Securities Industry Commentator by Bill Singer Esq WEEK IN REVIEW

March 3, 2018

Securities Industry Commentator: A legal, regulatory, and compliance feed curated by veteran Wall Street lawyer Bill Singer 

In today's Securities Industry Commentator feed:

Former Oyster Bay Town Attorney Agrees to Settle SEC Charges (SEC Litigation Release No. 24059) Former Oyster Bay, NY town attorney and deputy supervisor Leonard Genova was charged in a Complaint filed by the SEC in the United States District Court for the Eastern District of New York with defrauding investors in 26 of the Town's municipal securities offerings from August 2010 to December 2015. The SEC alleged that Genova hid the existence and potential financial impact of four private loan involving the Town that guaranteed over $20 million with a businessman who owned and operated restaurants and concession stands at several town facilities. The SEC deemed the this undisclosed information to be of a material nature because of its potential impact on the Town's finances. Genova agreed to settle the charges, in part, via permanent injunctions against violating the charged securities laws or participating in any offerings of municipal securities. READ the FULL TEXT COMPLAINT 

New Mexico man charged for defrauding investors out of $4.4 million (DOJ Press Release) Between 2006 and 2012, Eugene Turner and Timothy E. McShane allegedly solicited at least $4.4 million in investments in several companies they had established. Turner and McShane issued unregistered promissory notes and/or founder's shares that were purportedly collateralized by land pledges, crop pledges, real property and other items, but, in fact, those assets did not exist. Further, funds were used to make Ponzi-like payments to complaining investors. McShane, of Stow, has pleaded guilty to his role in the scheme. Turner was charged in a criminal Information with one count of wire fraud. 

In the Matter of Ameriprise Financial Services, Inc., Respondent, (Order Instituting Administrative And Cease-And-Desist Proceedings, Making Findings, And Imposing Remedial Sanctions And A Cease-And-Desist Order; '33 Act Rel. No. 10462; '34 Act Rel No. 82792; Invest. Adv. Act Rel. No. 4862; Admin. Proc. File No. 3-18381/ February 28, 2017) (the "OIP"). The OIP alleged in part that from at least January 2010 through June 2015, Ameriprise failed to ascertain that certain retirement plan customers were eligible for a less expensive share class, In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Ameriprise Financial Services, Inc. submitted an Offer of Settlement, which the federal regulator accepted. Ameriprise agreed to a Censure, to cease and desist from violations of securities laws and to a $230,000 civil monetary penalty. 

Securities Industry Commentator: A legal, regulatory, and compliance feed curated by veteran Wall Street lawyer Bill Singer 

In today's Securities Industry Commentator feed:

Dallas Man Sentenced for East Texas Investment Fraud Scheme (DOJ Press Release) Starting in 2009, Carlton Chadbourne Sayers a/k/a  Chad Sayers solicited loans/investments for the purchase and/or renovation of residential real properties, to be secured by an interest in the property. Sayers did not invest the funds or provide the secured interests as promised. Sayers, pleaded guilty in the United States District Court for the Eastern District of Texas to wire fraud and bank fraud and was sentenced to 132 months in federal prison and ordered to pay $2,102,617.27 in restitution. 

Non-Attorney Representatives Involved In FINRA Arbitration Blight ( Blog)Readers of the Blog know that our publisher, Bill Singer, Esq., is a critic of mandatory arbitration before the Financial Industry Regulatory Authority, whether the coerced litigants are public customers or industry participants. As such, readers might expect to find these words in a article penned by Bill:

This Arbitration Award is a blight on FINRA Arbitration proceedings. The Award that was obtained by the Respondents was procured by fraud and deceit when the Arbitrators turned a blind eye to needs of the individuals, the elderly public investors, that FINRA is charged with protecting. The relief that is requested is extraordinary but so are the facts of this case.

The thing about expectations is that they don't always turn out to be correct. Those acerbic words above did not flow from Bill's poison pen but from lawyers representing aggrieved public customers. You better sit down before your read today's blog. You're in for quite a trip. READ 

SEC Charges Penny Stock Company, Control Person, and Former Officer With Fraud In Filing False Reports and Selling Unregistered Securities (SEC Litigation Release No. 24058) The SEC filed a Complaint in the United States District Court for the District of Columbia alleging that from 2013 to 2014, Douglas Murdock, an undisclosed control person of Analytica Bio-Energy Corp., fraudulently procured Analytica shares and sold them in unregistered transactions. The Complaint further alleged that Murdock fraudulently induced Analytica's transfer agent to remove the shares' restrictive legend. from company shares. Further, the Complaint alleged that Murdock Analytica's former President, Luiz Brasil, substantially assisted Analytica's filing with the SEC of misleading periodic reports.In a related matter, the SEC sought a court order requiring Analytica's accountant, Marvin Winick, to comply with an SEC suspension order from 2006.Without admitting or denying the SEC's allegations, Murdock and Brasil agreed to the entry of judgments permanently enjoining them from future violations of federal securities laws; pennystock bars and officer-and-director bars; and possible disgorgement and/or a civil penalty. Winick consented to the entry of a court order enforcing the SEC's 2006 suspension order. READ the FULL TEXT Complaint.

