Administrative Action Report: Jan.-March 2018

Mar 31
The Texas State Securities Board took the following administrative actions from Jan. 1 through March 31, 2018:
Bitconnect: Cease and Desist

The Texas Securities Commissioner on Jan. 4 entered an Emergency Cease and Desist Order to halt the multiple investment programs operated by BitConnect, an overseas company that claims a market share of $4.1 billion for its cryptocurrency coins.

BitConnect is soliciting investors for cryptocurrency-based programs that the company claims will deliver annualized returns of 100% or more, according to the order. BitConnect, based in England, issues its own currency, called BitConnect Coins. The company says it has placed 9.4 million of the coins into the online cryptocurrency marketplace, representing a market value of $4.1 billion as of Jan. 3. The company has said it will issue a maximum of 28 million coins.

The company requires individuals to use Bitcoin, a more established cryptocurrency, to invest in various BitConnect programs. In one investment called the BitConnect Lending Program, investors purchase BitConnect Coins, which are provided to a “BitConnect Trading Bot” to generate returns as high as 40% a month.

The Securities Commissioner found that the BitConnect investments are securities, but were not registered as required by the Texas Securities Act and State Securities Board Rules and Regulations. In addition, the company is not registered to sell securities in Texas.

BitConnect has disclosed virtually nothing about its principals, financial condition, or strategies for earning profits for investors.

The company operates websites and deploys online advertising to recruit sales agents, which it calls “affiliates.” The company provides marketing material to affiliates, including online presentations, and pays them commissions for referrals that result in investments in BitConnect programs.

Sales agents for BitConnect are targeting Texas residents, as well as residents of other states, through websites, social media, and online marketplaces like craigslist. The sales agents are not, however, registered as agents of BitConnect to sell securities in Texas.

William A. Sewell a/k/a Gilligan Sewell, 7S Oil & Gas LLC, Pecos O&G Corp.: Cease and Desist

Texas Securities Commissioner Travis J. Iles entered a Cease and Desist Order on Jan. 8 that requires two Midland oil and gas companies and their managing member to stop selling unregistered investments.

William Alexander Sewell, who is also known as Gilligan Sewell, is not registered to sell securities in Texas. Sewell is the control person and managing member of 7S Oil & Gas LLC and Pecos O&G Corp.

Sewell, 7S, and Pecos offered and sold units of interest in an oil and gas investment called Superbowl Joint Venture #1. The units were not registered in Texas.

The order requires the companies and Sewell to stop selling the investments until they and the investments are registered with the Texas State Securities Board.

R2B Coin: Cease and Desist

Texas Securities Commissioner Travis J. Iles entered an Emergency Cease and Desist Order Jan. 24 against R2B Coin, a Hong Kong-based company selling investments tied to a cryptocurrency called r2b coin, promising investors that the digital currency will soon be one of the world’s most valuable.

According to the Enforcement Division staff of the State Securities Board, R2B Coin, represents to potential investors that the distributor of the coin, Williams Corp. Ltd., is a “licensed global firm and “licensed securities dealer” based in Hong Kong and Dubai. Williams Corp. has never been registered to sell securities in Texas.

The company claims that it will soon secure a listing on a major stock exchange, citing as possibilities the Seng Exchange in Hong Kong, the London Stock Exchange, and the NASDAQ, and that investors will be able to trade their tokens for stock.

According to the Enforcement Division staff of the State Securities Board, R2B Coin is telling prospective investors that the r2b coin “will never go down in value,” unlike the price volatility of established cryptocurrencies like Bitcoin and Ethereum. The contract R2B requires of investors, however, says the company does not guarantee the future value of investments.

R2B Coin’s business model is based in part on recruiting sales agents to recruit investors in a multi-level marketing scheme. The company refers to sales agents as affiliates and pay them generous commissions. These affiliates have been using online advertisements to specifically target Texas residents.

The Enforcement Division staff found multiple violations of the Texas Securities Act, including the sale of securities by an unregistered firm, Williams Corp.; affiliates earning commissions without being registered to sell securities in Texas; failing to disclose the identity and qualifications of the principles of R2B Coin, and the company’s financial situation; and failing to disclose the possibility of regulatory actions and technical problems.

Jason N. Anderson: Suspended

Texas Securities Commissioner Travis J. Iles entered a Disciplinary Order on Jan. 30 that suspended Jason N. Anderson, a Beaumont investment adviser representative, for charging  unreasonable fees to clients.

The order suspended Anderson for 90 days. It also granted the registration application of Anderson with Financial Management Services of America LLC, which had been pending since July 2017.

Anderson, while registered as an agent of a previous employer,  LPL Financial LLC, recommended an active-trading strategy based on an analysis of a stock's current price compared with its historical prices. He recommended the active-trading program to clients who had stated their preference for growth with a moderate amount of risk.

The active-trading program, however, would have had to generate extraordinary returns to offset the trading costs and commissions paid to Anderson. One client's costs were nearly 30% of the equities held in the account. The trading costs and commissions constituted inequitable practices in the sales of securities, a violation of the Texas Securities Act.

DavorCoin: Cease and Desist

Texas Securities Commissioner Travis J. Iles on Feb. 2 entered an Emergency Cease and Desist Order against DavorCoin, an entity offering investments in a cryptocurrency lending program in Texas.

The emergency order found that DavorCoin is telling investors they can earn lucrative profits by investing in a lending program based on a new cryptocurrency known as davorcoin. Investors allegedly purchase davorcoin and then lend it to DavorCoin.

