Securities Industry Commentator by Bill Singer Esq

May 9, 2018

Latest Internet Crime Report Released / IC3 Says Victim Losses Exceeded $1.4 Billion in 2017 (FBI Press Release)
The Internet Crime Complaint Center ("IC3") released its 2017 Internet Crime Report, which presents an often chilling depiction of online scams. A fascinating read!

Nicholas Webb, et al., Plaintiffs-Appellants, v. Financial Industry Regulatory Authority, Inc., Defendant-Appellee.(Opinion, United States Court of Appeals For the Seventh Circuit, 16-CV-04664)
The background of this federal appeal is set forth, in part, in the 9Cir Opinion:

In October 2013, brokers Nicholas Webb and Thad Beversdorf were fired by their employer, Jefferies & Company, Inc. ("Jefferies"). They decided to challenge their termination, and, as their employment contracts with Jefferies demanded, they filed their claims in the Financial Industry Regulatory Authority's ("FINRA") arbitration forum. FINRA required them to sign an "Arbitration Submission Agreement," which they did, and their dispute with Jefferies proceeded in arbitration for the next two-and-a-half years. They withdrew their claims before a final decision was rendered. Under FINRA's rules, that withdrawal constituted a dismissal with prejudice. 

After the arbitration failed, Webb and Beversdorf sued FINRA in the Circuit Court of Cook County, Illinois, alleging that FINRA breached its contract to arbitrate their dispute with Jefferies. They faulted FINRA for a number of things, including failing to properly train arbitrators, failing to provide arbitrators with appropriate procedural mechanisms, interfering with the arbitrators' discretion, and failing to permit reasonable discovery. They sought damages "in an amount in excess of $50,000" and a declaratory judgment identifying specified flaws in FINRA's Code of Arbitration Procedure. FINRA removed the dispute to federal court, where it moved to dismiss on multiple grounds, including arbitral immunity. The district court held that FINRA was entitled to arbitral immunity and dismissed the suit. Webb and Beversdorf appeal this judgment.

Pages 2 -3 of the 9Cir Opinion

The 7Cir vacated the District Court's judgment for lack of jurisdiction and remanded back to the lower court with instructions to remand to state court. As set forth in the 7Cir Opinion's "Syllabus":

The parties cast this case as one about arbitral immunity, which is the ground on which the district court dismissed the complaint. It turns out, however, that the case is really about federal jurisdiction. We asked the parties to submit supplemental briefs on this question, and they both contend that subject matter jurisdiction exists. Their strongest argument is grounded in the diversity statute, but the amount in controversy requirement presents an obstacle: the complaint satisfies it only if Illinois law permits the plaintiffs to recover their legal expenses from the underlying arbitration, this suit, or both. We conclude that while Illinois law permits the recovery of legal fees as damages in limited circumstances, those circumstances are not present here. 

Money For Nothing Leaves Stockbroker In Dire Straits With FINRA ( Blog)
Money for Nothing. Take the Money and Run. Catchy tunes. You get them in your head and they stay there. Sort of like today's Blog in which we watch a stockbroker push the plunger on his career -- even if only for a few months -- because of a measly $555. Maybe this respondent sort of confused a "sweep account" with his "business development account" and figured that he should sweep the year-end remaining balance from his firm into his own pockets? I mean, okay, we all have been tempted by such an impulse from time to time. On the other hand, most of us avoid that temptation. Most of us distinguish between that's mine, that's theirs, and, geez, if I get caught this could end in disaster. How's that lyric go?   Money for nothing and . . . oops, I don't think the rest of that lyric is still politically correct. How's that other song go? Oh yeah: Bill Mack is a FINRA detective. You know he knows just exactly what the facts is. He ain't gonna let those two escape justice. 