SEC Charges Texas Companies and Individuals in Oil-and-Gas Offering Fraud (SEC Litigation Release No. 24057) In a Complaint filed in the United States District Court for the Eastern District of Texas ("EDTX") the SEC alleges that AmeraTex Energy, Inc., Lewis Oil Corp., Lewis Oil Company, Thomas Lewis (the CEO of all three entities), and former AmeraTex President, William Fort, misappropriated over $1 million from over 150 investors via sales of unregistered securities and the use of misleading statements.  Lewis and Fort allegedly suppressed Internet search results that would have cautioned potential investors about their fraud. The SEC also alleges that accountant Damon Fox and compliance coordinator Brian Bull played key roles in the $11.7 million offering fraud for oil drilling and operations projects allegedly located in Kentucky. READ the FULL TEXT COMPLAINT. 

SEC Files Charges Seeking to Halt Recidivist and Associates in Scheme to Defraud Small Businesses (SEC Press Release 2018-27) The SEC filed a Complaint in the United States District Court for the Middle District of California  charging Steven J. Muehler with operating an unregistered broker-dealer, facilitating an unregistered securities offering, and defrauding small businesses, while promising to help them raise money from investors. Three companies under Muehler's control, his wife Claudia M. Muehler, and his associate, Koorosh "Danny" Rahimi, were also charged.  Also, the Complaint alleges that Steven Muehler violated a 2016 SEC cease-and-desist order barring him from associating with any broker-dealer. READ the FULL TEXT Complaint. 

Deloitte & Touche Agrees to Pay $149.5 Million to Settle Claims Arising From Its Audits of Failed Mortgage Lender Taylor, Bean & Whitaker (DOJ Press Release) Deloitte & Touche LLP has agreed to pay the United States $149.5 million to resolve potential False Claims Act liability arising from Deloitte's role as the independent outside auditor of Taylor, Bean & Whitaker Mortgage Corp. (TBW), a failed originator of mortgage loans insured by the Federal Housing Administration (FHA) in the Department of Housing and Urban Development (HUD). 

Grand Jury Indicts Four Brazilian Men in ATM Skimming Conspiracy (DOJ Press Release) Ricardo C. De Andrade, Sandro L. Trancoso Da Silva,  Diego M. Dacosta, and Leonardo W. Targino were indicted in the United States District Court for the District of Ohio ("DCOH") on one count of conspiracy to defraud the United States via"ATM Skimming," a fraud involving their installation of ATM skimming devices and pinhole cameras on commercial ATMs and then encoding the stolen information onto magnetic strips on counterfeit cards.The defendants purchased clothing, luggage, watches, jewelry, electronics, hotel accommodations, food, rental cars and other associated travel expenses, and would ship some of the items to counterparts who resold them on the Internet. 

Securities Industry Commentator: A legal, regulatory, and compliance feed curated by veteran Wall Street lawyer Bill Singer 

In today's Securities Industry Commentator feed:

How Morgan Stanley's ex-broker lawsuits could backfire (On Wall Street / Financial Planning by Kenneth Corbin) Read about Morgan Stanley's litigation after the firm's exit from the Broker Protocol. Is this the dire face of things to come? A compelling and excellent read by author Kenneth Corbin. 

"Outside Business Activities FINRA Requests Comment on Proposed New Rule Governing Outside Business Activities and Private Securities Transactions" (FINRA Regulatory Notice 18-08, February 26, 2018). Read the Blog's analysis of the rule and Bill Singer, Esq's comment ( Blog). As set forth int he OBA Notice's "Summary":

FINRA seeks comment on a proposed new rule to address the outside business activities of registered persons. The proposal is the result of FINRA's recent retrospective review of FINRA's rules governing outside business activities and private securities transactions, FINRA Rule 3270 (Outside Business Activities of Registered Persons) and FINRA Rule 3280 (Private Securities Transactions of an Associated Person), respectively. The proposed rule would replace FINRA Rules 3270 and 3280 and is intended to reduce unnecessary burdens while strengthening investor protections relating to outside activities. " 

SEC: Insider Bought Minutes After Warnings Not to Trade (SEC Litigation Release No. 24056 ) Without admitting or denying the SEC's allegations and subject to the Court's review, Yang Xie agreed to the entry of permanent injunctions as well as payment of a  $2,287disgorgement plus prejudgment interest and a $6,681 civil penalty of three times his trading profits. 

