Securities Industry Commentator by Bill Singer Esq

May 1, 2019
Unless you do Wall Street regulatory law for a living, you may not appreciate the dramatic -- frankly, historic -- nature of a just-published Opinion by the United States Court of Appeals for the District of Columbia Circuit in Robare Group, Ltd. v. SEC. All serious industry professionals should read the history of this SEC regulatory case from its inception through the deliberations of the federal circuit court -- and continue to follow this matter as it is remanded back to the SEC. Among the fascinating issues in dispute is whether an RIA is justified in relying upon the compliance advice of a seemingly reputable, independent consulting organization. Is it enough in 2019 for human beings to do their very, very best in order to comply with all of Wall Street's rules and regulations -- or, as the SEC asserts, even good faith may still involve sanctionable negligence. It's not that you knew but that you should have. Beyond the substantive issues on appeal, we witness, yet again, the dubious Wall Street regulatory practice of trying a case before an SEC administrative law judge, who renders a so-called "initial" decision, which is subsequently over-turned by the SEC's Chair and Commissioners, who did not sit in on the regulatory hearing, did not observe the witnesses' demeanor, and likely have less familiarity with the details of the underlying facts than the ALJ who is being reversed.
Reginald Fowler and Ravid Yosef (who remains at large) were each charged in an Indictment filed in the United States District Court for the Southern District of New York with one count of bank fraud and one count of conspiracy to commit bank fraud; and, additionally, Fowler was also charged with one count of operating an unlicensed money transmitting business and one count of conspiracy to do the same. As set forth in the part in the DOJ Release:

In or about 2018, REGINALD FOWLER, RAVID YOSEF, and others operated the Crypto Companies, and FOWLER opened and maintained bank accounts at various banks around the world on behalf of the Crypto Companies.  One of the Crypto Companies markets itself as a company that allows clients to deposit and withdraw government-backed, or "fiat,"  currency to numerous crypto exchanges, which are platforms where people can buy and sell cryptocurrency or "virtual currency."  Users of one particular crypto exchange ("Exchange-1") deposited government-backed currency into a bank account of the Crypto Companies ("Account-1") that was opened and maintained by FOWLER at a specific international bank ("Bank-1"). Although Exchange-1 advertised itself as providing required "know your customer" and anti-money laundering verification services in connection with Exchange-1's platform, this was false with respect to the shadow banking services provided by FOWLER and YOSEF.

As described in the Indictment, FOWLER and YOSEF conspired to, and did, misrepresent the nature of the Crypto Companies' business and falsely stated to Bank-1 that Account-1 would be used to process real estate investments.  These misrepresentations also appeared on wire transfer instructions sent out from bank accounts opened and maintained by FOWLER and YOSEF, among others, on behalf of the Crypto Companies.  Records from Bank-1 reveal that dozens of individuals from various countries wired millions of dollars into Account-1, and, at the same time, Account-1 also wired millions of dollars to other individuals and companies.  Even though FOWLER was receiving and directing these monetary transactions, neither he nor any of the Crypto Companies were ever licensed as a money transmitting business, as required by federal law.
Omigod -- I mean, geez, how the hell could you not want to read about this case after coming across such a headline? Ya got Miami Man. Ya got yer million dollar money launderin'. Ya got you email schemes. Ya got the sales of reptiles without a license! Who knew you even needed a license to sell a reptile and, more to the point, where the hell do you even go to apply for such a license? What's next? Miami Man was illegally selling federally-protected cacti? In any event, as to the pertinent facts, Alfredo Veloso  pled guilty in the United States District Court for the Southern District of Florida to one charge of conspiracy to commit money laundering and four counts of violating the Lacey Act for knowingly engaging in conduct that involved the sale and purchase of, and intent to sell and purchase, wildlife with a market value in excess of $350.00, knowing that said wildlife was taken, possessed, transported, and sold in violation of and in a manner unlawful under the laws and regulations of the State of Florida. As set forth in part in the DOJ Release: 

[F]rom April 2017 to December 2018, Veloso, together with co-conspirators Roda Taher a/k/a "Rezi," Karina Rosado, and Alvaro Lugo, and others participated in a scheme to help steal more than $1.5 million dollars from individual and corporate victims, which proceeds were later laundered. The scheme involved recruiting "money mules," including Veloso, who allowed their respective names and personal identifying information to be used by co-conspirators to incorporate a sham business through the Florida Department of State, Division of Corporations, under such mule's name.  As part of the scheme, a mule would then open bank accounts at multiple banks in the name of his or her shell company.  Several mules, including Veloso, later recruited and managed new money mules.  To date, more than 200 money mules and money mule recruiters have been identified as part of this international money laundering network.

