Securities Industry Commentator by Bill Singer Esq

May 10, 2018

Second Circuit Sustains FINRA Bar in Variable Annuity Surrender Case (FINRA NAC Decision; SEC Opinion; and 2Cir Order):

In the Matter of Department of Enforcement,Complainant, v. Bernard G. McGee, Respondent (FINRA NAC Decision, Complaint No. 2012034389202 / July 18, 2016)
In barring McGee and affirming $12,325.34 in hearing costs and $1,743.04 in appeal costs, the NAC stated in the "Syllabus" to the NAC Decision:

In connection with a customer's surrender of four variable annuities and purchase of a charitable gift annuity, respondent willfully omitted a material fact, made an unsuitable recommendation, engaged in undisclosed outside business activities, failed to timely update his Form U4, and made misrepresentations on his firm's annual compliance questionnaires. Held, findings affirmed, sanctions affirmed in relevant part.

In the Matter of the Application of Bernard G McGee For Review of Disciplinary Action Taken by FINRA (SEC Opinion, '34 Act Rel. No. 80314; Admin. Proc. File No. 3-17402 / March 27, 2017).
In sustaining FINRA's violations and sanctions, the SEC stated in the "Syallabus" to its Opinion:

Former registered representative of FINRA member firm appeals from FINRA disciplinary action finding that he induced an investor's securities transaction through a material omission, made an unsuitable recommendation to an investor, engaged in undisclosed outside business activities, failed to disclose material information to his firm, and misrepresented information on compliance questionnaires. Held, association's findings of violations and imposition of sanctions are sustained.

(Summary Order, United States Court of Appeals for the Second Circuit, 17-1240-ag)
Bernard McGee appealed the final order of the Securities and Exchange Commission, Bernard G. McGee, Exchange Act Rel. No. 80314 (Mar. 27, 2017), sustaining disciplinary action by the Financial Industry Regulatory Authority, Inc. ("FINRA") against him for inducing a transaction and conducting business activities in violation of Section 10(b) of the Securities Exchange Act ("Exchange Act") and FINRA rules. Pointedly, 2Cir admonished that [Ed: footnotes omitted]:

FINRA's Sanction Guidelines recommend consideration of a bar in particularly egregious situations where an associated person engaged in reckless or intentional misrepresentations. We agree with FINRA that aggravating factors demonstrate that McGee's fraudulent omission and unsuitable recommendation were egregious and justify a bar. McGee persuaded CF to liquidate nearly half of her investment holdings and invest those assets with 54Freedom, even though CF incurred nearly $40,000 in various expenses by doing so and McGee knew almost nothing about 54Freedom's financials or operations. As a result of this transaction, CF lost $200,000. McGee, on the other hand, earned $49,264 in compensation from 54Freedom. 

Moreover, even though CF was 71 years old at the time of the transaction, financially unsophisticated, and receiving income of only $1000 a month, McGee chose her to serve as a case study to determine whether 54Freedom's charitable gift annuity program worked. McGee violated his duty as a broker to disclose to CF that he would receive compensation from her investment in Freedom. McGee even attempted to conceal his misconduct during Cadaret's investigation.

Former Law Firm Clerk Resentenced To 37 Months In Prison For Role In $2 Million Insider Trading Scheme (DOJ Press Release)
Former lSimpson Thacher & Bartlett LLP law firm managing clerk Steven Metro pled guilty in the United States District Court for the District of New Jersey ("DNJ") to the first two counts of an indictment charging him with securities fraud and conspiracy to commit securities and tender offer fraud attendant to his theft of sensitive, confidential information from the law firm during a five-year insider trader scheme that yielded net profits of more than $2 million. In September 2016, DNJ sentenced Metro to 46 months in prison.  Following Metro's appeal of DNJ's 46-month sentence, the United States Court of Appeals  for the Third Circuit vacated Metro's sentence in February 2018 after review of the total loss attributable to him, and remanded to the District Court for resentencing. United States of America v. Steven Metro, Appellant (Opinion, 3Cir, No. 16-3813, 15-CR-00028-001 / February 14, 2018)DNJ resentenced Metro to 37 months in prison plus three years of supervised release. READ the FULL TEXT 3Cir Opinion

The Gambling Stockbroker, His Elderly Customers, And Their Loans To Him ( Blog)
When regulators and prosecutors realize that they're dealing with a defendant or respondent who simply wants to get it over with and settle, it's sometimes viewed as an invitation to pile on the prose and paint a far worse picture of what allegedly happened. After all, if the adversary has thrown in the towel and there's no chance of going to trial, why not burnish your image and do a little bit of self-serving public relations? In a recent FINRA regulatory settlement, it's hard to tell where the reality of what seems a horrific scenario begins and where the fiction of making a bad situation look even worse ends. We got a stockbroker with gambling debts. We got elderly customers. We got loans from those customers to their stockbroker. It could all be benign. Then again, it may be as frightening as it seems. Unfortunately, FINRA's statement of facts is so pregnant with negative possibilities that it's impossible to come away from this case with any sense that you know what went on and you understand how it all got wrapped up. And if the misconduct is truly as bad as FINRA suggests it is, then how are we to explain what comes off as a somewhat tepid fine and suspension?

