June 30, 2018
FINRA (Opinion, SEC, '34 Act Rel. No. 83555; Admin. Proc. File No. 3-17930 )
The SEC affirms FINRA's finding of the Form U4 violations, which Ottimo does not challenge, and affirms in part its findings of fraud as to the Private Placement Memorandum at issue. Not finding part of FINRA's fraud findings is not supported by the record, however, the SEC remands for FINRA to reassess the sanctions.
Established in 2010, the SEC's Whistleblower Program is in need of an overhaul. Accordingly, the SEC has proposed rules to ensure that meritorious whistleblowers are appropriately rewarded for their efforts, increase efficiencies in the whistleblower claims review process, and clarify the requirements for anti-retaliation protection under the whistleblower statute.
There are lawsuits in which it's pretty clear that we're dealing with an innocent victim. Imagine a pedestrian simply walking down the sidewalk and he gets hit by a car, which was cut off by a cab, which was rear ended by a bus, which was swerving to avoid hitting a bicyclist, who was forced out of the bike lane by a parked ambulance handling a medical emergency. Somebody's got to pay the injured pedestrian. In a recent FINRA customer arbitration, a public customer relied upon the valuation of his bonds as posted on his brokerage firm's website. Those prices may not have been accurate. The brokerage firm argued that the customer had "options" for verifying the accuracy of the bond prices.The brokerage firm argued that it had merely reposted lprices provided to it by an exchange. What's an arbitrator to do?
Former Chief Financial Officer of Bankrate Inc. Pleads Guilty to Orchestrating Complex $25 Million Accounting and Securities Fraud Scheme (DOJ Press Release) Edward J. DiMaria, the former chief financial officer of Bankrate Inc. pled guilty in the United States District Court for the Southern District of Florida to one count of conspiracy to make false statements to a public company's accountants, falsify a public company's books, records and accounts, and commit securities fraud; and one count of making materially false statements to the Securities and Exchange Commission. The charges were in connection with his role in orchestrating an accounting and securities fraud scheme that caused more than $25 million in shareholder losses. DiMaria admitted, in part, that between 2010 and 2014, he directed and conspired to commit a complex scheme to artificially inflate Bankrate's earnings through so-called "cookie jar" or "cushion" accounting, where millions of dollars in unsupported expense accruals were purposefully left on Bankrate's books and then selectively reversed in later quarters to boost earnings.
Rick Guyon, a/k/a, Richard Guyon, a/k/a Rick Garrison, a/k/a Mark Thomas, pled guilty in the United States District Court for the District of Idaho to one count of wire fraud. Federal prosecutors alleged that from 2015 through 2017, Guyon devised a scheme to defraud individual investors that (i) resulted in an actual loss of between $1,500,000 and $3,500,000; (ii) resulted in a substantial financial hardship to an investor-victim who personally lost approximately $1,281,783; and (iii) involved the defendant acting as an organizer and leader of at least three other participants in the scheme.
Former Equifax Manager Charged With Insider Trading (SEC Press Release 2018-115) In a Complaint filed in the United States District Court for the Northern District of Georgia, the SEC alleged that former Equifax software engineering manager Sudhakar Reddy Bonthu traded on confidential information he allegedly received while creating a website for consumers who had been impacted by a data breach. The Complaint alleges that although Bonthu was told the work was being done for an unnamed potential client, he apparently concluded that Equifax itself was the victim of the breach.The Complaint alleges that Bonthu purchased Equifax Put options in advance of the company's September 2017 announcement of a massive data breach that exposed Social Security numbers and other personal information of approximately 148 million U.S. customers. Bonthu allegedly sold the put options for a $75,000 profit, which was allegedly over a 3,500% return on his initial investment. In a parallel proceeding, the U.S. Attorney's Office for the Northern District of Georgia filed criminal charges against Bonthu.To settle the SEC's civil charges, Bonthu has agreed to a permanent