April 16, 2018
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Instinet, LLC, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Instinet, LLC, Respondent, (FINRAAWC 2013036836015, April 12, 2018)
The Financial Industry Regulatory Authority, BOX Options Exchange LLC; the CBOE BZX Exchange, Inc.; Investors Exchange LLC; the NASDAQ Stock Market LLC; and the New York Stock Exchange; and certain of their affiliated Exchanges censured and imposed a $1.575 million fine on Instinet, LLC for violations of various provisions of Rule 15c3-5 of the Securities Exchange Act of 1934 (known as the Market Access Rule) and related exchange supervisory rules. As set forth in part in the FINRA AWC:
Instinet provided market access to numerous clients. FINRA and the Exchanges found that the Firm failed to supervise trading to detect and prevent potentially violative and manipulative activity. Further, FINRA and the Exchanges found that the firm failed to comply with the Market Access Rule by failing to implement financial and regulatory risk management controls and procedures reasonably designed to prevent the entry of erroneous or duplicative orders, orders that exceeded appropriate pre-set credit or capital thresholds, or erroneous messaging activity resulting from malfunctioning customer algorithms and trading systems.
Federal prosecutors alleged that between approximately January 2016 and February 2017, former investment adviser/hedge fund manager Eric Erb fraudulently solicited about $5.4 million from investors, who believed that he would follow their investment instructions. Although Erb persuaded the investors that they were earning profits, in fact, they were suffering losses and their investments had been diverted by Erb for such personal purposes as home renovations, country club dues and private school tuition. Erb pled guilty in the United States District Court for the Eastern District of New York to wire fraud. He was sentenced to 57 months in prison plus three years supervised release, and ordered to pay $5.3 million in restitution and a $5.3 million forfeiture judgment and a $215,000 forfeiture of the proceeds from the sale of his former residence.
A recent FINRA regulatory settlement presents us with the puzzling scenario of three versions of the same event as told by the stockbroker, his employer, and the industry regulator. There seems little doubt that according to the letter of the rulebook, the stockbroker entered unauthorized trades. The more interesting question is why and whether there were circumstances that might excuse or explain the questioned use of discretion. All of which reminds me of the famed film Rashomon and its characters the bandit, the samurai, and the samurai's wife. In the end, wrong was committed but as to who did what and why -- ahhhh, that's the movie.
Federal prosecutors alleged from about July 2014 to October 2015, Patrick Morgan Schiro fraudulently induced five individuals to invest $440,000 with his alleged investment management business Black Rock Morgan LCC ("BRM") by falsely stating, for example, that BRM had many clients, managed millions of dollars in assets, and had "a team of investment professionals with significant sector-specific expertise." Schiro purportedly diverted the bulk of the investments to such personal use as his children's university tuition and then concocted excuses as to why he could not redeem investments. Moreover, Schiro allegedly concealed his prior federal conviction for securities fraud from at least four of the five investors. Schiro pled guilty in the United States District Court for the Eastern District of New York to wire fraud and was sentenced to 28 months in prison with restitution to be determined. $440,000.
The SEC filed a Complaint in the United States District Court for the Northern District of Illinois against Andrew J. Kandalepas, the CEO of an alleged penny-stock company the Wellness Center USA, Inc. ("Wellness") for allegedly making false and misleading statements in the company's SEC filings and press releases and with manipulating the company's stock. Securities and Exchange Commission v. Andrew J. Kandelapas, (18-cv-02637, NDIL)The Complaint alleges that Kandalepas took $450,000 in unauthorized withdrawals from the company and then concealed his actions by causing Wellness to characterize his withdrawals as salary, prepayments, or loans in false and misleading Forms 10-K and 10-Q. Further, Kandalepas was charged with manipulating the market for Wellness stock and causing Wellness to issue false and misleading press releases touting non-existent sales of medical devices by a subsidiary. Separately, the SEC made findings with respect to the involvement of settling Respondents Wellness, its auditor Li and Company, P.C. (Li & Co.), audit engagement partner Tony Li, and Matthew T. Mushlin, who Kandalepas hired as an unregistered broker to solicit investments in Wellness through private placement agreements. Without admitting or denying the SEC's findings. Wellness agreed to a cease-and desist order. Mushlin agreed to a cease-and-desist order, to pay disgorgement of $232,925 with $23,101 of prejudgment interest, and a $240,000 civil penalty, and bars and prohibitions from association. Li & Co. and Li agreed to a cease-and-desist order, to each pay $22,500 in disgorgement with $2,643 of prejudgment interest, and to pay, jointly and severally, a $45,000 civil penalty, and to be permanently suspended from appearing or practicing before the Commission as an accountant, which includes not participating in the financial reporting or audits of public companies.
South Florida Certified Public Accountant Indicted for Tax Fraud (DOJ Press Release)
Certified public accountant Darryl Sharpton, the owner of the public accounting firm The Sharpton Group, was indicted in the United States District Court of the Southern District of Florida with tax evasion, failing to file tax returns, and failing to pay over payroll taxes to the Internal Revenue Service. The Sharpton Group allegedly specialized in financial and management consulting, audit and attestation, and tax and wealth planning. Allegedly, Sharpton filed personal income tax returns for the years 2004 through 2008 and 2010, but failed to pay the reported taxes' and, further, he failed to file personal income tax returns for years 2011 through 2016 despite his obligation to do so. After the IRS audited him and issued levies/liens, Sharpton then purportedly removed himself from his company's payroll, paid his personal expenses through the corporate bank accounts, lied to an IRS collections official, and failed to timely pay over to the IRS payroll taxes that he withheld from the paychecks of The Sharpton Group's employees.