Anilesh Ahuja a/k/a "Neil," the founder, chief executive officer, and chief investment officer of a New York-based investment firm that managed hedge funds focused on structured credit products ("the Firm"), Amin Majidid, a former partner and portfolio manager at the Firm, and Jeremy Shor, a former trader at the Firm AHUJA, MAJIDI, and SHOR are indicted in the United States District Court for the Southern District of New York for allegedly participating in a scheme, from in or about 2014 through in or about 2016, to commit securities fraud and wire fraud relating to the mismarking of over $200 million worth of securities held in hedge funds that the Firm managed. Charges were also announced against Ashish Dole, a former chief risk officer and trader at the Firm, and Frank DiNucci, Jr. a former salesman at a broker-dealer, both of whom pled guilty and are cooperating.
Separately, the Securities and Exchange Commission filed civil charges against Ahuja, Majidi, and Shor.
READ the FULL TEXT SEC Complaint

SEC Levies Fraud Charges Against Texas-Based Municipal Advisor, Owner for Lying to School District (SEC Press Release 2018-82)
In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Barcelona Strategies, LLC and Mario Hinojosa submitted an Offer of Settlement, which the federal regulator accepted. In the Matter of Barcelona Strategies, LLC and Mario Hinojosa , Respondents (Order Instituting Administrative And Cease-And-Desist Proceedings, Making Findings, And Imposing Remedial Sanctions And A Cease-And-Desist Order; '34 Act Rel. No. 83191; Invest. Co. Act Rel. No. 33093; Admin. Proc. File No. 3-18476 / May 9, 2018) (the "OIP").
The OIP found that Hinojosa and Barcelona engaged in fraudulent, deceptive, or manipulative acts and breached their fiduciary duties to municipal clients.  Barcelona and Hinojosa consented to a cease-and-desist order and are jointly and severally liable for paying $362,606 in disgorgement and $19,514 in prejudgment interest.  Hinojosa was barred from association with various regulated entities, including municipal advisors and assessed a $20,000 civil penalty. Barcelona was assessed a  $160,000 civil penalty. As set forth in pertinent part of the SEC Press Release:

[I]n connection with three municipal bond offerings between January 2013 and December 2014, Mario Hinojosa and his wholly-owned municipal advisor, Barcelona Strategies LLC, misrepresented their municipal advisory experience and failed to disclose conflicts of interests to their client, a local school district in South Texas.  While working as a paralegal, Hinojosa set up Barcelona, registered it as an SEC municipal advisor, drafted a marketing brochure about the firm, and circulated the brochure to the school district and other municipalities.  The brochure created the misleading impression that Hinojosa and Barcelona had served as a municipal advisor on numerous municipal bond issuances and failed to disclose that Hinojosa had a financial interest in the school district's offerings.  By virtue of their misrepresentations and omissions, Barcelona and Hinojosa improperly earned hundreds of thousands of dollars in municipal advisory fees. 

Atlanta investment advisor sentenced for stealing nearly $3 million from clients (DOJ Press Release)
In February 2011, Paul James Marshall formed investment advisory firm Bridge Securities LLC, and falsely promised clients (mostly elderly) that their funds would be invested in specific securities in JP Morgan accounts. Marshall said funds into JP Morgan Chase checking accounts under his control and then converted about $2.9 million for such personal expenses as luxury trips, private school tuition, country club fees, and payments to his ex-wife. When clients sought information about their savings, Marshall either mailed fake account statements showing investment accounts, lied to them, or ignored their inquiries. After pleading guilty to wire fraud, Marshall was sentenced in the United States District Court for the Northern District of Georgia to six years and nine months in prison plus two years of supervised release, and ordered to pay $2,892,982.52 restitution.

Five Real Estate Investors Sentenced for Rigging Bids at Northern California Public Foreclosure Auctions (DOJ Press Release)
Between 2008 and January 2011, Joseph Giraudo, Kevin Cullinane, Raymond Grinsell, Daniel Rosenbledt, Mohammed Rezaian and other bidders conspired not to bid against one another at real estate foreclosure auctions in San Mateo County, California. The conspirators designated a winning bidder and negotiated payoffs among themselves. Giraudo, Cullinane, Grinsell, Rosenbledt, and Rezaian pled guilty to bid rigging in violation of the antitrust laws. 
  • Giraudo was sentenced to serve 15 months in prison followed by three years of supervised release, and he was ordered to pay a criminal fine of $2 million with restitution to be decided; 
  • Cullinane was sentenced to serve eight months in prison followed by three years of supervised release, and he was ordered to pay a criminal fine of $500,000 with restitution to be decided;
  • Grinsell was sentenced to three years of probation on the condition that he reside at a halfway house or residential re-entry center for 10 months. Grinsell was also ordered to pay a criminal fine of $1,433,045 and $156,146.79 in restitution;
  • Rosenbledt was sentenced to serve six months in prison followed by three years of supervised release, and he was ordered to pay a criminal fine of $1,236,355 and $127,808 in restitution; and
  • Rezaian was sentenced to four years of probation on the condition that he reside at a halfway house or residential re-entry center for five months. Rezaian was also ordered to pay a criminal fine of $1,236,355 and $110,155.70 in restitution.