injunction and to return his allegedly ill-gotten gains plus interest. The settlement is subject to court approval. SEC Proposes New Approval Process for Certain Exchange-Traded Funds (SEC Press Release 2018-118) The SEC proposed a a new rule and amendments to forms designed to modernize the regulatory framework for exchange-traded funds ("ETFs"). Proposed Rule 6c-11 would permit ETFs that satisfy certain conditions to operate within the scope of the Investment Company Act of 1940 (the "Act"), and come directly to market without the cost and delay of obtaining an exemptive order. Proposed Rule 6c-11 would be available to ETFs organized as open-end funds. ETFs organized as a unit investment trusts, ETFs structured as a share class of a multi-class fund, and leveraged or inverse ETFs would not be able to rely on the proposed rule. Financial Advisor Indicted on Fraud Charges for Allegedly Swindling Investors out of $4.7 Million (DOJ Press Release) Financial Advisor Darayl Davis was indicted on six counts of money laundering, five counts of wire fraud, four counts of mail fraud, and one count of aggravated identity theft in the United States District Court for the Northern District of Illinois. Federal prosecutors alleged that Davis falsely represented to 22 victims that they were guaranteed to receive at least 6% annual interest payments through investments with his Financial Assurance Corp. or Affluent Advisory Group LLC. . Further, Davis allegedly promised that principal investments were protected against losses and that some of the purported investments were backed by a well-known multinational life insurance company. Instead of investing his clients' money, Davis allegedly diverted the funds for his own personal benefit, including $706,000 on credit card payments, $476,500 to rent a mansion in Los Angeles, $102,000 on airline tickets, $45,000 on car rentals, $42,500 on membership in an exclusive club, $42,000 on luxury hotels, and $25,000 on theater tickets; and he also made Ponzi-like payments to other investors. READ the FULL TEXT INDICTMENT. The Double Edged Sword Of Facts And A FINRA Expungement (BrokeAndBroker.com Blog) Sometimes facts are double-edged. They can prove or disprove a complaining customer's case -- or, they can defend or upend a stockbroker's explanations. All of which explains why a savvy lawyer, who knows what to look for and how to use it, can make all the difference in the outcome of litigation. And, yes, for the cynics among you, that would also explain why certain evidence is oddly lost, destroyed, or never produced. On the one hand. On the other hand. Slash and slash. In today's BrokeAndBroker.com Blog we consider a FINRA expungement arbitration in which an arbitrator's rationale provides us an opportunity to use and duck from the back-and-forth blade of facts as presented in litigation. Former State Street Executive Convicted in Scheme to Defraud Clients Through Secret Trading Commissions
(DOJ Press Release) Former State Street Corporation executive vice president, global head of its Portfolio Solutions Group, and President of its U.S. broker-dealer unit Ross McLellan was convicted in the United States District Court for the District of Massachusetts on one count of conspiring to commit securities fraud and wire fraud, two counts of securities fraud and two counts of wire fraud in connection with his role in a scheme to defraud at least six of the bank's clients through secret commissions applied to billions of dollars of securities trades
Three Men Arrested And Charged With Trading On Inside Information Misappropriated From A Credit Rating Agency (
DOJ Press Release) Sebastian Pinto-Thomaz, Abell Oujaddou, and Jeremy Millul were arrested pursuant to a criminal Complaint filed in the United States District Court for the Southern District of New York alleging insider trading. Defendant Pinto-Thommaz was a credit rating analyst assigned to work on a Rating Evaluation Service for Sherwin-Williams Company. That assignment gave Pinto-Thomaz access to inside information about Sherwin-Williams acquisition of Valspar. The Complaint alleges that Pinto-Thomaz passed inside information about the acquisition to Oujaddou, a hairstylist and salon owner, and Millul, a jeweler -- both defendants allegedly had close relationships with Pinto-Thomaz. Allegedly, Oujaddou sold his Valspar shares for approximately $192,080 in profits; and Millul sold his for about $106,806 in profits. The Complaint charges the three defendants each with one count of conspiracy to commit securities fraud and one count of securities fraud. In response to warrants, the government seized $100,000 from a bank account belonging to Millul, and over 25,000 shares of BlackBerry stock from brokerage accounts belonging to Oujaddou. In a separate action, the SEC filed civil charges against all three individuals. READ the FULL TEXT COMPLAINTS
