Securities Industry Commentator by Bill Singer Esq

November 16, 2018

Dramatic Reversal of High Profile Libel Case Involving FINRA NAC Panelist Plaintiff Christopher Brummer and Defendant Benjamin Wey 
http://www.courts.state.ny.us/reporter/3dseries/2018/2018_07843.htm
The background of this matter is briefly synopsized in the NYS Appellate Division's Decision and Order as follows:

Plaintiff, a law professor, sat on the appellate panel of the Financial Industry Regulatory Authority, Inc. (FINRA) that affirmed the lifetime ban imposed on two stockbrokers, nonparties Talman Harris and William Scholander. Defendants allegedly control a website known as TheBlot, a tabloid-style platform that has published a substantial quantity of material attacking FINRA's ban of Harris and Scholander and the FINRA personnel, including plaintiff, who were involved in adjudicating that case. The attacks on plaintiff have included -- in addition to name-calling, ridicule and various scurrilous accusations -- juxtapositions of plaintiff's likeness to graphic images of the lynching of African Americans, and statements that the banning of Harris, who is African American, constituted a "lynching."

In this action, plaintiff, who is also African American, seeks, as here relevant, an injunction against the posting on TheBlot of material attacking or libeling him. In this regard, he argues that the lynching images posted alongside photographs of him on TheBlot should be understood as a threat of violence against himself. In the first order under review, entered June 6, 2017, Supreme Court granted plaintiff's motion for a preliminary injunction, enjoining defendants "from posting any articles about the Plaintiff to TheBlot for the duration of this action" and directing them to "remove from TheBlot all the articles they have posted about or concerning Plaintiff[.]" Defendants filed this appeal and then moved this Court for a stay of the preliminary injunction. After an interim stay of the preliminary injunction was granted by order dated June 15, 2017, this Court entered an order, dated August 1, 2017, lifting the stay

"to the extent of directing defendants to remove all photographs or other images and statements from websites under defendants' control which depict or encourage lynching; which encourage incitement of violence; or that feature statements regarding plaintiff that, in conjunction with the threatening language and imagery with which these statements are associated, continue to incite violence against plaintiff" 

This Court's order of August 1 further provided that the interim stay of the preliminary injunction was lifted "so as to prohibit defendants from posting on any traditional or online media site any photographs or other images depicting or encouraging lynching in association with plaintiff (id.)." . . .

Finding the speech at issue "highly offensive, repulsive and inflammatory, the Appellate Division nonetheless found that the speech did not meet the exacting constitution standard necessary to allow for prior restraint. The Court ruled that in order to justify prior restraint, a party is required to demonstrate that such speech is "likely to produce a clear and present danger of a serious substantive evil that rises far above public inconvenience, annoyance or unrest." Pointedly, the Appellate Division found that Plaintiff had not established that:

[a]ny reasonable viewer would have understood the posts as threatening or calling for violence against him. Moreover, even if the posts could reasonably be construed as advocating unlawful conduct, plaintiff has not established that any "such advocacy is directed to inciting or producing imminent lawless action and is likely to incite or produce such action" . . .

Accordingly, the Appellate Division unanimously reversed the Supreme Court's Order and vacated the injunction. Further, the Appellate Division unanimously reversed the lower court's order holding defendants in civil contempt, and, upon remand, the lower court is directed to hold proceedings on the contempt motions to determine whether defendants exercised control and authority over the subject website at the times of the alleged contemptuous conduct. 
Readers are urged to consider "Setting The Record Straight By Bill Singer, Esq." (BrokeAndBroker.com Blog, April 9, 2018) 
http://www.brokeandbroker.com/3912/brummer-finra-singer/

https://www.justice.gov/usao-sdca/pr/wells-fargo-personal-banker-indicted-money-laundering
In an Indictment filed in the United States District Court for the Southern District of California, Luis former Wells Fargo personal banker Fernando Figueroa was charged with Conspiracy to Launder Monetary Instruments, Conspiracy, and Operation of an Unlicensed Money Transmitting Business. The charges were in connection with allegations that an international money laundering organization had laundered about $19.6 million dollars in narcotics proceeds on behalf of Mexican-based drug trafficking organizations, including the Sinaloa Cartel. In furtherance of that crime, the Indictment alleged that individuals were recruited to serve as "funnel account holders" and open personal bank accounts at Wells Fargo Bank and other banking institutions; and, thereafter, "couriers," travelled to San Diego, Los Angeles, the East Coast, and other U.S. cities, where they picked up and transported the narcotics proceeds, which were then deposited into the funnel bank accounts. 