Keeping Shareholders on the Beat: A Call for a Considered Conversation About Mandatory Arbitration (Speech by SEC Commissioner Robert J. Jackson at CECP CEO Investor Forum) A very thoughtful and erudite opening salvo from new Commissioner Jackson. 

Ponzi Scheme Nets Federal Prison Sentence, Probation for Berjac Company Leaders (DOJ Press Release) Between 2008 and 2012, brothers Michael and Gary Holcomb were the principal managing partners of the Oregon-based Berjac, an insurance premium financing business. The brothers solicited investments for the alleged purpose of financing loans to small businesses to pay for insurance premiums and investors were promised between 5% and 7% returns. Federal prosecutors alleged that the Holcombs concealed the investments' under-performance and diverted funds into real estate speculation and various personal uses. Pursuant to their guilty pleas, Michael and Gary Holcomb were sentenced to 72 months in federal prison followed by three-year terms of supervised release. 

Securities Industry Commentator: A legal, regulatory, and compliance feed curated by veteran Wall Street lawyer Bill Singer 

In today's Securities Industry Commentator feed:

In the Matter of Steven Zoernack and Equitystar Capital Management, LLC, Respondents (SEC Order) In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Steven Zoernack and Equitystar Capital Management, LLC submitted an Offer of Settlement, which the federal regulator accepted. Zoernack and his unregistered investment adviser EquityStar fraudulently offered and sold to over 40 investors at least $5.6 million of interests in Global Partners Fund, LLC and Momentum Growth Fund, LLC, unregistered investment funds created by Zoernack and managed through EquityStarThe Respondents were ordered to cease and desist from violations of federal securities laws; Zoernack was barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; Zoernack and EquityStar were prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter; and Zoernack and EquityStar will pay, jointly and severally, a $2,890,518.54 disgorgement. The SEC did not impose a civil penalty and prejudgment interest against Respondents in light of Respondent Zoernack's 60 month prison sentence, which commenced on November 15, 2017, in United States v. Zoernack (United States District Court for the Middle District of Florida, 17-CR-13). 

Former Financial Advisor Sentenced to Two Years in Prison for Defrauding Client in Private Investment Scheme (DOJ Press Release) Former bank-based financial advisor Paul Schuerger pled guilty to wire fraud and money laundering in connection with his misrepresentation to a bank customer about a $100,000 investment opportunity providing a 10% rate of return. Schuerger was sentenced to 24 months in federal prison and ordered to pay $100,000 restitution for falsely representing a private investment scheme to a customer that resulted in the client losing money. Schuerger diverted the investment funds to pay off personal debts and towards others personal uses. 

Broker Dealer Wins Indemnification Arbitration Against Stockbroker ( Blog) Buried somewhere among the bundle of papers that you never really read when you joined your current firm is likely an Indemnification Agreement. I'm not going to attempt to explain all the variations that exist among such undertakings but suffice it to say that should your employer incur costs in defending you against lawsuits or reimburses a client for losses, you may get a demand to indemnify your employer.  In today's Blog, we present a recent FINRA arbitration in which member FINRA firm Kovack Securities comes after a former employee for indemnification arising out of a settled customer arbitration. It's an unusual lawsuit because most of these matters either get resolved prior to the need for the employer to sue the employee, or the employer firm simply eats the charges as a cost of doing business. Whatever the circumstances between Kovack Securities and its employer, nothing got worked out between the employer and employee, and, alas, we wind up with a lawsuit and an arbitration hearing. 

Employee of United States Department of Agriculture Office in Houston County Arrested After Being Charged with Crop Insurance Fraud (DOJ Press Release) Former United States Department of Agriculture's Farm Service Agency employee Anna Marie Knowles was indicted in the Middle District of Alabama on charges of wire fraud, theft of government property, and using a false document.. Knowles allegedly fraudulently obtain $116,500 by falsely reporting that a drought had caused her to lose the majority of her squash crop. 