The Elderly Wife, The Husband, And The Transfer On Death Account (BrokeAndBroker.com Blog) Here we go again. Marital bliss ain't all it's cracked up to be. Add one elderly wife. Add one part husband. Add two parts brokerage account for the benefit of the kids. Shake. Remove cash from the account. Pour into one big regulatory glass and garnish with a compliance nightmare. SEC Obtains Final Judgment Against Attorney in Scheme to Manipulate Stock of Sports Ticket Broker (SEC Litigation Release No. 24175) The United States District Court for the District of Massachusetts entered final judgment against former law partner Richard Weed for his role in defrauding investors in CitySide Tickets Inc. via false opinion letters that he authored as part of a "pump and dump" scheme In a parallel criminal case, Weed was sentenced to 4 years in prison and 3 years of supervised release and ordered to pay a fine of $100,000 and to forfeit $90,000. In the SEC case, the judgment imposes a permanent injunction against future violations of the antifraud provisions of the federal securities laws, a penalty of $150,000, and permanently bars Weed from serving as an officer or director of a public company and from participating in penny stock offerings. SEC Charges Texas Businessman in Multi-Million Dollar Ponzi Scheme (SEC Litigation Release No. 24175) In a Complaint filed in the United States District Court for the Northern District of Texas, the SEC alleges that purported securities-fraud-recidivist James VanBlaricum was the driving force behind Texas Energy Mutual, LLC (f/k/a Texas Energy Management) and had enlisted Rodney Pope and Chet Inglis to serve as the face of the company. The Complaint further alleges that Robert Gilliam, Matthew Leaverton, William Hill, and Erik Rhodes solicited investors from whom over $10 million was raised pursuant to guarantees of investment returns and assurances that funds would be used to drill oil wells. The Complaint alleges that defendants used investor money for a variety of personal expenditures, including luxury international vacations and wedding expenses, and for Ponzi-like payments to investors. Defendants VanBlaricum, Pope, Inglis, Gilliam, Hill, and Rhodes each agreed to be permanently enjoined from violating securities laws. VanBlaricum, Pope, and Inglis consented to officer and director bars. Rhodes agreed to disgorge $33,000. Separately, VanBlaricum, Pope, Inglis, Leaverton, and Gilliam were charged in a parallel criminal case and have each pleaded guilty and were sentenced to federal prison terms ranging from 30-84 months, and ordered to pay between $1.8 million and $32 million in restitution. READ THE FULL TEXT COMPLAINT Wall Street watchdog accused of age discrimination (New York Post by Kevin Dugan)
The New York Post article asserts in part that FINRA terminated some 20 senior employees, each of whom was over 40 years old. The lawsuit alleges that FINRA used its pension eligibility termination as a pretext to disguise its discrimination of older employees.
In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Wells Fargo Advisors, LLC,submitted an Offer of Settlement, which the federal regulator accepted. In the Matter of Wells Fargo Advisors, LLC, Respondent (SEC Order Instituting Administrative and Cease-And-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order; '33 Act Rel No. 10511; '34 Act Rel. No. 83508; Invest. Adv. Act Rel. No. 4947; Admin. Proc. File No. 3-18556 / June 25, 2018).
In accordance with the terms of the settlement, the SEC Ordered Respondent Censured and to cease and desist from committing or causing any violations and any future violations of cited provisions of the Securities Act. Further Respondent shall pay $5,108,441.27 in disgorgement, prejudgment interest, and a civil monetary penalty. The SEC alleged that from 2009 through June 2013, certain Wells Fargo advisors improperly solicited customers to redeem their market-linked investments and purchase new ones without adequate analysis or consideration of the attendant costs.
