Securities Industry Commentator by Bill Singer Esq

October 19, 2018

United States of America, Plaintiff/Appellee, v. John Steven Blount, Defendant/Appellant (Opinion, United States Court of Appeals for the Fifth Circuit, 147-30623)
Blount was the subject of over 100 customer complaints during his period of FINRA registration from 1992 through 2003, which resulted in FINRA barring him in any capacity. See: "NASD Bars Louisiana Broker and Orders Restitution for Unsuitable Sales of Variable Annuities and Mutual Funds" (FINRA Release, January 12, 2004).
Blount disregarded FINRA's Order and by at least 2007 was acting as an investment advisor and stockbroker, during which time he targeted some 72 retirees via a $5.8 million Ponzi scheme that diverted their funds for his own benefit. FINRA forwarded a complaint in 2014 to the Louisiana Office of Financial Institutions citing Blount's violation of his 2003 Bar. In response to a federal criminal action, Blount pled guilty in the United States District Court for the 
Western District of Louisiana to wire fraud and affirmed that he had violated FINRA's Bar as part of his plea. Blount was sentenced to 235 months in prison plus 3 years supervised release and ordered to pay $4,313,173.22 restitution. Blount moved in District Court to vacate/set aside/correct his sentence on constitutional grounds that he had ineffective assistance of counsel. The court vacated his sentence and ordered a revised PSR. The court re-sentenced Blount to 188 months plus the same term of supervised release and restitution. 
On appeal to 5Cir, Blount asserts that the lower court's two-level prior administrative order enhancement was inappropriate because FINRA is a private self-regulator-organization and its Orders are not "prior administrative orders," and, further, even if they were, he had not violated same.The 5Cir Opinion sustains the district court's determination that FINRA's Order fell under the ambit of an administrative order by explaining, in part:

[T]he Government concedes that FINRA is "technically a private entity." The Government nevertheless argues that FINRA's order qualifies because FINRA "mirrors the typical governmental oversight body with respect to its responsibilities, authority, and procedure" and the SEC has formally tasked it with regulating the securities industry, "including conducting enforcement actions against individuals." Further, the Government emphasizes the plain error standard of review and urges that Blount's inability to cite Fifth Circuit precedent supporting his argument demonstrates that even if applying the administrative order enhancement to the FINRA order were error, it was certainly not a plain error.

As to Blount's argument that he did not violate the FINRA Order, he asserted that the cited misconduct involved sales of non-securities insurance products. that fell outside FINRA's jurisdiction. In contrast, the government argued that Blount admitted in his plea that he had engaged in securities trades in violation of the FINRA Order. In affirming the district court, the 5Cir Opinion finds in pertinent part that:

[W]hether Blount calls the investments he peddled insurance, annuities, or magic beans, they are substantively securities for the purposes of the Securities Exchange Act. 

Finally, to further rebut a conclusion that he violated the FINRA order by selling securities, Blount argues that his activity did not violate the order because that order was "imposed in his capacity as a licensed securities dealer working for a brokerage firm," but at the time of the offense, he operated "under an insurance license . . . and worked for himself." This practically redundant argument is likewise unpersuasive. FINRA's order does not bar Blount merely from working as a licensed broker affiliated with a brokerage firm, it further bars him from "associating with any [FINRA] member in any capacity." The fact that Blount was not affiliated with a brokerage firm at the time of the offenses is of no consequence. Blount violated FINRA's order when he advertised and sold financial products that meet the federal definition of "security." 

Still further, Blount's plea agreement and sworn statements amount to an unambiguous admission that he sold securities in violation of the FINRA order . . .

