Securities Industry Commentator by Bill Singer Esq

October 26, 2018

United States of America, Plaintiff/Appellee, v. Kulwant Singh Sandhu, a/k/a Ken Sandhu, Defendant/Appellant (Memorandum, United States Court of Appeals for the Ninth Circuit, 17-10265)
Defendant Sandhu was convicted by jury in the Eastern District of California on two counts of making harassing telephone calls to the Securities and Exchange Commission and the Financial Industry Regulatory Authority in violation of 47 U.S.C. § 223(a)(1)(D). "Tracy Man Convicted of Making Harassing Phone Calls to U.S. Securities & Exchange Commission Employees and Another Individual" (DOJ Release) As set forth in part in the DOJ Release:

According to evidence presented at trial, since at least 2012, Sandhu has been making harassing phone calls to personnel at the U.S. Securities and Exchange Commission (SEC), in Washington, D.C., and other private individuals. During 2015, Sandhu placed over 3,000 harassing phone calls to SEC employees, leaving at least 350 lengthy voicemails and also made hundreds of phone calls to another nongovernmental person. According to the evidence at trial, many of Sandhu's phone calls to employees and his voicemails were profanity-filled tirades that repeatedly called for SEC personnel and others to be, among other things, rounded up, publicly hanged, water-boarded, burned alive, shot, and blown up with rockets and tanks. His comments were often sexually graphic and targeted individuals.

Sandhu appealed after being sentenced by the District Court to 60 months probation (and yes, that's NOT a typo. The District Court declined to sentence Sandhu to a term of incarceration!). The 9Cir found that the District Court had properly instructed the jury and did not omit any required elements, and, pointedly, the lower court did not err in failing to give Defendant's proposed instructions regarding the First Amendment. Essentially, 9Cir affirmed that Sandhu was not convicted for any "speech" but, to the contrary, for his conduct as evidenced by "the sheer number of calls, as well as the ensuing conversations evidencing the intent Sandhu had in making those calls."

In the Matter of Oriental Dragon Corp. (SEC ALJ Order Granting Motion to Pursue Alternative Service; Admin. Proc. Rul. Rel. No. 6252; Admin. Proc. File No, 3-18450)
The SEC Division of Enforcement moved to request that SEC Adminstrative Law Judge James E. Grimes allow service of the Order Instituting Proceedings ("OIP") via Federal Express on Respondent Oriental Dragon Corp via its last known address in the Cayman Islands and also by email to the company's Chief Executive Officer. Since the initiation of proceedings in April 2018, the Division has unsuccessfully attempted to serve Respondent via the U.S. Postal Service at Respondent's place of incorporation in the Cayman Islands. The SEC Rules of Practice allow service of an OIP on a foreign corporation by "any form of mail . . . that requires a signed receipt," "is reasonably calculated to give notice," and is not "prohibited by the foreign country's law." ALJ Grimes notes that email is not a form of mail requiring a signed receipt; and it is unclear whether the SEC's Rules countenance Federal Express as a form of mail. Notwithstanding, the ALJ notes that the Rules provide for service on a foreign entity "[b]y any other means not prohibited by international agreement, as the . . . hearing officer orders." As to the Federal Express option, the ALJ notes that Due Process requires "notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections;" however, the ALJ admonishes that Division has not explained how it knows that the Cayman Islands address is associated with Respondent. Accordingly, the ALJ orders in using Federal Express service, the Division must establish in its service declaration that the address is a valid address for Respondent to receive notice. As to the proposed e-mail service, the ALJ states that [Ed: footnotes omitted]:

There is a potential due process concern, however. Some courts have indicated that one could demonstrate that e-mail service comports with due process by showing that the parties have previously communicated by e-mail. Here, the Division states that it is "aware of an email address" used by Respondent's CEO, but does not describe any prior successful e-mail communications with the CEO. Therefore, although the Division may attempt to send the OIP to Respondent's CEO by e-mail, I cannot determine at this juncture that the mere act of sending the e-mail, without any reply from the CEO, will constitute service. After the Division files a status report about its attempt, I will determine whether its attempt to serve by e-mail was effective. The Division may also include in its report any prior e-mail communications it has had with the CEO. 