https://www.sec.gov/news/press-release/2018-262
In a Complaint filed in the United States District Court for the Eastern District of New York, the SEC charged Mark Burnett, Jeffrey Miller, Christian Romandetti, Frank Sarro, Anthony Vassallo, and Elite Stock Research Inc with defrauding elderly and unsophisticated investors through the manipulation of the company's shares that yielded over $3.3 million in profits and over $560,000 in kickbacks for Romandetti. In 2017, the SEC Elite Stock Research, as well as another Long Island boiler room and 13 individuals, with bilking victims out of more than $10 million through high-pressure sales tactics and lies about penny stocks. Seven of those individuals have pleaded guilty to parallel criminal charges brought by the U.S. Attorney's Office for the Eastern District of New York.  The SEC's litigation against the 13 individuals is continuing. In the most recent Complaint, the SEC alleges that Romandetti and the other defendants duped more than 100 victims in a scheme that inflated First Choice's stock price from less than $1 per share to $3.40 per share; and that the defendants used multiple accounts to disguise their trading, engaged in manipulative trading practices, and hired Elite Stock Research, a boiler room run by defendant Anthony Vassallo, to promote First Choice to vulnerable investors, some of who invested retirement savings. In a parallel action, the U.S. Attorney's Office for the Eastern District of New York announced parallel criminal charges against Romandetti, Burnett, Miller, and Sarro. READ the SEC Complaint 
https://www.sec.gov/litigation/complaints/2018/comp-pr2018-262.pdf

Stockbroker Victimized By Mother In Law Complaint About Stolen Funds (BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/4292/FINRA-Mother-In-Law/
All's well that ends well, except, when, by the time it ends, you've been put through the ringer and emerge much worse for the wear and tear. In a recent FINRA arbitration, a stockbroker seems to have been put through hell by the false accusations of her former mother-in-law. The focus here is on "former," which, you know, pretty much sets the stage in terms of all your questions about "why" or "how come." Suffice it to say, the victimized stockbroker emerges from the regulatory ringer with an expungement recommendation, but I doubt that she feels the outcome off-set the stress she was put through.

https://www.justice.gov/usao-edny/pr/brooklyn-businessman-pleads-guilty-defrauding-investors-through-two-initial-coin
Maksim Zaslavskiy pled guilty in the United States District Court for the Eastern District of New York to conspiracy to commit securities fraud in connection with two Initial Coin Offerings (ICOs): REcoin Group Foundation, LLC (REcoin) and DRC World, Inc., also known as Diamond Reserve Club (Diamond). Although Zaslavskiy had never bought real esate or diamonds, he fraudulently marketed RECoin as "The First Ever Cryptocurrency Backed by Real Estate," and subsequently touted Diamond as an "exclusive and tokenized membership pool" hedged by diamonds; and the purported certificates he provided to investors were not backed by the promised blockchain technology.  Previously, the Court had denied Zaslavskiy's motion to dismiss the Indictment based upon assertions that the securities laws did not apply to cryptocurrency offerings and were unconstitutionally vague. A parallel SEC civil action is pending against Zaslavskiy. As set forth in part in the DOJ Release:

[T]he court further held that a jury was entitled to decide if REcoin and Diamond tokens were securities.  "Stripped of the 21st-century jargon," the court wrote, referring to Zaslavskiy's ICO marketing solicitations, the indictment described a "scam, replete with common characteristics of many financial frauds."  The court added, "simply labeling an investment opportunity as 'virtual currency' or 'cryptocurrency' does not transform an investment contract -- a security -- into a currency," and does not, therefore, remove the offerings from the ambit of securities law. 
https://www.cftc.gov/PressRoom/PressReleases/7840-18
In a Complaint filed in the United States District Court for the Southern District of New York, the CFTC charged Kevin P. Whylie, Matthew James Zecchini, and the New York hedge fund they co-founded, Algointeractive Inc. with engaging in a fraudulent scheme to solicit at least $300,000 from members of the public to participate in a pooled investment vehicle for futures trading; misappropriating and commingling commodity pool participants' funds; issuing false account statements to pool participants to conceal their trading losses and misappropriation; and engaging in false advertising, and failing to register with the CFTC. The Court entered a Consent Order approving a settlement between Whylie and the CFTC; and an Order Awarding the CFTC a Default Judgement against Zecchini and Algointeractive, who failed to appear. The Consent Order requires Whylie to pay a $100,000 civil monetary penalty; and the Default Order requires Zecchini and Algointeractive to pay, jointly and severally, a $721,650 civil monetary penalty. Further, the Defendants are ordered to pay $240,550 total in restitution to pool participants, and permanent trading and registration bans are imposed on the Defendants, who are permanently enjoined them from further violations of the Commodity Exchange Act and CFTC Regulations. READ the
Complaint 
https://www.cftc.gov/sites/default/files/2018-11/enfalgointeractivedefaultjudgement102218.pdf
Consent Order 
https://www.cftc.gov/sites/default/files/2018-11/enfkevinpwhylieconsentorder102218.pdf
Default Judgement
https://www.cftc.gov/sites/default/files/2018-11/enfalgointeractivedefaultjudgement102218.pdf