According to the order, DavorCoin says an investor lending $30,000 in davorcoin may earn $15,390 in the first month of the program and receive $107,217 after 120 days. DavorCoin, however, is not providing any details about how it will generate such profits. DavorCoin also is not disclosing the identity of its principals or its place of business, claiming instead that “due to tax and regulation risks,” it “cannot officialize its domiciliation.”

DavorCoin appeared to step up marketing of its lending program after the closure of another cryptocurrency lending platform, BitConnect.

Commissioner Iles on Jan. 4 entered an Emergency Cease and Desist Order to stop BitConnect’s illegal and fraudulent offers of a different lending scheme.

According to the State Securities Board's Enforcement Division, DavorCoin responded to BitConnect’s closure by announcing “[t]his does not change anything for us,” and that DavorCoin is now “the number one lending platform in the world!!"

The Enforcement Division also found that DavorCoin is an unregistered firm and it is selling unregistered securities through affiliates, which violate the Texas Securities Act.

DavorCoin is telling investors that davorcoin "aims to become the best alternative to current popular coins such as Bitcoin and Ethereum."

The company is recruiting individuals who are not registered as securities dealers or agents to act as its affiliates and offer investments in the DAVORCOIN Lending Program in Texas.

Jason A. Gilbert, Parker R. Hallam: Cease and Desist

Texas Securities Commissioner Travis J. Iles on Feb. 9 entered an Emergency Cease and Desist Order against two Dallas men who are soliciting $4.4 million for an oil and gas project without disclosing their history of unpaid tax liens and allegations of fraud. The order names Jason A. Gilbert and Parker R. Hallam, who are doing business through SourceRock Energy Phoenix Prospect LP and two affiliated companies. The companies are based in Dallas.

According to the order, Gilbert and Hallam are offering for sale interests in a single well project in Sumner County, Kansas. Of the $4.4 million the pair say they plan to raise, $1 million is supposed to be paid to one of their companies, SourceRock Energy Partners LP, as a management fee.

Gilbert and Hallam are telling investors that the remaining $3.4 million will be spent to lease the land in Kansas and develop the well field. They are not, however, disclosing that the estimated drilling costs are far lower – $750,000.

Hallam is also not disclosing that the Securities and Exchange Commission in 2016 named him as one of a dozen defendants in a lawsuit alleging oil and gas fraud of $80 million. Hallam consented to an SEC judgment in the case in the U.S. District Court for the Northern District of Texas on April 18, 2017. Hallam agreed to pay disgorgement of gains and a civil penalty to be determined by the SEC.

Gilbert is not disclosing $548,041 in tax liens the IRS filed against him from 2009 to 2017. The IRS filed liens against Hallam in 2016 and 2017, which have an unpaid balance of $142,672.

Intentionally failing to disclose material information about an investment or persons offering the investment violates the anti-fraud provisions of the Texas Securities Act.

Gilbert and Hallam are not registered to sell securities. Neither are the SourceRock energy companies.

Daniel Neves, Investors In Crypto LLC: Order

The chief executive officer of an Austin-area cryptocurrency investment firm agreed to stop offering for sale any security in Texas until the firm complies with state registration requirements.

Texas Securities Commissioner Travis J. Iles on Feb. 15 entered an Order in which Daniel Neves, the CEO of Investors in Crypto LLC, agreed to halt sales until he and his firm register with the Securities Commissioner or qualify for an exemption from registration. The firm is based in Leander, an Austin suburb.

At the time of the order Neves' firm was offering unregistered securities in various cryptocurrency trading programs and investment portfolios. The order found that Neves was offering the investments through social media – including Facebook and videos posted on YouTube and an online financial services forum for Austin residents.

Neves agreed to the order after the Enforcement Division of the State Securities Board notified him on Feb. 10 that he and his firm were violating the Texas Securities Act.

LeadInvest: Cease and Desist

The Texas Securities Commissioner entered an Emergency Cease and Desist Order on Feb. 26 against cryptocurrency firm LeadInvest, an offshore entity that claims it is advised by Supreme Court Justice Ruth Bader Ginsburg and three former U.S. Solicitors General. The action was brought to stop the firm's fraudulent offers of various investments, including one tied to a cryptocurrency mining program in Iceland.

LeadInvest was using public advertisements to lure Texans to its website, which contained profiles and photographs that purported to depict its team, advisors and legal professionals.

A photograph of LeadInvest’s legal professionals portrays Justice and former Solicitors General Theodore Olson, Paul Clement and Seth Waxman. The photograph was first printed in the Fall 2005 edition of the GW Law Briefs, a publication of the George Washington University Law School. The order alleges that LeadInvest is deceiving the public through its use of the photograph to tout its legitimacy.

The agency’s Enforcement Division determined that some of these images are stock photographs of models sold on the internet. Other photographs are actually images from unrelated websites that depict an attorney licensed to practice in Texas, and attorney licensed to practice in North Carolina, and a law firm based in California.

The emergency action also alleges that LeadInvest is illegally and fraudulently offering at least three different investment programs. One program offers investments tied to what LeadInvest calls its “own Green energy Bitcoin Mining Farm build [sic] out in Iceland.” The LeadInvest website represents that a person who invests $1,000 in something called a “1 Month Miner” will receive approximately $1,204 in 30 days.

In addition to the cryptocurrency mining program, LeadInvest was offering Texans the opportunity to have one of more than 40 “specialists” manage their principal. A third investment is based on lending money to LeadInvest in return for interest payments.

LeadInvest was not registered as a dealer, and its securities are not registered for sale in Texas.