Securities Industry Commentator by Bill Singer Esq

February 16, 2018

BREAKING NEWS: U.S. v. Internet Research Agency, et al (Indictment, 18-CR-32, United States District Court for the District of Columbia) READ the FULL TEXT Indictment alleging that 13 Russian nationals and 3 Russian entities accused interfered with U.S. elections and political processes.

Baton Rouge-Based Investment Adviser To Be Barred and Firm Registration To Be Revoked For Hiding Losses From Investors (SEC Litigation Release 24050)
In Securities and Exchange Commission v. Commonwealth Advisors, Inc. and Walter A. Morales (United States District Court for the Middle District of Louisiana,  No. 3:12-CV-00700 ) a final judgment was entered against hedge fund manager Walter A. Morales and Commonwealth Advisors Inc. In part, the judgment ordered Morales to pay a $130,000 penalty. Separately, Morales and Commonwealth agreed to the entry of an SEC Order revoking Commonwealth's registration and barring Morales from associating with an investment adviser with the right to apply for reentry after five years. The litigation was in connection with alleged investment losses involving residential mortgage-backed securities also known as RMBS.

Court Orders Connecticut Hedge Fund Manager and Firms to Pay Nearly $13 Million in SEC Case (SEC Litigation Release No. 24049)
In SEC v. Southridge Capital Management LLC, et al., (United States District Court for the District of Connecticut, No. 10-cv-1685), the SEC obtained final judgments against hedge-fund manager Stephen Hicks, and his investment advisory businesses Southridge Capital Management LLC, and Southridge Advisors LLCa Ridgefield,  The Defendants were ordered to pay $7,864,064 in disgorgement and prejudgment interest, and Hicks was ordered to pay a $5 million penalty.
for their illegal diversion of investor money for use by other hedge funds that were illiquid and in need of cash. 

Chicago Trader Facing Federal Fraud Charge for Allegedly Misappropriating $2 Million in Cryptocurrencies (DOJ Press Release)
Joseph Kim, a former assistant trader for Consolidated Trading LLC,, was charged in a federal criminal Complaint with one count of wire fraud.  The Complaint alleges that over a two-month period in 2017, Kim concealed his misappropriation of at least $2 million of the firm's Bitcoin and Litecoin cryptocurrency.

Austin Crypto-Investment Firm Signs Compliance Order (Texas State Securities Board Press Release)
TSSB entered an Order against Daniel Neves, the CEO of Investors in Crypto LLC, in which he agreed to halt sales unregistered securities in various cryptocurrency trading programs and investment portfolios until  such time as he and his firm register with the Securities Commissioner or qualify for an exemption. READ the FULL TEXT TSSB Order.

30 Months Of Violations Under FINRA's Nose ( Blog) 
There are times when the Financial Industry Regulatory Authority's regulation of its Wall Street member firms looks a lot like someone reading toe-tags in the morgue. As an exercise in explaining to us how someone died, that's fine. As an exercise in preventing their death, well, you know, it's a tad too little and too late. There are times when we need better written laws, rules, and regulations. There are times when we need more intelligent and savvy folks walkin' the beat. There are times when we need more adept prosecutors. There are times when we need more capable judges. The cohesion of the social contract depends upon the right amount of glue inserted at many points. As a recent FINRA regulatory settlement shows, there are times when self-regulation comes apart at the seams -- even if that failing takes 30 months to happen. The question is whether FINRA should be more proactive. The cynical question is whether FINRA sees its role as a hypocritical toll-taker or as an active partner in self-regulation.