Mandatory Arbitration: An Illusory Remedy for Public Company Shareholders (Speech at PLI's The SEC Speaks in 2018 by Rick A. Fleming, SEC Investor Advocate) As a legal matter, I believe the Commission has been on solid footing when objecting to companies forcing shareholders into arbitration. Securities Act Section 8(a) allows the Commission to refuse to accelerate the effective date of an issuer's registration statement upon considering, among other things, the facility with which the rights of the issuer's securities holders can be understood, the public interest, and the protection of investors. If an issuer chooses to file a registration statement with a forced arbitration provision, I would urge the Commission and staff to make use of Section 8(a). 

"Anticompetitive Mergers in Labor Markets" by Marinescu, Ioana and Hovenkamp, Herbert J., (Penn Law Legal Scholarship Repository, February 20, 2018). Here, we offer a first but reasonably comprehensive and empirically based assessment of the problem of mergers that facilitate anticompetitive wage and salary suppression. We analyze the empirics and consider the most likely problems that courts will encounter in such litigation, including market definition, assessment of market concentration, the role of non-compete and non-poaching agreements as aggravating factors for concentration, and application of the government's Merger Guidelines.6 Although many of the queries that this analysis requires might seem unique, the principles being applied are derived entirely from well-established economic doctrine and traditional antitrust rules concerning competitive harm. We comprehensively apply these well-established principles to purchasing rather than selling, and to labor rather than products. 

Securities Industry Commentator: A legal, regulatory, and compliance feed curated by veteran Wall Street lawyer Bill Singer 

In today's Securities Industry Commentator feed:

L.A. Man Convicted of ATM ‘Shoulder Surfing' that Allowed Him to Withdraw Cash after Bank Customers Left ATMs (DOJ Press Release) Following a two-day bench trial, Daniel Jermaine Usher was found guilty of three counts of aggravated identity theft for "shoulder surfing"as a means of obtaining PIN numbers of elderly Bank of America ATM customers in Los Angeles and Orange County. When victims left the ATMs without concluding their sessions, Usher entered their PIN and fraudulently withdraw cash. Previously, Usher pleaded guilty last month to five counts of bank fraud and admitted that he illegally withdrew cash from Bank of America ATMs. 

Wells Fargo Sustains Stunning Promissory Note Loss ( Blog) To those unfamiliar with Wall Street litigation, today's featured FINRA arbitration and court order may seem unimportant. The dispute at issue is a garden variety promissory note lawsuit pitting a former employee against Wells Fargo Advisors and yet again involving an allegation of an unpaid balance due on the employee forgivable loan. In more dry terms, we seem to have yet another EFL case. For those more familiar with Wall Street's litigation docket, we have a very important case that highlights a dramatic attempt by one of FINRA's large member firms to gain and advantage over an employee and to then to further exploit that leverage via a costly lawsuit. Moreover, today's arbitration warns future industry employees to pay very, very careful attention to whether their settlements or lawsuits against their former employers deem the unpaid EFL balances to constitute the cancellation of a debt or unpaid income. 

Stock Promoter Sentenced to 27 Months in Prison for His Role in International Pump and Dump Scheme / Roy Sahachaisere Was Convicted at Trial of Fraudulently Inflating the Value of Penny Stocks (DOJ Press Release) After more than five weeks of federal trial, Songkram Roy Sahachaisere was convicted of conspiring to commit securities fraud, conspiring to commit wire fraud, two counts of wire fraud and one count of securities fraud. Sahachaisere helped to arrange promoters to "pump" stocks as part of a multi-million dollar market manipulation. Sahachaisere was sentenced to 27 months in federal prison. 

New York Man Pleads Guilty to Conspiracy Charge Related to Investment Fraud Scheme (DOJ Press Release) Thomas Heaphy pleaded guilty  to one count of conspiracy to commit mail and wire fraud in connection with a scheme from about August 2016 to February 2017 to promote and sell securities in advance of an initial public offering of Waters Club Worldwide, Inc. and Waters Club Holdings, Inc., which provided yacht charter services to customers. . Heaphy and his co-conspirators represented that Waters Club intended to form a membership-based "time share" club with a fleet of yachts that members jointly owned and could use for yachting vacations. At least 12 investors paid at least $1,289,500 for shares of Waters Club stock, no fewer than six of those victims had been victims in an earlier pump and dump scheme involving Heaphy. 

Opening Remarks at the "SEC Speaks" Conference by SEC Chairman Jay Clayton 

Remarks at SEC Speaks: Increasing Product Complexity: What's at Stake? by SEC Commissioner Kara M. Stein