FINRA Fines and Sanctions Rep for Corporate Borrowing from Lawyer.
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Ronald Jacob Dawson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of  Ronald Jacob Dawson, Respondent (AWC 016050800401, November 14, 2018). 
http://www.finra.org/sites/default/files/fda_documents/2016050800401%20Ronald
%20Jacob%20Dawson%20CRD%205418933%20AWC%20va.pdf
If you're having trouble with directly accessing the AWC per the PDF link, it may be that FINRA requires you to agree to its Terms of Use for its portal. I mean, you know, this is a state secret that must be guarded from prying eyes. Oh, wait, you're right, FINRA claims to be a regulator protecting the public's interest but behind closed doors requiring a special knock and password. To better understand the issue, try the links for the United States Securities and Exchange Commission or the Department of Justice and see if you have to agree to Terms of Service before access. Yeah, I know, everything has to be monetized these days. http://www.finra.org/industry/finra-disciplinary-actions-online (The Home Page with TOU)
As set forth under the AWC's ""FACTS AND VIOLATIVE CONDUCT":

In August 2016, FINRA began an investigation into this matter after receiving the Firm's July 27, 2016 Form U5 indicating that Dawson was under internal review. In June 2016, in anticipation of leaving Merrill Lynch and affiliating with another firm, Dawson borrowed $250,000 from a customer, an attorney with whom he also had a personal friendship. Dawson borrowed the money through a corporation formed to conduct business at his new firm and used the borrowed funds to remodel office space that he planned to occupy. The loan was documented. Dawson timely repaid the loan with interest in August 2016. At no time did Dawson notify or seek approval of the loan from Merrill Lynch.

FINRA Rule 3240 prohibits registered representatives from borrowing money from a customer, unless his or her member firm has written procedures allowing the borrowing and unless certain other notification and approval conditions are met. In this instance, Merrill Lynch's written procedures prohibited all borrowing from customers, except where the customer was also a family member of the registered person. The customer at issue above was not a family member. By virtue of the foregoing, Dawson violated FINRA Rules 3240 and 2010.

In accordance with the terms of the AWC FINRA imposed upon Dawson a $5,000 fine and a 45-day suspension from association with any FINRA member firm in any capacity. 
Bill Singer's Comment: Not to split too many hairs here but, FINRA Rule 3240 states in pertinent part that:

3240. Borrowing From or Lending to Customers
(a) Permissible Lending Arrangements; Conditions
No person associated with a member in any registered capacity may borrow money from or lend money to any customer of such person unless:

If I read the AWC literally, which, go figure, I do, the charge is NOT that Dawson (a "person associated with a member") borrowed money from a customer but that:

[D]awson borrowed the money through a corporation formed to conduct business at his new firm and used the borrowed funds to remodel office space that he planned to occupy. . .

Ummm . . . no, that's a bit too slick for me. I don't understand how Dawson borrowed money "through" a corporation. I'm guessing that in the Loan Agreement, the corporation is the borrower and the lawyer the lender -- and if that's not the case, I sure as hell wish FINRA would stop getting so cute with these statements of facts and specify whether the loan was between Dawson and the lawyer or between the corporation and the lawyer. If the latter, then FINRA is welcome to assert that the corporation was an alter ego of Dawson and/or that the loan agreement actually was between Dawson and the lawyer. My focus here is that the corporation is NOT "a person associated with a member" and, as such, would not fall under the rule's purview or FINRA's jurisdiction absent compelling facts and circumstances, which, if they exist, need to be set forth in the AWC.

