The SEC, The Federal Inmate, And The Florida Bar Advice

January 29, 2018

There are times when you just have to shake your head and wonder.  As I get older, I find my neck getting sore from all the back and forth twisting. You start trying to explain something and the words just don't come out and the more you try to think about what to say, the more you realize how stupid and absurd the whole thing is and, maybe, just maybe, there ain't no way to explain  the thing you're trying to explain because it's so ridiculous as to be unexplainable. Which brings to mind the eye poppin', jaw droppin' escapades of fraudster Joseph Vitale, now known as federal inmate #15859-104. 

Case In Point

On October 16, 2017, the United States Securities and Exchange Commission filed an Order Instituting Administrative Proceedings and Notice of Hearing ("OIP") against Joseph Vitale. In the Matter of Joseph Vitale, Respondent (OIP, '34 Act Rel. No. 81875; Admin. Proc. File No. 3-18252 / October 16, 2017). By way of background, the OIP asserts that on June 6, 2017, Vitale, 32, pled guilty in the United States District Court for the Southern District of Florida to one count of mail fraud, and on August 22, 2017, he was sentenced to 57 months in prison and ordered to make restitution. Pursuant to his plea, Vitale admitted that:

(a) From approximately 2015 to 2017, he worked as a broker soliciting investments in LottoNet;
(b) He frequently used the alias of "Donovan Kelly" when speaking to potential investors in LottoNet;
(c) He sent out the LottoNet private placement memorandum to prospective investors, which explicitly stated that: "[n]o commissions or any other form of remuneration will be paid on sales made directly to the public by the company";
(d) In or around December 2016, Vitale met with a Federal Bureau of Investigation cooperating witness ("CW") regarding LottoNet and told the CW that he received 35% commissions on investor money raised. On a conference call with an undercover agent posing as a potential investor, Vitale instructed the CW to falsely represent that no commissions were paid to CW as a broker;
(e) At least one investor that Vitale solicited mailed a $250,000 check to LottoNet's offices for an investment in LottoNet. Vitale did not tell the investor that he was receiving a 35% commission on the transaction and the investor would not have invested had he known of this commission;
(f) LottoNet made at least $700,000 in payments to Vitale or his companies; and
(g) Vitale was responsible for soliciting more than ten investors who made investments in LottoNet.

Weddings and Strip Clubs

For a sense of all that was LottoNet, consider this explanation in SEC HALTS BOILER ROOM SCHEME INVOLVING STATE LOTTERY TICKETS (SEC Litigation Release No. 23791 / March 27, 2017): 

The SEC has obtained an emergency court order freezing the assets of LottoNet Operating Corp., David Gray, and Joseph A. Vitale. The SEC's complaint alleges that they misrepresented to investors that their money would be used to develop and market LottoNet and that sales agents did not receive commissions. At least 35 percent of investor proceeds were allegedly paid to boiler room sales agents in the form of commissions, and LottoNet allegedly siphoned investor funds for personal spending on clothing, wedding-related expenses, and strip clubs.

According to the SEC's complaint, which was unsealed in federal court today, among the pitches used in sales agent scripts prepared for cold calls to investors was "you're looking at a monthly dividend payout of $8,500 every month" on a $25,000 investment if LottoNet reaches 1 percent market share. The scripts also allegedly touted the purported safety of the investment, noting a 60 percent return as a "worst case" scenario if the company was ever sold. The SEC alleges that while LottoNet has raised a total of approximately $4.8 million from investors, the company had only paid $10,525.43 in investment returns to investors through the end of February. Sales agents allegedly have been paid more than $1.1 million out of investor funds.

The SEC's complaint further alleges that Vitale, who personally raised at least $1.4 million from investors, used the alias Donovan Kelly in an apparent attempt to hide from investors that he is permanently barred by the Financial Industry Regulatory Authority (FINRA). . .

Inmate Vitale

According to online records of the Federal Bureau of Prisons, Vitale is now inmate #15859-104 at the Federal Detention Center in Miami, Florida.  Given Vitale's criminal plea, the SEC filed its OIP as a follow-on proceeding to determine whether it is in "the public interest to suspend or bar Respondent from participating in any offering of 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." Page 3 of the OIP. 

In the public interest to suspend or bar Vitale? Ya think??

Oh well, that crunching noise you hear is the sound of the wheels of justice ever so slowly grinding. 

