Net Capital Violations Become Federal Criminal Case

November 12, 2015

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 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 though 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. 


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 Comment

Compliments 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 Instituting Proceedings, SEC, '34 Act Rel. 72797; Invest. Co. Act Rel. 31201; Admin. Proc. File 3-16008 / August 8, 2014) . 

By way of what comes off as more of a sideshow than anything more weighty, it turns out that the existence of both the SDNY US Attorney's criminal case and the separate SEC administrative matter produced a number of folks apparently stepping on each others shoes. It's all far more sideshow than anything weighty, but it does have the result of sort of prompting you to roll your eyes and shrug your shoulders.

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.

Page 2 of the December 8th Letter

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 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. Grimes 

Administrative Law Judge

November 10, 2015: Veteran Wall Street lawyer and blogger Bill Singer speaks to the Reformed Broker, Josh Brown, on his history in the financial services industry; his disillusionment with the brokerage model and with Wall Street; why young advisors should not follow his example; his new focus as a registered investment advisor with partner Barry Ritholtz; and how he rose to popularity as a writer and blogger (hint: "I've been known to send a tweet or two."). WATCH

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