https://www.sec.gov/litigation/complaints/2018/comp-pr2018-263.pdf
In an Indictment filed in the United States District Court for the Eastern District of New York, the SEC charged Giga Entertainment Media Inc. and five of its former officers and directors: Gary Nerlinger, Jarret Streiner, Lawrence Silver, Alfred Colucci, and Charles Noska, with fraud in connection with a scheme to mislead investors. Without admitting or denying the findings, Giga, Nerlinger, Silver, Colucci, Noska, and Streiner consented to the entry of an SEC order finding that they violated the antifraud provisions, and a finding that Giga violated registration provisions of the federal securities laws. Colucci and Noska each agreed to a $25,000 penalty, and Streiner agreed to a $15,000 penalty. Nerlinger, Silver, and Colucci each agreed to a permanent officer and director bar, and Streiner agreed to a five-year bar. As set forth in part in the DOJ Release:

According to the SEC's complaint, between February and August 2016, the company bought at least 559,662 downloads from outside marketing firms to boost the profile of the company's mobile app, SELFEO. These firms provided Giga with a shortcut to propel its app to the top of the Apple Store download rankings. But instead of disclosing the real cause of the app's artificial meteoric rise, the company misled its shareholders into believing that this success was due to traditional marketing tactics like billboards and radio advertisements. The complaint alleges that when the company stopped paying for downloads in August 2016, the app's rankings on the Apple Store plummeted. Rather than come clean about the fact that the spike in downloads was a result of paid download campaigns, the company, Nerlinger, Streiner, and Colucci lied and told shareholders that the number of downloads continued to grow at the same high rate. Further, Nerlinger, Silver, Colucci, and Noska lied and falsified documents to conceal Nerlinger's role as Giga's de facto CEO to prevent the investors from discovering his prior criminal conviction for mail fraud.

http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2018-039.pdf
FINRA filed a proposal with the SEC to amend  its Rule 4570. As set forth in part in the "Text of the Propsed Rule Change," the proposed amendments will:

(1) provide a member that is filing a Form BDW (Uniform Request for Broker-Dealer Withdrawal) the option of designating another FINRA member as the custodian of its books and records on the form; (2) clarify the obligations of the designated custodian; and (3) require the designated custodian to consent to act in such a capacity.

https://www.sec.gov/litigation/litreleases/2018/lr24351.htm
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged the town of Ramapo; its local development corporation, Ramapo Local Development Corp. ("RLDC").; town officials Aaron Troodler, Nathan Oberman and Michael Klein; and former Ramapo Town Supervisor, Christopher P. St. Lawrence, with fraud for hiding a deteriorating financial situation from municipal bond investors. All parties have now settled. 
The Court entered final judgment against St. Lawrence and ordered him to pay $327,000 in civil penalties; and permanently enjoined him from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. 
The Court had previously permanently enjoined the Town and RLDC from violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and, additionally, imposed various undertakings on the Town and RLDC, among which were retention of an independent consultant and Auditing Firm. Further, for a period of three years from the date of the entry of the Judgment, the Town and RLDC may not participate in the offer and sale of any municipal securities for which the Town and RLDC are issuers or obligated persons unless the Town and RLDC have, prior to each such offering retained an Independent Disclosure Counsel 
The Court had previously permanently enjoin Troodler, Oberman and Klein from violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Oberman was ordered to pay $10,000 in civil penalties and Klein was ordered to pay $25,000 in civil penalties; and both were required resign from their employment with Ramapo, N.Y. and prohibited for five and seven years, respectively, from being employed by Ramapo. Oberman and Klein consented to their respective final judgments without admitting or denying the allegations in the SEC's complaint. Troodler previously pled guilty to criminal charges in the parallel criminal case.
READ the SEC Complaint https://www.sec.gov/litigation/complaints/2016/comp-pr2016-68.pdf

In a Complaint filed in theThe SEC's complaint, filed on June 29, 2017 in the United States District Court for the Northern District of Illinois, the SEC alleged that former Chief Executive Officer Nandu Thondavadi and former Chief Financial Officer Dhru Desai stole more than $4 million from Schaumburg, Illinois-based Quadrant 4 System Corp. ("QFOR") over a nearly five-year period; and that they caused the company to understate its liabilities and inflate its revenues and assets, evading scrutiny by lying to the company's auditors and providing them with forged and doctored documents. After Thondavadi and Schaumburg were arrested and criminally charged with wire fraud and certifying false financial reports, QFOR announced their resignations and disclosed that the financials were not reliable and needed to be re-stated. Desai pled guilty to wire fraud and he was sentenced to 39 months in prison and ordered to pay $2,869,226 in restitution (jointly and severally with Thondavadi). A Final Judgment on the SEC's action was entered against Desai that imposed a permanent injunction, disgorgement of ill-gotten gains totaling $1,293,694, prejudgment interest thereon of $150,117, and a $184,767 civil penalty; thereafter, the SEC suspended him from practicing before the Commission as an accountant,