Bill Singer's Comment on Blount: You ever find yourself in the position where you agree with the outcome of a particular case but not the manner in which the rationale was created?  Sort of how you enjoy arriving at your destination but didn't particularly care for the trip. In that spirit, I don't find myself disapproving Blount's sentence as imposed and affirmed, but I'm not crazy about the 5Cir's analysis of how the order of a private, non-governmental entity (FINRA) rises to the statutory "administrative order." I'm even less enthused when the federal appellate court sort of rolls its eyes and uncomfortably blesses the district court's "administrative order" conclusion via the less-than-compelling explanation that the lower court "did not plainly err in determining that FINRA's order was within the terms" of the statute at issue. When a federal appellate court sustains a term of incarceration upon something as flimsy as a finding that a lower court did not commit "plain error," that's a tad too close for comfort for me.
The United States District Court for the Southern District of New York issued a Final Judgment by Default and a Consent Order for Final Judgment in response to a Complaint filed by the CFTC .against Gelfman Blueprint, Inc. (GBI) and its Chief Executive Officer Nicholas Gelfman. The Orders find that Defendants Gelfman and GBI, by and through its officers and agents and employees, operated a Bitcoin Ponzi scheme in which they fraudulently solicited over $600,000 from at least 80 customers.  Instead of having their funds pooled into "Jigsaw," a purported high-frequency, algorithmic trading strategy executed by Defendants' computer trading program, the funds were diverted to Ponzi-like payments to other customers. In order to conceal his fraud Gelfman staged a fake computer "hack" that supposedly caused the loss of nearly all customer funds. In addition to requiring GBI and Gelfman, respectively, to pay $554,734.48 and $492,064.53 in restitution to customers and $1,854,000 and $177,501 in civil monetary penalties, the Orders impose permanent trading and registration bans on GBI and Gelfman and permanently enjoin them from further violations of the Commodity Exchange Act and CFTC Regulations, as charged. READ the FULL TEXT:
Final Judgment 
Consent Order 

SEC Obtains Final Judgment Against Founder of Medical Marijuana Company (SEC Litigation Release No. 24318)
In a Complaint filed in the United States District Court for the District of Maine, the SEC alleged that Richard J. Greenlaw advertised on Craigslist and thereby raised about $500,000 from at least 59 investors by offering unregistered securities in 20 cannabis-related entities that he formed, which purportedly sold medical marijuana products that did not contain THC, the chemical compound responsible for most of marijuana's psychological effects. The Court entered a final judgment finding Greenlaw and the 20 entities in violation of the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933; and ordered permanent injunctions against Greenlaw and the entities from further violations of Sections 5(a) and 5(c) of the Securities Act, as well as ordering an additional conduct based injunction against Greenlaw. It also ordered Greenlaw to pay disgorgement and prejudgment interest of $340,142 and a civil penalty of $50,000.
A recurring theme in the Blog is the manner in which seemingly sensible, reasonable, and intelligent settlements of disputes just don't quite make it across the old finish line. Now, don't misunderstand me. I'm a lawyer and I've had clients prod, press, and push me to get a messy dispute settled. After I hammer out the terms, my client agrees to pay or to accept $X by a specific date. Some would think that such a milestone is the end of the process. A veteran lawyer such as me knows it's often only the beginning -- if even that. At some point, the excuses start.
Michael Siva, formerly a technology consultant in an investment bank's Research and Capital Markets Technology Group, pled guilty in the United States District Court for the Southern District of New York to one count of conspiracy to commit securities fraud and fraud in connection with a tender offer in connection with his role in an insider trading scheme based on material, nonpublic information misappropriated from an investment bank by Daniel Rivas, a former employee at the bank.  Siva, Roberto Rodriguez, Rodolfo Sablon, and Jeffrey Rogiers were charged in a 54-count Indictment for their involvement in three insider trading schemes, all stemming from information misappropriated by Rivas.  Rivas and an additional participant, James Moodhe, had previously pled guilty and are cooperating with the government in this investigation.  Between 2015 and 2017, Siva and Moodhe used Rivas's inside information to trade ahead of the public announcements of more than two dozen transactions, including numerous tender offers that yielded over $3 million in profits plus Siva earned thousands of dollars in commissions on the illegal trades entered on behalf of his clients.
In a Complaint filed in the United States District Court for the Northern District of California, the SEC charged Jean Danhong Chen, Tony Jianyun Ye, and Law Offices of Jean D. Chen with a fraudulent scheme that generated millions of dollars of undisclosed compensation from foreign investors seeking permanent U.S. residency through the EB-5 Immigrant Investor Program.  The Complaint alleges that the Chen, Ye, and the law firm, with the assistance of a personal friend, Kuansheng Chen, secured over $10 million in undisclosed commissions by selling EB-5 securities to hundreds of Chen's legal clients. Allegedly, Jean Chen and Ye secretly acquired and operated Golden State Regional Center LLC (an EB-5 regional center); and, thereafter, advised clients to invest in the center's projects without disclosing their ownership interest. Kai Hao Robinson allegedly assisted in the scheme by posing as the sole manager in control of Golden State when she was in fact merely a figurehead controlled by Jean Chen and Ye. Upon learning of the SEC investigation, Chen and Ye allegedly backdated documents and scrubbed other business records to conceal their role in the alleged scheme.   READ the FULL TEXT Complaint