On January 24, 2018, SEC Administrative Law Judge Joseph Patil held a prehearing conference on the OIP and Counsel for the Division of Enforcement appeared. On the other hand, inmate Vitale did not appear. In the Matter of Joseph Vitale (Order Following Prehearing Conference, Securities and Exchange Commission, Admin. Proc. Rul. Rel. No. 5540; Admin. Proc. File No. 3-18252 / January 26, 2018)  As set forth in part in the January 26th Order:

[B]efore the conference, the Division represented that it received a voicemail from a counselor at Vitale's correctional facility indicating that Vitale "refuse[d] to call in or otherwise appear" at the prehearing conference. Div. Notice Concerning Jan. 24, 2018 Telephonic Prehearing Conference. Although the Division previously reported that Vitale said he was represented by counsel-and that he would not speak to Division counsel without his attorney-no attorney has filed a notice of appearance for Vitale or otherwise participated in this proceeding. Based on Division counsel's representations, U.S. postal service tracking information, and a legal mail log obtained by the Division from the correctional facility, I find that Vitale was served with the order instituting proceedings (OIP) on October 27, 2017. Therefore, Vitale's answer was due November 20, 2017. OIP at 3; 17 C.F.R. §§ 201.160(a)-(b), .220(b). Vitale has not filed an answer.  

I deem Vitale to be in default for failing to file an answer to the OIP or appear at the prehearing conference, of which he had been notified, and at which he expressly refused to appear. 17 C.F.R. § 201.155(a)(1)-(2). In addition, I deem the allegations of the OIP to be true. Id. Vitale may move to set aside the default. . .

An interesting issue popped up during the prehearing conference:

[D]ivision counsel mentioned that the Florida Bar advised her not to communicate with Respondent, even to serve papers on him, because he had told her he was represented by counsel. However, the commentary to Rule 4-4.2 of the Rules Regulating the Florida Bar states that the "prohibition on communications with a represented person only applies in circumstances where the lawyer knows that the person is in fact represented in the matter to be discussed. This means that the lawyer has actual knowledge of the fact of the representation." F.S.A. Bar Rule 4-4.2, cmt. (emphasis added). Here, no attorney has appeared on Vitale's behalf in this proceeding in accordance with Commission Rule of Practice 102(d)(2), 17 C.F.R. § 201.102(d)(2), nor has he provided his purported attorney's name or contact information.  

Florida Bar Rule 4-4.2(a) provides that "[n]otwithstanding" the prohibition on direct communication with a represented individual, "a lawyer may, without . . . prior consent, communicate with another's client to meet the requirements of any court rule . . . requiring notice or service of process directly upon a person." Under Commission Rule of Practice 150, service shall be made upon a party unless that party is represented by counsel who has filed a notice of appearance, which has not occurred here. 17 C.F.R. § 201.150(a)-(b). In any event, to alleviate the Division's concern, I ORDER the Division to continue serving papers on Vitale in the usual manner until an attorney files a notice of appearance on his behalf. See 17 C.F.R. § 201.150(b).  

Bill Singer's Comment
Sure . . . I'll take a crack at explaining it to you. Let's see . . . ummm . . . first off, Vitale is in federal prison in Miami, Florida and the SEC wants to serve him with papers because the federal regulator has to determine if it's in the best interest of the public to suspend or bar a guy who's serving just shy of a five year sentence. 

The Florida Bar has advised SEC staff that they can't communicate with Vitale because the inmate told the regulator that he is represented by a lawyer. Part of what's involved in "communicating" according to the Florida Bar is trying to serve papers. 

How do we know Vitale is represented by a lawyer? Because he says so. Has anyone seen hide or hair of this purported lawyer? Apparently not but, c'mon, it's not as if the inmate offering up that explanation is a fraudster or anything . . . oh, yeah, you're right, he pled guilty to fraud but, let's be fair here, it was "mail" fraud and who the hell uses mail anymore, right? 

In what appears to be an old-fashioned effort to smoke out a varmint, the SEC ALJ has said, in effect, the hell with the Florida Bar's advice because it's only applicable if the inmate is represented by counsel not merely because he says so -- which, now that I read what I've written, that seems a fair point and a credible challenge. So . . . the ALJ sets fire to a lot of legal wet wood and branches and stuff and sends a mass of smoke Vitale's way. Either Vitale's purported lawyer responds or maybe there ain't no lawyer and the SEC can communicate with the inmate and figure out whether the public needs protection by a suspension or bar.

Also READ: