Securities Industry Commentator by Bill Singer Esq

April 17, 2019

Man Sentenced to 58 Months for Darknet Credit Card Scheme (DOJ Release)
Odis Edwards pled guilty in the United States District Court for the Northern District of Texas to conspiracy to commit access device fraud and was sentenced to 58 months in federal prison. As far as pleas and sentencings go, that's about as cut-and-dry as it gets. Now for the oddball stuff as set forth in all its glory in the DOJ Release:

In plea papers, Mr. Edwards admits he stole more than 1,200 credit and debit card numbers via the darknet and internet chat rooms. He and his co-conspirators used counterfeit cards to book more than $250,000 in rooms and incidentals at hotels around Dallas. 

An agent testified in Court on Monday that Mr. Edwards sub-rented the rooms to drug dealers and pimps at a fraction of their true cost.

Hotel personnel became suspicious when multiple people racked up hefty room service bills, all charged to Mr. Edward's account. Inside the rooms, law enforcement officers found altered credit cards as well as notebooks containing what appeared to be credit card numbers and URLs for digital credit card number generators.
A 34-count federal indictment was filed in the United States District Court for the Southern District of Florida on Dec. 6, 2016, against Jesus Gerardo Gutierrez Rojas, Maria de Guadalupe Alexandra Podesta Bengoa, Virgilio Ignacio Polo Davila, and Omar Alfredo Portocarrero Caceres who were arrested in Peru in late 2017, and have remained incarcerated in Peru pending their extradition to the United States. Having been extradited, the Defendants now face an unsealed Indictment charging them with managing and operating Peruvian call centers that placed calls to Spanish-speaking United States residents, many of whom were elderly. As set forth in part in the DOJ Release:

[P]odesta, Polo, Portocarrero, and their employees in Peru used Internet-based telephone calls and claimed to be attorneys and government representatives to threaten victims in the United States. The callers falsely claimed that victims failed to pay for or receive a delivery of products. The callers also falsely claimed that victims would be sued and that the companies would obtain large monetary judgements against them. Some victims were also threatened with negative marks on their credit reports, imprisonment, or immigration status. The callers said these threatened consequences could be avoided if the victims immediately paid "settlement fees." Many victims made monetary payments based on these baseless threats.
Some say that Wall Street's Employee Forgivable Loans (also known as a "Promissory Notes" or  "EFLs") is a charade -- according to that line of thought, these are really signing bonuses or retention bonuses masquerading as loans. Frankly, that's one hell of a masked ball but the courts generally (but not always) sustain these arrangements as loans requiring repayment. As it turns out, it proves quite the uphill battle to argue that the promissory notes you signed weren't meant to be enforced; or that the provision in the agreement you signed whereby you agreed to repay any loan balances upon termination of registration. was just so much legalese. Yeah . . . I know . . . I've heard it all. It was a wink-wink-nudge-nudge transaction. It was meant to be a bonus. Good luck with that. Oh, and by the way, should your former firm pursue collection of your EFL balance, you better make sure that you timely file an Answer and that you show up at the designated dates and times for all the hearings. And make sure that your address-of-record is current. As shown in a recent FINRA EFL arbitration, an up-to-date address isn't all that easy to accomplish, and even if you think everyone knows where you are and where you aren't, that may not be enough to ensure that you get notice.

4th Circuit Says Time Ran Out On Claims by Alleged Victims of Annuity Salesperson Who Committed Suicide. Alfred L. Snapp, Jr., Betty V. Snapp, and Sharon K. Snapp, Plaintiffs/Appellants, v. Lincoln Financial Securities Corporation, Riversource Distributors, Inc., and Riversource Life Insurance Company (Opinion, United States Court of Appeals for the Fourth Circuit, 18-1344 / April 16, 2019)  There are times when no amount of paraphrasing or extracting will do justice to what is often a dramatic, poignant rendition of a fact patter in the source document. To that extent, consider this narrative from the 4Cir's Opinion:

A retired couple and their daughter-in-law brought this action alleging that they were fraudulently induced to purchase financial products by a representative of the Lincoln Financial Securities Corporation. According to the plaintiffs, Lincoln's representative falsely assured them that the products, known as variable annuities, would pay out a death benefit equal to the amount they invested, when in fact, their financial statements showed that their death benefits were declining while the annuities paid a monthly income. Because the plaintiffs did not file their action until many years after they began to receive such statements, the district court dismissed the case as time-barred. We agree and affirm the district court's judgment. 

In 2007, plaintiffs Alfred and Betty Snapp, a retired couple living in Virginia, met with Randy Watts, a locally-based Lincoln representative who was authorized to sell annuities from the RiverSource Life Insurance Company. According to the Snapps' complaint, Watts advised the couple to place their retirement savings into a RiverSource variable annuity. Watts allegedly promised the couple that they would receive a monthly disbursement of $2,150 for the rest of their lives, with the couple's full investment amount to be paid out as a death benefit when one of them died. The couple followed Watts's advice and placed approximately $350,000 into a RiverSource variable annuity. 

