The Securities and Exchange Commission barred an investment advisor from the industry for recommending and selling unregistered 1 Global Capital securities. 1 Global is the firm at the heart of a massive fraud scheme that raised more than $320 million in illegal securities from thousands of investors.
Michael Pellegrino, the co-founder and head of SEC-registered Goldstone Financial Group, was unaware that 1 Global Capital was a fraud when recommending their notes to clients, according to the SEC’s settlement order with Pellegrino and his brother Anthony Pellegrino, a co-founder of Goldstone.
But the duo did not reveal they were receiving referral fees when clients invested in 1 Global’s notes, according to the commission.
The settlement is the latest development in the 1 Global Capital saga, in which former CEO Carl Ruderman was charged in 2018. 1 Global was purportedly a merchant lender providing short-term loans for small and medium-sized businesses as an alternative to traditional bank loans. The company claimed it made $1.30 to $1.40 for every dollar invested in these cash advances, but investors never received any interest payments and eventually lost their principal, according to the SEC.
While 1 Global said most investors’ funds were paying for these loans, in reality Ruderman and the firm used much of the raised funds for other purposes. The SEC said Ruderman misappropriated at least $32 million for his own uses, including a vacation to Greece, monthly payments for a Mercedes-Benz and American Express card, salaries for Ruderman’s household staff and $1 million for his son to invest in cryptocurrency.
Last August, two Florida securities attorneys and the former chief operating officer of 1 Global were sentenced for participating in the fraud, with former COO Stephen Schwartz serving 24 months and ordered to pay more than $36 million in victims’ restitution. In January 2020, former 1 Global CFO Alan Heide was sentenced to five years in prison and ordered to pay more than $57 million.
To run the scheme, 1 Global invited dozens of external sales agents and firms to sell their product, including the Pellegrinos, according to the commission. 1 Global’s outside securities counsel allegedly lied to the Goldstone duo, saying 1 Global’s performance returns had been validated by an independent accounting firm.
The Pellegrino brothers tried to investigate 1 Global’s offerings through internet research about its executives and in conversations with 1 Global’s director of business development, according to the commission.
Michael Pellegrino was affiliated with the broker/dealer Taylor Capital Management, according to his BrokerCheck profile (though the b/d is not named in the SEC order). After a review, the b/d determined the 1 Global investments weren’t securities and approved Pellegrino to sell the investments only as an outside business activity.
Afterwards, the Pellegrinos marketed 1 Global investments to clients through emails, telephone calls and in-person dinners, with Michael typically recommending a 10%–20% allocation in investors’ portfolios. By June 2018, the duo had each sold about $18 million of 1 Global notes to about 445 clients around the country, pocketing about $800,000 in referral fees.
But Goldstone’s Form ADV and a disclosure document given to 1 Global investors didn’t disclose the fees the Pellegrinos received for referring clients to the unregistered securities.
After 1 Global filed for bankruptcy, Goldstone set up funds for a settlement with its investors, returning all the referral fees and an additional $700,000; Anthony Pellegrino offered $1.3 million from his personal funds to investors and Michael Pellegrino stepped down as Goldstone’s CCO in August 2018.
Goldstone and the Pellegrino brothers did not admit or deny the SEC’s findings, but agreed to hire an independent consultant to oversee their practices. The SEC barred Michael Pellegrino, while issuing a formal censure against Anthony Pellegrino. The firm and two brothers were each asked to pay five-figure penalties.
Other 1 Global promoters, some registered and some not, have also been caught up in the aftermath of the scheme. In March 2021, the SEC charged four individuals with selling at least $24 million in 1 Global unregistered securities, while the commission also charged a Tennessee-based unregistered broker for raising more than $3.5 million in commissions after selling 1 Global securities to more than 600 investors.
Last December, the SEC barred Matthew L. Walker, managing partner and chief compliance officer of Pinnacle Plus Wealth Management, a state-registered advisor in Kansas, for five years after Walker settled charges he raised some $11 million for 1 Global across some 140 transactions with investors, and through a company that raised another $9 million across 100 transactions.