Page 5 of the ALJ Order
Few things are more frustrating for Wall Street's customers than to believe that they were victimized by one of the industry's large broker-dealers and then find out that their disputes must be adjudicated via mandatory arbitration before the Financial Industry Regulatory Authority ("FINRA"). For many investors the whole mandatory arbitration route comes as a surprise. Yes, as it turns out, there was a mandatory arbitration clause buried among many, many papers that were part of the new account onboarding package. Remember all those yellow-arrow-stickies indicating sign here, and here, and here, and here too, oh, and don't forget here too? Yup, you sorta signed away your right to sue in a court. Making matters worse, it turns out that the mandatory arbitration is going to be conducted by FINRA, which, after you do some belated online research, looks less like an independent industry regulator and more like a glorified trade group controlled by its large broker-dealers. All of which brings us to a recent lawsuit in which one angry UBS Financial Services customer was not prepared to go with the flow. Her lawyer truly came up with some clever and persuasive legal arguments against enforcing the mandatory arbitration agreement.  The thing with clever and persuasive legal arguments is that they don't always result in the desired verdict.
According to federal prosecutors brothers,Jehu, Learned, and Adam Hand engaged in a pump-and-dump scheme involving the Crown Marketing microcap company, which purportedly owned a patented drug delivery technology. Jehu Hand incorporated Crown in 2010 and issued stock to front companies that he secretly controlled. In 2012, Jehu enlisted his brothers Adam and Learned, with Learned becoming Crown's Chief Executive Officer. Learned put out misleading press releases about Crown; and Adam traded and sold the company's.Crown was presented as having revolutionary drug-delivery technology, when in actuality there was no real commercial interest in the product. Federal prosecutors alleged that the brothers sold over 23 million shares of Crown stock, causing over $1.5 million in investors' losses. In another scheme involving the stock of Greenway Technology, the conspirators again used front companies to conceal their control over the vast majority of Greenway's stock, which became available for sale to the public after Jehu Hand authored and sent several false opinion letters to the transfer agent and brokerage firms. The conspirators hired stock promoters to send blast e-mails to potential investors touting Greenway as a company on the verge of acquiring hotels which would cater to gay and lesbian travelers, when in fact the company lacked the requisite funds to acquire any such properties. Adam Hand and Learned Hand pled guilty to Informations charging each with conspiracy to commit securities fraud. Jehu Hand was convicted after a 13-day trial of conspiracy, securities fraud and wire fraud. Adam Hand was sentenced in the United States District Court for the District of Massachusetts  to 30 months in prison and three years of supervised release; and Jehu Hand was sentenced to 66 months in prison plus three years of supervised release.
After a seven-day jury trial in the United States District Court for the Southern District of New York,  Mencham Abramov and Sholom Muratov were convicted of conspiring to commit mail fraud in connection with their defrauding diamond sellers in Mumbai, India out of over $12 million in loose a/k/a "melee" diamonds. Federal prosecutors alleged that the scheme involved numerous misrepresentations, including but not limited to: (i) the defendants' corporate affiliations; (ii) the longevity and track records of those corporations; (iii) that the defendants were not affiliated with one another, and, most significantly; (iv) purporting to agree to payment terms proposed by the victim merchants in order to induce those merchants to release diamonds without having received full payment. Ten other defendants have previously pled guilty in connection with their participation in this and related schemes.
In a Superseding Indictment filed in the United States District Court for the Southern District of New York, Tan Wee Beng a/k/a/ "WB" (who remains at large) was charged with conspiracies to violate the International Emergency Economic Powers Act (the "IEEPA"), to commit bank fraud, to commit money laundering, and to obstruct the lawful functions of United States Department of the Treasury's Office of Foreign Assets Control ("OFAC"), as well as with substantive counts of bank fraud and money laundering. The Indictment alleges that Beng conspired to use the U.S. financial system to conduct millions of dollars' worth of transactions to finance shipments of goods to the Democratic People's Republic of Korea by a Singapore-based commodities company of which Beng is a director and part-owner. In addition to the pending Indictment, OFAC designated Beng, the company, and another affiliated entity for sanctions.
READ the FULL TEXT Indictment
If it hasn't happened to you it has probably happened to someone you know: individuals purporting to IRS employees telephone and threaten legal action, arrest, and imprisonment for a supposed tax debt; and demand that victims wire  money utilizing MoneyGram, Walmart-2-Walmart Money Transfer, and other wire-transfer services. To date, some  6,282 nationwide victims  who lost about $10,735,762.61 have been identified. In the United States District Court for the Eastern District of Arkansas, Yosvany Padilla, the leader of one such IRS conspiracy, was sentenced to 135 months' imprisonment plus two years of supervised release, and ordered to repay about $9 million in restitution. READ the FULL TEXT Indictment The following dispositions have occurred for the remaining Defendants:
  • Jeniffer Valerino Nuñez, who collected over $1.3 million in wire transfers from more than 1,050 victims, was given 47 months' imprisonment, plus three years of supervised release, and ordered to repay about $2.5 million in restitution; 
  • Esequiel Bravo Diaz, who collected approximately $115,000 from 350 victims, was given 47 months' imprisonment plus two years' supervised release, and ordered to repay about $115,000 in restitution; 
  • Dennis Delgado Caballero, who collected more than $1.1 million in wire transfers from 950 different victims and recruited others into the scheme, was given 72 months' imprisonment, plus three years of supervised release, and ordered to repay about $2.5 million in restitution; 
  • Angel Carrillo, who collected more than $1.3 million in wire transfers from more than 750 people, was given 72 months' imprisonment plus three years of supervised release, and and ordered to repay $1.3 million as restitution. 
  • Defendants Elio Carballo Cruz, Alejandro Valdes, and Alfredo Echevarria Rios have pled guitly and are awaiting sentencing; and
  • Defendant Ricardo Fontanella Caballero is awaiting trial.
Jesse Wells Haug, the owner of a Twin Cities-based construction company called 7-10 Services, LLC, pled guilty in the United States District Court for the District of Minnesota to one count of wire fraud in connection with defrauding two real estates investors out of $880,000. Haug was sentenced to 49 months in prison. Haug falsely represented that he would use investors' money to purchase and renovate residential real estate, and, thereafter, share the profits when the properties were re-sold, or "flipped." Haug spent the investment money on personal expenses, including credit card bills, and never purchased or sold any of the properties.