The next year, in 2008, the couple's daughter-in-law, Sharon Snapp, also purchased a RiverSource variable annuity from Watts based on similar assurances. She, too, allegedly was advised by Watts that the annuity would provide a monthly stipend for the rest of her life - in her case, $1,400 - and that her estate would receive a death benefit equaling the amount of money that she placed into the annuity, which was about $265,000. 

But Watts's alleged assurances about the permanence of the Snapps' death benefits were false. Shortly after purchasing their annuities, the Snapps began to receive quarterly financial statements from RiverSource showing that the value of their death benefits was declining as they were paid monthly disbursements. The Snapps noticed this discrepancy, and "would often question [] Watts about statements received showing a reduction in the annuity's value." J.A. 19. In response, "Watts repeatedly assured [them] that their death benefit was still secure and it would not drop below the original amount invested." Id. 

The Snapps do not allege that they consulted with anyone other than Watts about the discrepancies they identified between their financial statements and Watts's original promises and later assurances. At some point around 2009, Betty Snapp did call RiverSource's toll-free number regarding her concerns, but did not inquire further after "[t]he customer service representative she spoke to told her to call [Watts] to explain it to her." J.A. 261. The Snapps "believed [Watts's assurances] to be true," according to the complaint, and therefore did not take further action. J.A. 19. 

The Snapps allege that they did not discover the true nature of their annuities until late in 2015, after Watts, under investigation for defrauding other customers, allegedly committed suicide. The Snapps then spoke with Watts's colleague and "found out for the first time that [Watts's] statements about the death benefit were not true." J.A. 19-20. 

On April 18, 2016, the Snapps commenced a FINRA arbitration proceeding against Lincoln and RiverSource, which was dismissed as untimely under the arbitration body's six-year limitations period.1 The Snapps subsequently commenced this court action, asserting statutory securities fraud violations and multiple claims under Virginia common law. The defendants again moved to dismiss the case as time-barred, pointing to the lapse of time between Watts's alleged point-of-sale misrepresentations in 2007 and 2008 and the Snapps' 2016 commencement of legal action.2 In response, the Snapps argued that Watts's misrepresentations prevented them from discovering the fraud before Watts's suicide in 2015, and that the relevant statutes of limitations should be tolled as a result. In a carefully reasoned opinion, the district court agreed with the defendants and granted their motion to dismiss.

FOOTNOTE 1: FINRA - the Financial Industry Regulatory Authority - is a private selfregulatory organization that regulates certain aspects of the securities industry. Under FINRA's arbitration rules, the dismissal of the Snapps' arbitration action was without prejudice to a later court action.

FOOTNOTE 2: FINRA's rules provide for the tolling of otherwise applicable statutes of
limitations while arbitration is pursued. The parties thus agree that April 18, 2016, the
day on which the Snapps commenced their arbitration action, should be treated as the
operative date on which their claims were asserted for statute-of-limitations purposes.
We may proceed on that assumption, as the result in this case does not depend on
whether the operative date is April 18, 2016, or instead May 17, 2017, when the Snapps filed their court complaint. 

Pages 2 - 4 of the 4Cir Opinion

In affirming the District Court's dismissal of the Snapps' claims as time-barred, that lower court also rejected equitable tolling. As to the Snapps' 2007 and 2008 annuities purchases, both courts found that the operable Virginia Securities Act and the Securities Exchange Act of 1934 started their respective clocks on the date of the transaction, and, further, that the respective cut-off dates were, two years and five years. The courts both found that the Snapps' claims were filed after those date, and, further, that the two and four years periods were not "statutes of limitation" but "statutes of repose," which are not subject to equitable tolling. 

As to the Snapps' common-law fraud claims, those were, indeed, subject to a two-year Virginia statute of limitations but the courts both found that the Snapps reasonably should have discovered Watt's misrepresentations before April 2014.  Consequently, the courts declined to grant equitable tolling beyond the April 2014 date because ordinary due diligence would have uncovered the misrepresentation on a more timely basis. The courts similarly rejected tolling for the Snapp's other common-law claims, which ran up to five years but all expired well before 2016.
The SEC and FINRA announced the opening of registration for their 2019 National Compliance Outreach Program for Broker-Dealers, which will be held June 27, 2019, at the Federal Reserve Bank of Chicago from 9 a.m. to 3 p.m. CT. The SEC's Office of Compliance Inspections and Examinations in coordination with the SEC's Division of Trading and Markets is sponsoring the program with FINRA. Admission is free to the first 250 on a first-come, first-served basis, but there will be a maximum of four attendees per firm. For those that cannot attend, a live webcast will be available at The program is purportedly:

[D]esigned to provide an open forum for regulators and industry professionals including compliance, internal audit, and other senior personnel of broker-dealer firms and branch offices to discuss current compliance practices and promote a more effective compliance structure for the protection of investors.