As stated in court records, a related cyberattack aspect of the scheme involved the creation, by co-conspirators, of email addresses that mimicked, but differed slightly from, legitimate email addresses of supervisory employees at various companies. The conspirators used these deceptive email addresses to send emails that appeared to be requests for payment of legitimate invoices or debts owed by the victims. The victims were deceived into transferring funds by wire into the bank accounts opened by the money mules and controlled by Veloso and the co-conspirators.  After the victims complied with the fraudulent wiring instructions, Veloso, Rosado, and Lugo, under the direction of other conspirators, quickly debited thousands of dollars from the accounts through in-person withdrawals, ATM withdrawals, and debit card purchases. The co-conspirators also transferred funds to foreign bank accounts that co-conspirators controlled.

Veloso, Rosado, Lugo, and other co-conspirators kept a fraction of the proceeds as payment.  For example, over a two-day period in April 2017, Veloso's shell company, Veloso Bulk Trade, received incoming wires totaling more than $1,000,000 from four victims, which included two corporations, a law firm, and an individual.  Of these funds, Veloso withdrew or spent approximately $26,686. 

Veloso admitted that he recruited more than eight individuals to participate as mules in the money laundering scheme, many of whom were women he met through his kink pornography/adult film business. Veloso and his mules laundered between $1.5 to $3.5 million dollars.

Additionally, Veloso used his reptile business, known as Tri Reptiles and Xtreme Reptiles, to knowingly sell and ship wildlife in interstate commerce in 2018.  His yearly reptile sales volume was at least approximately $150,000.  Veloso acted as a reptile wholesaler, reselling hundreds of reptiles without obtaining the required Florida license.

Meadview Man Sentenced to Prison for Drug Sales, Theft of Government Property, and International Smuggling of Federally-Protected Cacti (DOJ Release)
Hey, it's me again,the omniscient and omnipresent author's voice. Well, okay, it's actually me, Bill Singer, international man of mystery and hidden blog voice. Earlier, as in the story just before this one, I asked if the so-called Miami Man was illegally selling federally-protected cacti. Yeah, I set you up. As you can see from the DOJ Release headline for this case, there really are federally-protected cacti! Maybe the federally-protected reptiles should be housed on federally-protected cacti? Just a thought. Perhaps we should introduce Miami Man to Meadview Man? Just another thought. Anyway back to the serious stuff. William Starr Schwartz pled guilty in the United States District Court for the District of Arizona to possession with intent to distribute methamphetamine, theft of government property, smuggling cacti from the United States, and Lacey Act false labeling charges. Yup, we got two Lacey Act convictions in a row today. Schwartz was sentenced to 24 months in prison plus three years of supervised release' and ordered $22,655 restitution to the National Fish and Wildlife Foundation. As set forth in part in the DOJ Release:

[B]etween approximately Oct. 1, 2014 and Aug. 22, 2018, Schwartz stole, and directed others to steal for him, in excess of 500 federally-protected cactus plants from the Lake Mead National Recreation Area in Arizona.  Schwartz sold the stolen cacti through the Internet, and illegally shipped the cacti from Meadview to more than 20 countries throughout the world.  During a search warrant conducted on Schwartz's residence in August 2018, numerous stolen cacti were recovered by law enforcement agents.  Additionally, methamphetamine and related drug paraphernalia were found.

Bill Singer's Comment: Me again -- how ya doin? I had one other thought about the Schwartz a/k/a Meadview Man, who will be doing 24 months in the Big House and may find himself walkin' the Yard when some of the tougher inmates ask him what he's in for. How is Schwartz going to leverage his illegal sales of cacti into something that will earn him respect? I mean, you know, with Miami Man at least he could sort of jack his illegal sales of lizards into something like a Jurassic Park thing with Godzilla . . . but cacti? If I were Schwartz a/k/a Meadview man, I'd soft pedal the whole cacti thing and really work the whole meth aspect.
Former EmCare employee Jacqueline Meyer and former Health Management Associates LLC ("HMA") employee J. Michael Cowling filed a lawsuit in the United States District Court for the District of South Carolina under the Qui Tam or whistleblower provisions of the False Claims Act. After the case was transferred to the United States District Court for the District of Columbia,  In September 2018 HMA entered into a $61.8 million civil settlement and a Non-Prosecution Agreement (NPA) under which it paid a $35 million monetary penalty. Additionally an HMA subsidiary that formerly owned one hospital pled guilty to a single count of conspiracy to commit healthcare fraud, and paid a $3.25 million fine. In December 2017, EmCare paid $29.6 million to resolve these allegations. As alleged in the DOJ Release, former HMA Chief Executive Officer Gary D. Newsome had caused:

[H]MA to pressure ED physicians to increase inpatient admissions by recommending admission without regard to medical necessity. The government claimed that the inpatient admission of these beneficiaries was not medically necessary, and that the care needed by, and provided to, these beneficiaries should have been provided in a less costly outpatient or observation setting. Hospitals generally receive significantly higher payments from Medicare for inpatient admissions as opposed to outpatient treatment; therefore, the admission of beneficiaries who do not need inpatient care, as alleged here, can result in substantial financial harm to the Medicare program. 

The United States also alleged that Newsome caused HMA to pay remuneration to EmCare, a company that provided physicians to staff HMA hospital EDs, to recommend admission when patients should have been treated on an outpatient basis.  As part of the alleged scheme, Newsome caused HMA to make certain bonus payments to EmCare ED physicians and tied EmCare's retention of existing contracts and receipt of new contracts to increased admissions of patients who came to the ED.

Morgan Stanley Liable For Over $400,000 in Mismanaged Portfolio Arbitration. In the Matter of the Arbitration Between Carpenter Law Firm Defined Benefit Plan, Claimant, and Morgan Stanley & Co., LLC and Michael Lee Carney, Respondents (FINRA Arbitration 18-01007)
In a FINRA Arbitration Statement of Claim filed in March 2018, public customer Claimant  asserted breach of fiduciary duty, negligence, breach of contract, ERISA violations, negligent misrepresentation, constructive fraud, failure to supervise, and respondeat superior. Claimant alleged that Respondents Morgan Stanley and Carney mismanaged the plan's portfolio by "failing to fix an appropriate investment strategy, which caused the portfolio to underperform due to excessive cash and a concentration in a single sector of the S&P. FINRA ." Claimant sought a joint-and-several Award of $667,725 in compensatory damages plus interest, fees, and costs. Respondents generally denied the allegations and asserted various affirmative defenses. The FINRA Arbitration Panel found Respondents jointly-and-severally liable to Claimant and ordered them to pay $415,088 in compensatory damages; $36,500 in expert witness fees; $2,000 in costs, and a $425 reimbursement for FINRA filing fees. The Panel denied the request for the expungement of Respondent Carney's and another individual's Central Registration Depository records. 

Beyond Hollywood: Money Laundering in the Securities Industry (FINRA Unscripted Podcast)
As noted in FINRA's "Summary":

The only thing many people know about money laundering is what they've learned from Hollywood. So if you want to really understand what money laundering is, and more specifically, the efforts brokerage firms must take to prevent and detect it, tune in. On this episode we talk to two of FINRA's Anti-Money Laundering experts.

Two Costa Rican Residents Sentenced to Lengthy Prison Terms in Connection with $10 Million International Telemarketing Scheme (DOJ Release)
After a three-day jury trial in the United States District Court for the Western District of North Carolina, Andrew Smith and Christopher Lee Griffin were convicted each on one count of conspiracy to commit wire fraud, eight counts of wire fraud, one count of conspiracy to commit money laundering, and seven counts of international money laundering. Smith was sentenced to 25 years in prison and ordered to pay jointly and severally with his co-conspirators $10,222,838.76 in restitution and forfeit $406,324.96. Griffin was sentenced to 20 years in prison and ordered to pay jointly and severally with his co-conspirators $10,222,838.76 in restitution and forfeit $406,324.96. As set forth in part in the DOJ Release:

[S]mith and Griffin worked in a call center in Costa Rica in which conspirators, who posed as representatives of the U.S. Securities and Exchange Commission and the Federal Trade Commission (FTC), contacted victims in the United States to tell them that that they had won a substantial "sweepstakes" prize.  After convincing victims, many of whom were elderly, that they stood to receive a significant financial reward, the conspirators told victims that they needed to make a series of up-front payments before collecting their supposed prize, purportedly for items like insurance fees, taxes and import fees.  Conspirators used a variety of means to conceal their true identities, such as Voice over Internet Protocols, which made it appear that they were calling from Washington, D.C., and other places in the United States.  According to trial testimony, one elderly victim who indicated she was going to stop paying was warned by a conspirator that they knew where she and her family lived.

Smith and Griffin arranged for victims to transmit payments through international wire transfers directly to Costa Rica or through "runners," who collected money from victims in the United States and forwarded payment to Smith, Griffin and others in Costa Rica, according to evidence presented at trial.  Runners dispatched by Smith and his co-conspirators met elderly victims at their homes to collect bags of cash, which they in turn remitted to Costa Rica, the evidence showed. 

Smith, Griffin and their conspirators stole more than $10 million from victims, the evidence showed.
Dale Scott Wood pled guilty in the United States District Court for the Southern District of Florida to one count of wire fraud, and he was sentenced to 151 months in prison plus 3 years of supervised release, and ordered to pay $7,130,410 in restitution. As set forth in part in the DOJ Release:

[I]nvestors in Germany formed a limited partnership to invest in the United States real estate mortgage market.  The partnership made mortgage loans secured by commercial properties throughout the United States.  After the United States real estate market crash beginning in 2007, the partnership had to foreclose on many of the mortgages it owned domestically.  The partnership needed someone to oversee the foreclosure process and manage, maintain, and market the properties when the partnership acquired title.  The partnership retained Wood for that purpose.  From November 2009 to November 2013, Wood retained Theodore Gunter Gies, a bookkeeper, to assist him.  Wood and Gies, without disclosure to or authorization from the partnership, sold the properties to third parties.  Wood and Gies then submitted, via international e-mail, false financial and status reports indicating that the properties were still held by the partnership.  The loss to the partnership by the actions of Wood and Gies was $7,130,410. 

Gies previously pled guilty for his role in the conspiracy and was sentenced to 51 months in prison.