Opening Statement at the SEC Staff Roundtable on Market Data and Market Access (SEC Director, Division of Trading and Markets, Brett Redfearn)
In his opening remarks, Director Redfearn muses, in part:

Today, a key, overarching issue for this roundtable is whether, despite the Commission's belief in 2005 that retaining the existing SIP model would uphold the integrity and affordability of core data, a series of factors, including significant technological advances and new proprietary data offerings, has led to the very result that the Commission hoped to avoid. Technology has greatly transformed the U.S. equity markets. This transformation raises fundamental questions for our two-tiered system of market data and market access, including:
  • Does SIP data, with its latencies and content differentials compared to proprietary data, meet the basic needs of market participants in today's algorithmic markets? Or are the exchanges' proprietary data products and access services necessary to satisfy competitive forces and regulatory duties? 
  • And, does SIP data alone still qualify as "core" data, or have we inadvertently evolved to a model in which the purchase of an additional set of proprietary data and access products is mandatory for core data?
In his statement, SEC Commissioner Roisman encapsulates his thoughts, in part, as follows:

To sum up, I believe it is important for the Commission to discern where market forces versus regulation are driving demand for premium products and services versus SIP products, as well as how retail investors are benefiting from our regulation in this area. Any change in the Commission's approach to market data and access will inevitably affect today's market dynamics. As regulators, it is incumbent upon us to understand, as fully as possible, the incentives our actions generate and, on this basis, decide whether the benefits we aim for are worth the consequences (including costs and complexity) that will ensue.