drugs when it was operational. AlphaBay was the world’s largest criminal marketplace on the darknet, ten times larger than Silk Road. It had servers in Quebec, and was founded and operated by a Canadian named Alexandre Cazes, who amassed a Bitcoin fortune of $23 million despite having no job. He committed suicide in jail. More on the Canadian AlphaBay here.

Proceeds of crime seized from Aaron Shamo.

Stashes of Cash

Shamo used to work at eBay and left that job to become a drug dealer, earning more than $12 million in drug sales online in a short time. Although he was effectively unemployed for almost a two year period, engaged in drug trafficking, he still managed to have a bank account and digital currency exchange accounts that he used to move millions in proceeds of crime and to cash it out.

At the time of his arrest, Shamo had a duffel bag with $429,000 cash stored at his parents’ house, and over $1.2 million in cash in a sock drawer, wrapped in elastic bands. And he had $8.5 million in Bitcoin.

Instagram Bragging

Before his arrest, he bragged on Instagram about his new-found wealth that enabled him to buy a boat, a luxury car, designer clothing and to take expensive trips and sip champagne.

Federal prosecutors alleged that dozens of people died as a result of his drug trafficking. He was only charged in connection with one death, that of 21-year-old Ruslan Klyuev, who died in California after taking a fentanyl-laced pill shipped from Shamo’s team.

At his trial, prosecutors tendered evidence that Shamo received messages from customers that they were getting sick from his pills and instead of fixing the problem, Shamo sent more fentanyl-laced pills to the complaining customers.

Although AlphaBay was the world’s largest darknet criminal enterprise, no natural or legal person has ever been prosecuted in Canada for facilitating AlphaBay, or its now-deceased founder, over the harm caused by such facilitation by the fentanyl crisis. Shamo could not have operated his criminal enterprise without Canada’s AlphaBay.

This case was investigated by U.S. Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations (HSI), Drug Enforcement Administration (DEA), IRS’s Criminal Investigation, U.S. Food and Drug Administration’s Office of Criminal Investigations, and U.S. Postal Inspection Service.

Assistant U.S. Attorney Vernon Stejskal of the U.S. Attorney’s Office, District of Utah, and Special Assistant U.S. Attorneys Michael Gadd and Kent A. Burggraaf prosecuted the case.

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