Securities Industry Commentator by Bill Singer Esq

October 10, 2018
Without admitting the allegations, HSBC will pay $765 million civil penalty pursuant to the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") to settle claims related to its packaging, securitization, issuance, marketing and sale of residential mortgage-backed securities ("RMBS") between 2005 and 2007.  HSBC allegedly misrepresented to investors the quality of its RMBS and of its due diligence procedures. HSBC purportedly told investors that it selected 20% of the loan pool as an "adverse sample" based on "a proprietary model, which will risk-rank the mortgage loans in the pool;"  however, contrary to such representations, HSBC's RMBS trading desk allegedly influenced how the risk management group selected loans for the adverse portion of the sample. 

In 2017, the Federal Trade Commission received 4.5 million illegal robocall complaints - two and a half times more than in 2014. NY Attorney General Barbara D. Underwood and 34 other Attorneys General called on the Federal Communications Commission to create new rules to allow telephone service providers to block more illegal robocalls being made to unsuspecting consumers in New York and across the country. Scammers using illegal robocalls have evaded a call blocking order entered last year by the FCC. One tactic on the rise is "neighbor spoofing," a technique that allows calls - no matter where they originate - to appear on a consumer's caller ID as being made from a phone number that has the same local area code and exchange as the consumer. READ the FULL TEXT Comment of 35 AGs
In an Indictment filed in the United States District Court for the Northern District of Ohio, Romeo Vasile Chita was charged with racketeering, wire fraud conspiracy, conspiracy to launder money and conspiracy to traffic in counterfeit services in connection with an international cyber fraud ring that used malware to steal in excess of $4 million after taking people's passwords, personal identifying information, and bank account information. Based in Romania, Chita allegedly led a racketeering enterprise that operated in the United States, Romania, Canada, Croatia, Latvia, Hungary, Bosnia, China, Jordan, Malaysia and elsewhere. The group allegedly sent "phishing" emails containing "keylogger" malware purporting to be from the Better Business Bureau, the IRS, U.S. Tax Court, the National Payroll Records Center, and others. Captured confidential information was then used to withdraw funds from the victims' bank accounts. Also, the group allegedly engaged in online auction fraud, placing ads for non-existent cars and other expensive items on eBay, Craigslist,, and other websites.
Usually, a FINRA Arbitration involves a public customer's allegation about a stockbroker's failure to do something -- as in failing to enter my order, or failing to recommend a suitable investment, or failing to get my authorization to buy or sell. In today's Blog, we have a customer alleging that her stockbroker forced her to enter a Stop Loss order, which is typically utilized to protect against loss. As such, the lawsuit is not about a failure to do something but about something that got done. Now, don't get me wrong, there could be circumstances where a stockbroker over-reaches and effectively takes control of a customer's account. It happens. In such circumstances, you might argue that a stockbroker "forced" a transaction onto a defenseless customer. There's precedent for that. On the other hand, if a customer hasn't surrendered control of her account and she is aware that a Stop Loss order is active, then that customer can (should) cancel the order before the stop is activated and a sale occurs. What you can't do, however, is have it both ways. You can't keep the downside protection in place and then complain about it if your shares are sold. You know what . . . let me rephrase that, you can always complain about anything, and all the more so if you want to hire and lawyer and pay that advocate by the hour. Consider today's public customer arbitration.

SEC Obtains Final Judgment in Forex-Based Offering Fraud Case (SEC Litigation Release No. 24310)
In a Complaint filed int he United States District Court for the Eastern District of Virginia, the SEC 
alleged that Steve H. Karroum and his company FX & Beyond Corporation had defrauded investors in a foreign exchange trading program; also named as a relief defendant was his wife, Sahar Karroum, Following Mr. Karroum's death, the SEC substituted Sahar Karroum as heir and successor for Mr. Karroum as a defendant in the action. The Court granted the SEC's emergency motion to, among other relief, freeze certain proceeds that would otherwise be paid to Sahar Karroum from a life insurance policy owned by FX & Beyond; and, thereafter, entered a final judgment which ordered FX & Beyond to pay a civil penalty of $512,430 and disgorgement of $805,960, plus prejudgment interest of $74,266; enjoined FX & Beyond from violating the antifraud provisions of Section 17(a) of the Securities Act, and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, as well as the registration provisions of 5(a) of the Securities Act; and further enjoined FX & Beyond from directly or indirectly participating in the issuance, offer or sale of securities. The final judgment dismissed all claims against Mr. Karroum's widow, Sahar Karroum.
Former investment adviser Darrel Smith caused unauthorized withdrawals of over $2.4 million in funds from ten of his investment clients' accounts, and Smith used the stolen funds to pay expenses related to the operation of Permeate Refining, LLC, which operated a now-defunct ethanol plant. Following his guilty plea in the United States District Court for the Northern District of Iowa to one count each of wire fraud and aggravated identity theft, Smith, who had previously been sentenced to 13 months in  prison for payroll tax fraud.  was sentenced to 175 months in prison plus three years supervised release; and ordered to make $1,056,909.68 in restitution to ten victims and ordered to pay costs of prosecution in the amount of $2,947.35.  As set forth in the DOJ Release:

In sentencing Smith, Judge Reade noted that Smith was a skilled "con man" who used diversionary techniques, appeared to have an answer for everything, and "picked on" vulnerable investors, including the elderly.  Judge Reade stressed that Smith's sentence "brought on himself" Judge Reade increased Smith's sentence on account of the fact that he obstructed justice while the case was pending.  For example, Smith obstructed justice by enlisting the help of a relative in an attempt to dissuade one of his victims from seeking restitution and cooperating with the government in the case.  While in jail awaiting sentencing, Smith also convinced a Dubuque man to loan him $25,000.
The United States District Court for the District of Columbia entered a final judgment against Lawrence P. Schmidt in an SEC case brought against Schmidt and several entities he controlled, including Commercial Equity Partners, Ltd. and FutureGen Company. The SEC Complaint alleged that Schmidt raised nearly $22 million from over 200 unsuspecting investors who purchased notes from the various companies, siphoning off almost $2 million of investor funds for his own benefit, paying old investors with new investor money a la Ponzi, and ultimately firing all his employees and fleeing the country when his scheme collapsed. In granting the SEC's motion for a default judgment, the Court entered a final judgment against Schmidt ordering him to pay a disgorgement of $12,025,210, prejudgment interest of $1,717,982.11, and a civil penalty of $12,025,210; and enjoining him from violating the registration provisions of Section 5 of the Securities Act of 1933, and the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934, as well as Rule 10b-5 thereunder, and barring him from serving as an officer or director of a public company.

SEC Files Subpoena Enforcement Against Investment Company Trust and Trustee for Failure to Produce Documents (SEC Litigation Release No. 24308)
The SEC filed a subpoena enforcement action in the United States District Court for the Central District of California against the Saint James Holding and Investment Company Trust and its sole trustee, Jeffre James. The SEC is investigating a potential "pump-and-dump" scheme in the stock of Cherubim Interests, Inc., among other penny-stock companies, and the federal regulator had suspended trading in the company's (and other microcap issuers') securities . The SEC believes that Cherubim issued false public statements in January 2018 claiming that the company had executed a $100,000,000 financing commitment to launch an initial coin offering ("ICO") for St. James Trust, and that said false statements were intended to pump the stock price and trading volume. SEC subpoenas sought the production of documents related to the cited public statements, as well as any agreements or communications among St. James Trust, James, and Cherubim; but James and St. James Trust have not responded.
FINRA posted a comprehensive and thoughtful  online primer on digital assets. Among the topics are 
Blockchain Technology
Initial Coin Offerings (ICOs)
In a crininal complaint filed in the United States District Court for the Southern District of New York, certified public account and CPA firm Managing Partner Steen L. Henning was charged with wire fraud in connection with his allegedly false claims to have entered into multi-million-dollar intellectual property deals, which purportedly defrauded investors out of $2 million. Henning was the Partner-in-Charge of Advisory Services and served on the firm's Executive Committee.  Previously, he was  university accounting professor and had served as an Academic Fellow in the SEC's Office of the Chief Accountant. Allegedly, in June 2008, while employed at the accounting firm, Henning formed what would later become known as OpportunIP, LLC, of which he was the Chief Executive Officer and owned an interest in OpportunIP through an entity known as the Henning Family Partnership ("HFP").  Members of the accounting firm also owned interests in OpportunIP. I cannot do justice to the complex nature of the fact pattern in this matter within the confines of this brief paragraph; and, according, READ the FULL TEXT Complaint