Securities Industry Commentator by Bill Singer

April 13, 2018

Securities and Exchange Commission / Division of Trading and Markets No-Action Letter to FINRA: Third-Party Recordkeeping Services under Rule 17a-4  (SEC No-Action Letter to FINRA / April 12, 2018) READ the FULL TEXT NAL.
In pertinent part, the NAL states:

[C]ontractual provisions that would permit, among other things, a service provider to delete or discard records in the event of non-payment by the broker-dealer are inconsistent with the retention requirements of Rule 17a-4 and the undertaking requirements of paragraph (i) of Rule 17a-4.7 Moreover, if a service provider deletes or discards broker-dealer records in a manner that is not consistent with the retention requirements in Rule l 7a-4, such action would constitute a primary violation of the rule by the broker-dealer and may subject the service provider to secondary liability for causing or aiding and abetting the violation.

Department of Justice Begins Second Distribution of Funds Recovered Through Asset Forfeiture Totaling $1.2 Billion to Compensate Victims of Bernard Madoff Fraud Scheme (DOJ Press Release)
On April 12, the Madoff Victim Fund (MVF) began its second distribution to over 21,000 victims of $504 million in funds forfeited to the U.S. Government in connection with the Bernard L. Madoff Investment Securities LLC (BLMIS) fraud scheme, bringing the total distributed to over $1.2 billion.  Of the approximately $4.05 billion to be paid out, about $2.2 billion came from the civil forfeiture recovery from the estate of Jeffry Picower; about $1.7 billion via a Deferred Prosecution Agreement with JPMorgan Chase Bank N.A. and civilly forfeited in a parallel action.  The remaining funds came from forfeiture actions against investor Carl Shapiro and his family, and from Bernard L. Madoff, Peter B. Madoff and their co-conspirators.

Defendants Stole Hundreds of Thousands of Dollars by Luring Korean-American Investors into Bogus Foreign Exchange Trading (DOJ Press Release)
Tae Hung Kang, also known as "Kevin Kang," and John Won were indicted in the United States District Court for the Eastern District of New York ("EDNY") with conspiring to commit wire and securities fraud, securities fraud, and conspiring to commit money laundering, in connection with schemes involving foreign exchange trading that targeted defrauded dozens of Korean-Americans.  Kang was also charged with substantive wire fraud. Kang and Won promised investors double-digit returns, and claimed to have a secret algorithmic trading method that would generate large profits with minimal risk. The Indictment alleges that Kang and Won had minimal trading experience, their algorithmic trading method never performed as promised, and investors suffered substantial losses. In a second fraud, Kang and Won persuaded investors to purchase shares of Safety Capital Management, Inc. ("Safety Capital"), which did business as FOREXNPOWER, which was purportedly engaging in foreign exchange trading.READ the FULL TEXT Indictment

CFTC filed a Complaint in the U.S. District Court for the Southern District of New York (SDNY) against Defendants Kevin P. Whylie; Matthew James Zecchini; and Algointeractive Inc, a New York corporation owned and controlled by Whylie and Zecchini.  The CFTC Complaint alleges that from approximately April 2016 through the present, Defendants fraudulently solicited at least $300,000 for participation in a pooled investment vehicle for futures trading. The Complaint alleges, in part, that Defendants misrepresented or omitted material information about their own experience, track record, and amount of assets under management. Further, Defendants are charged with misrepresenting that participants' funds would be pooled and invested in, among other things, futures contracts, for the participants' benefit. CFTC seeks restitution, disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act and CFTC Regulations. READ the FULL TEXT Complaint
Today's Blog examines the curious case of a stockbroker acting as an agent for the collector of rare books. Sort of sounds like a movie plot. Be that as it may, we have a ten-year-long pattern of conduct that FINRA doesn't quite like. As the self-regulator is apt to do, it suspends and fines the guy. When it comes to a fine, howsabout we impose something like, say, ummm, okay, $1,000 to, what's a nice high-end number?, yeah, $5,000. What am I talking about? Well, what are you talking about? You never heard of a fine between $1,000 and $5,000? You never made a dinner reservation for 6 p.m. to 10 p.m.?

North Branford Man Admits to Hacking Apple iCloud Accounts of More Than 200 People, Including Celebrities (DOJ Press Release)
Federal prosecutors alleged that from April 2013 through Octboer 2014, George Garofano sent e-mails to victims that appeared to be from security accounts of Apple and encouraged the victims to send him their usernames and passwords, or, in the alternative, to enter the information on a third-party website, where he would later retrieve them.  Thereafter, Garofano would use the stolen information to access about 240 victims' iCloud accounts and obtain personal information including sensitive and private photographs and videos. Garofano waived indictment and pled guilty to one count of unauthorized access to a protected computer to obtain information.

Court Orders California Firm and Founder Charged with Defrauding Investors to Pay Over $3.8 Million (SEC Litigation Release No. 24109)
The United States District Court for the Central District of California ("CDCA") ordered Christopher M. Lee, (who operated under the alias Rashid K. Khalfani) and his firm Capital Cove Bancorp LLC to pay over $3.8 million in disgorgement and civil penalties.As charged in an SEC Complaint, Lee and his company purportedly raised investments in distressed real estate through REO Opportunities Fund II LLC and Rittenhouse Square Trust LLC. The SEC alleged that Khalfani hid dhis prior criininal history from investors, stole the investments and, in some instances, used the proceeds to purchase real estate for his own benefit.  Khalfani and Capital Cove are permanently enjoined from violating Section 17(a) of the Securities Act of 1933, Sections 5 and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Section 207 of the Investment Advisers Act of 1940, and Capital Cove from violating, and Khalfani from aiding and abetting violations of, Section 203A of the Advisers Act. Securities and Exchange Commission v. Capital Cove Bancorp LLC and Christopher M. Lee aka Rashid K. Khalfani (15-CV-980, CDCA)