Subject to Court approval, the United States Attorney for the Southern District of New York, announced a two-year Deferred Prosecution Agreement whereby the U.S. Bancorp ("USB") accepts responsibility for its conduct, pays a $453 million civil forfeiture and a $75 million scivil money penalty assessed by the Office of the Comptroller of the Currency (the "OCC"), and continues reforms of its Bank Secrecy Act ("BSA") /anti-money laundering program ("AML") compliance program. The matter arises in connection with two alleged felony violations of the USB's subsidiary, U.S. Bank National Association (the "Bank"), the fifth largest bank in the United States, for willfully failing to have an adequate AML program to file a suspicious activity report ("SAR"). 
"Mutualism: Reimagining the Role of Shareholders in Modern Corporate Governance" (Remarks at Stanford University by SEC Commissioner Kara M. Stein) A thoughtful and provocative speech by SEC Commissioner Stein. In presenting her thought-piece, Commissioner Stein touches upon such flash-points as Cyberthreats, Board Composition, Shareholder Activism, and Dual-Class Capital Structures. In her opening remarks, the Commissioner explains, in part::

[F]or those of you not familiar with the concept, mutualism is a symbiotic relationship between individuals of different species in which both benefit from the association. One example of mutualism is the relationship between bees and flowers. Bees fly from flower to flower gathering nectar to make food. By flying from flower to flower, bees pollinate the plants on which they land. Bees get to eat, and the flowering plants get to reproduce. Bees help plants grow, thus supporting other animals, including us humans. The bee-flower relationship is integral to our entire food chain, and our larger ecosystem.

The relationship between a company and its shareholders is rooted in a similar form of mutualism. Shareholders invest their savings or capital in a company. The company then deploys the capital to fund its operations. This allows the corporation and its shareholders' investments to grow. This corporation-shareholder relationship is likewise part of a larger ecosystem. When all goes well, more employees and managers get hired, and the company produces more products or provides more services, all of which benefits the entire economy.

Unfortunately, the relationship between corporations and their shareholders may be moving away from its origins and becoming less mutualistic. This, I believe, may harm companies and their shareholders, as well as those who depend on the health of the corporation-shareholder relationship.

So, how do we restore mutualism in the relationship upon which our corporate ecosystem is based?

Jury Convicts Attorney-Imposter Who Operated Fraudulent Nationwide Law Practice (DOJ Press Release) 
 Leaford George Cameron was convicted by a federal jury of one count of mail fraud, two counts of wire fraud, and three counts of making false statements in connection with his operation of a fraudulent nationwide law practice. For over a decade, Cameron , who was not a licensed lawyer, posed as an attorney admitted in the the State of Pennsylvania in numerous legal cases in federal and state courts, and, as such, defrauded over 100 victim "clients" who paid for what they thought were legitimate legal services. At sentencing, he faces a statutory maximum sentence of 75 years in prison, up to $1.5 million in fines, three years of supervised release, and a $600 special assessment. As set forth in part in the DOJ Press Release:

[C]ameron devised a fake law firm complete with fake lawyers and fake administrative/support staff. Cameron, who called his fraudulent firm "The Law Offices of Cameron, Hamilton and Associates" or "The Law Offices of Bernstein, Cameron, Hamilton and Associates," invented the identities of fake lawyers with the last names "Hamilton" and "Bernstein," neither of whom were real lawyers working at the firm. Cameron obtained and used business cards, letters, and envelopes which contained images of the scales of justice and that listed the name of his fake law firm and the other fake lawyers in the firm. Cameron submitted legal filings to courts in which he forged the name of one of the fake lawyers at his fake firm, and also communicated with victims by writing letters that he signed using different versions of a fake staff worker who Cameron called, at various times, either "Ann Marie Hyde," "Ann Marie Hall," or "Ann Marie Hinds." In one letter Cameron wrote to a victim using the "Ann Marie" identity, Cameron threatened the victim that failing to pay Cameron's legal bill would cause adverse consequences for the victim's immigration status in the United States. 

Cameron, who ran his fraudulent law practice from his house in Burlington, NJ, created fake identifiers for his home address to deceive his victims and the courts into believing that he had a real commercial office.  Specifically, Cameron added the words "Suite B-1," "Suite B-2," "PO Box 399," and/or "PO Box 1399" to his letters and filings to give the impression that his house was a commercial setting. Cameron, however, knew that he could not tell the IRS or the New Jersey government that he was a lawyer in his tax returns, and risk being caught; Cameron thus stated in his tax returns that he either was a "consultant," "litigation specialist," or "legal consultant."