The Deceased Father, Claimant Mother, Daughter, Son In Law Stockbroker, And A Kickboxing Investment (BrokeAndBroker.Com Blog) In today's featured FINRA public customer arbitration against both UBS and Morgan Stanley, we have some curious facts and allegations. We go a mother and father and their daughter. We got the son-in-law stockbroker. We got a disputed kickboxing investment. We got some odd decisions to drop parties and not to call certain witnesses. We got allegations involving money that seems to have come and gone and come back without damage. All in all, it's a confusing case that becomes even more so after you read the arbitrators' decision. SEC Notices of Stay: Boilerplate language is beginning to appear in published SEC Notice to Stay noting that the SEC would immediately stay as of June 21, 2018, until at least July 23, 2018 all administrative proceedings before it or its ALJ in light of the Supreme Court's Lucia opinion. Federal Court Orders Jody Dupont of Anderson, South Carolina, and His Company, Open Range Trading LLC, to Pay $192,000 for Defrauding Customers in Connection with Offering and Selling Futures Trading System (CFTC Press Release 7743-18) The United States District Court for the District of South Carolina entered a Consent Order against Defendant Jody Dupont and an Order of Default Judgment against his company (Open Range Trading) in connection with the CFTC's allegations that Dupont and Open Range fraudulently solicited at least 175 clients and prospective clients to subscribe to a commodity futures day-trading system that generated buy and sell trading signals in various futures markets, including the E-mini S & P 500 Index, the Russell 2000 Index Mini, crude oil, and soybeans. The Consent Order requires Dupont to disgorge $92,000 pay a $100,000 civil monetary penalty; the Consent Order also enjoins Dupont from future violations and permanently prohibits Dupont from seeking registration with the CFTC and from trading for five years. READ the FULL TEXT ORDERS Man Sentenced to Prison for $1.1 Million Email Phishing Scam Olajide Abraham Eyitayo opened three banking accounts, which had a combined balance of under $5 as of April 25, 2016, on which date a Virginia-based trade association approved a payment of over $280,000 intended for a travel vendor, but the payment went to one of Eyitayo's accounts. The payment was in response to a "spoof" email impersonating that vendor that requested the payment information be changed to an account number belonging to Eyitayo. Over the next several months, Eyitayo's account received two more payments totaling over $1.1 million intended for the association's travel vendor which Eyitayo spent and laundered. After the victim association detected the fraud, Eyitayo told a variety of false and misleading stories to bank officials and law enforcement, and claimed that he worked in the lingerie business and falsely claimed that the first fraudulent deposit was for that business. Eyitayo pled guilty to wire fraud and was sentenced in the United States District Court for the Eastern District of Virginia to 32 months in prison.
As set forth in part in the SEC Opinion:
Robert J. Escobio appeals from a FINRA decision denying an MC-400 membership continuance application by Southern Trust Securities, Inc. ("STS"), a FINRA member, to remain a FINRA member while continuing to employ Escobio notwithstanding his statutory disqualification. FINRA denied the application because it found that the conduct underlying Escobio's statutory disqualification was egregious, the statutory disqualification was recent, and STS had failed to satisfy its burden of demonstrating that it was capable of providing stringent supervision over a statutorily disqualified individual such as Escobio. We base our findings on an independent review of the record, and we dismiss Escobio's appeal for the reasons set forth below.
Variable Annuities And Wall Street's Jurassic World (BrokeAndBroker.com Blog) Decades ago, Wall Street sold its soul when it embraced the so-called "financial superstore" model and integrated banking, mortgages, insurance, stocks, bonds, options, annuities, and futures under one leaky umbrella. The theory was that cross-selling would move the the old-fashioned brokerage firm onto a glitzy platform from which customers would be up-sold into a wide array of new and different financial products. In reality, that platform turned out to be little more than a plank from which many customers were prodded into walking to the end and then plummeting into the murky waters of financial ruin. Rather than protect consumers, Wall Street's regulators took on the role of cheerleaders and, at times, rigged the regulatory system so that it favored financial superstores over more local, smaller brokerage firms. The wise voices urging caution were marginalized as out-of-touch old-timers. Financial superstores may have taken control of Wall Street's Jurassic Park but they are little more than re-animated fossils of a bygone era. In the end, these financial dinosaurs cannot sustain themselves in the modern world. Court Enters Final Judgment Against Board Chairman Charged with Lying to Auditors (SEC Litigation Release No. 24174) The United States District Court for the Southern District of New York entered a final judgment against Stephen B. Pence, the former chairman and majority shareholder of General Employment Enterprises -- Pence was also former United States Attorney and Lieutenant Governor of Kentucky. The SEC had alleged that Pence misled the company's auditors and investors by concealing his knowledge regarding $2.3 million in missing company cash and several related-party transactions. Pence created the impression that he was acting independently as GEE's chairman, when he was in fact merely a figurehead working on behalf of convicted felon Wilbur Anthony Huff, transferred substantially all of the company's cash to a third party. Without admitting or denying the SEC's allegations, Pence consented to the entry of a judgment permanently enjoining him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-2 thereunder, ordering him to pay a $200,000 civil penalty, and permanently barring him from serving as an officer or director of a public company.