FINRA Sanctions Fifth Third Securities, Inc., $6 Million for Cost and Fee Disclosure Failures and Unsuitable Recommendations Related to Variable Annuity Exchanges (FINRA Press Release)
FINRA fined Fifth Third Securities, Inc., $4 million and required the firm to pay about $2 million in restitution to customers for failing to appropriately consider and accurately describe the costs and benefits of variable annuity exchanges, and for recommending exchanges without a reasonable basis to believe the exchanges were suitable. READ the FULL TEXT FINRA AWC Settlement.
The FINRA Press Release noted that this is the "second significant FINRA enforcement action against Fifth Third involving the firm's sale of variable annuities." In a 2009 action, FINRA found that, from 2004 to 2006, Fifth Third effected 250 unsuitable VA exchanges and transactions and had inadequate systems and procedures governing its VA exchange business.  As set forth in part in the FINRA Press Release:

FINRA found that Fifth Third failed to ensure that its registered representatives obtained and assessed accurate information concerning the recommended VA exchanges. It also found that the firm's registered representatives and principals were not adequately trained on how to conduct a comparative analysis of the material features of the VAs. As a result, the firm misstated the costs and benefits of exchanges, making the exchange appear more beneficial to the customer. By reviewing a sample of VA exchanges that the firm approved from 2013 through 2015, FINRA found that Fifth Third misstated or omitted at least one material fact relating to the costs or benefits of the VA exchange in approximately 77 percent of the sample.  For example:
  • Fifth Third overstated the total fees of the existing VA or misstated fees associated with various additional optional benefits, known as riders.
  • Fifth Third failed to disclose that the existing VA had an accrued living benefit value, or understated the living benefit value, which the customer would forfeit upon executing the proposed exchange.
  • Fifth Third represented that a proposed VA had a living benefit rider even though the proposed VA did not, in fact, include a living benefit rider.
FINRA found that the firm's principals ultimately approved approximately 92 percent of VA exchange applications submitted to them for review. However, in light of the firm's supervisory deficiencies, the firm did not have a reasonable basis to recommend and approve many of these transactions. 

An Order of default judgment and permanent injunction was entered in the United States District Court for the District  of New Jersey against Alcibiades Cifuentes, Jennifer Wee Cifuentes, and their corporate entity, Cifuentes Fund Management, LLC. The Court found that from at least April 2013 through March 2015, the Defendants devised a sham commodity pool trading in off-exchange foreign currency, and in order to induce participants to transfer funds, the Defendants made false statements, fabricated account documents, and established a practice, or "demo," forex trading account that involved no actual funds and posed no risk of loss. The Defendants posted "profitable" trades from the demo account online and falsely represented them to be the Defendants' actual trades, without disclosing that the demo account had sustained "losses" exceeding $5 million. Further, Cifuentes and Wee misappropriated pool participants' funds by purchasing luxury vehicles, jewelry, and clothing for themselves. Also, the Defendants engaged in Ponzi-like payments to other victims. READ the FULL TEXT ORDER Defendants were ordered to pay on a joint and several basis $457,120 in restitution to pool participants, a $1.7 million civil monetary penalty, plus post-judgment interest on both amounts; and they are permanently banned from the markets the CFTC regulates, and permanently enjoined from future violations of the Commodity Exchange Act and CFTC Regulations. In a parallel action,Cifuentes and Wee were indicted on one count of wire fraud conspiracy, four counts of wire fraud, and one count of embezzlement and theft by a commodity pool operator.

The Securities and Exchange Commission ("SEC") filed two Orders Instituting Administrative Proceedings (the "OIPs") against Respondents Visium Asset Management LP and its Chief Financial Officer Steven Ku. In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Visium and Ku submitted an Offer of Settlement, which the federal regulator accepted. The SEC alleged that Visium had engaged in asset mismarking and insider trading by its privately managed hedge funds and portfolio managers; and, separately, that Ku had failed to respond appropriately to red flags that should have alerted him to the asset mismarking. Visium agreed to settle the SEC's charges by, among other things, disgorging over $4.7 million in illicit profits plus $720,711 in interest, and paying a penalty of more than $4.7 million. Ku agreed to pay a $100,000 penalty and to be suspended from the securities industry for twelve months. READ the FULL TEXT SEC ORDERS for Visium and Ku

Connecticut Man Sentenced To Prison For Role In $5 Million Investment Fraud Scheme (DOJ Press Release)
James Trolice, President and owner of Trolice Consulting Services LLC and President and Chief Marketing Officer of eAgency, pled guilty in the United States District Court for the District of New Jersey to a two-count information charging him with securities fraud and transacting in criminal proceeds. Trolice and Lee Vaccaro sold investors interests in Trolice Consulting Services and other companies controlled by Vaccaro through misrepresentations that such companies held eAgency warrants. Vaccaro pled guilty to his role and was sentenced to 78 months in prison. Trolice was sentenced to 19 months in prison plus three years of supervised release, and ordered him to pay $5,000,512.65 representing the proceeds of his offense.

Former South Bay Resident Convicted Of Defrauding Japanese Investors In Almost $7 Million Ponzi Scheme (DOJ Press Release)
After a one-week trial, Kevin Kyes was convicted in the United States District Court for the Northern District of California of one count of conspiracy to commit wire fraud, seventeen counts of wire fraud, one count of conspiracy to commit money laundering, and two counts of money laundering in connection with a nearly $7 million Ponzi scheme involving over 60 Japanese investors. The jury acquitted Kyes of one count of wire fraud. As set forth, in part, in the DOJ Press Release:

The evidence at trial showed that, from December 2012 through July 2015, Kyes worked with John Holdaway, 73, of Sandy, Utah, to defraud the Japanese investors through a business that they referred to as "Money Management Strategies," or MMS.  Kyes and Holdaway told the investors their money would be invested in high-speed trading programs with historical returns of well over 100% annually.  Kyes and Holdaway also told investors that their investments would be safe, in part because their principal investment would never leave the bank accounts into which the funds were sent, and that instead, MMS would draw a credit line secured by their funds and use that to fund trading.  Kyes and Holdaway further explained that any trading losses would be borne by MMS.  Based on the representations of Holdaway and Kyes, these investors wired money to bank accounts in Northern California controlled by Holdaway and Kyes.  The Japanese investors sent approximately $6.8 million to Holdaway and Kyes during the scheme.

The evidence at trial demonstrated that, in reality, Holdaway and Kyes did not invest the money as promised.  Instead, they spent the money themselves, used it to fund Ponzi-type payments back to investors, spent the money to pay back prior creditors to whom they owed funds, and spent it on gold-related businesses.  In addition, Holdaway and Kyes told investors that they were receiving distributions or returns on their investment.  To back up their claims, Holdaway and Kyes created and sent to investors fake documents, including phony account statements and forged letters from an accountant.  Holdaway, with Kyes's knowledge and participation, also sent emails to investors under fake names, to give the appearance that multiple people worked for Holdaway and Kyes, and lied about traveling to Europe or elsewhere to work on their investments.  

Former Belmont Resident Convicted of $6 Million Investment Fraud Scheme (DOJ Press Release)
After a two week trial in the United States District Court for the District of Massachusetts, John William Cranney, a/k/a Jack Cranney was convicted on three counts of wire fraud, 12 counts of mail fraud, and three counts of money laundering. As set forth, in part, in the DOJ Press Release:

From 2001 through 2012, Cranney solicited money from people with whom he had personal and business relationships and represented that he would invest their money in an investment fund or a retirement plan he said he managed. However, instead of investing the money, Cranney spent his victims' savings and retirement on his own bills and debts to fund his declining health and nutrition products distributorship. To carry out his scheme, Cranney created shell companies that he named specifically to sound like investment funds. He also set up a sham Employee Stock Ownership Plan to convince victims to transfer their IRA and 401k retirement funds to him. Cranney's scheme ultimately collapsed in early 2012 when he could not obtain new investment money and initial investors began demanding return of their funds.