Securities Industry Commentator by Bill Singer Esq

May 17, 2019

Wells Fargo Personal Banker Pleads Guilty to Money Laundering Charges (DOJ Release)
Former Wells Fargo Bank banker Luis Fernando Figueroa pled guilty in the United States District Court for the Southern District of California to conspiracy to launder money for a purported international organization that laundered about $19.6 million dollars in narcotics proceeds between 2014 and 2016 on behalf of Mexican based drug trafficking organizations including the Sinaloa Cartel. As set forth in part in the DOJ Release:

[T]he money laundering organization recruited individuals to serve as funnel account holders to open personal bank accounts at Wells Fargo Bank and other U.S. banks.  Figueroa, as a personal banker with Wells Fargo, admitted in his plea agreement that he knowingly opened personal bank accounts at Wells Fargo for the funnel account holders, knowing that those personal accounts would be used to launder funds to Mexico.

Other members of the money laundering organization, known as couriers, travelled to Los Angeles, Chicago, Charlotte, Boston, New Jersey, and New York City to pick up bulk cash narcotics proceeds that ranged from thousands to hundreds of thousands of dollars in narcotics proceeds. The couriers made contact with individuals holding the bulk cash in private residences or public places such as parking lots and retail stores.  The cash was typically concealed in shopping bags, duffel bags or shoeboxes.

Once in possession of the money, the couriers deposited the bulk cash in increments of $22,000 to $45,000 into the funnel bank accounts at Wells Fargo Bank and other U.S. banks controlled by the money laundering organization.  The funds were then wire transferred from the funnel accounts to a series of Mexico based shell companies operated by the money laundering organization.  Figueroa himself made multiple wire transfers from the funnel accounts knowing that the funds were from unlawful activity. Once in Mexico, the funds were transferred to representatives of the Sinaloa Cartel.
Today's featured FINRA regulatory case is about a Wells Fargo employee who was charged with converting funds from his employer and failing to fully cooperate in FINRA's ensuing investigation. Against that background of alleged misconduct, we witness an individual struggling with an opioid addiction and rehabilitation. It is a life spiraling out of control and a career headed into oblivion. There is no victory here. It is merely the devolution of a promising life into tragedy. Hopefully, the respondent will find redemption. Hopefully, the publication of this case may prompt others to seek earlier help or cause their friends and family to undertake earlier intervention.
In an Indictment filed in the United States District Court for the Western District of Pennsylvania 10 members of the GozNym criminal network were charged with conspiracy to commit computer fraud, conspiracy to commit wire fraud and bank fraud, and conspiracy to commit money laundering (an eleventh co-conspirator was previously charged in a related Indictment).  As set forth in part in the DOJ Release:

A complex transnational organized cybercrime network that used GozNym malware in an attempt to steal an estimated $100 million from unsuspecting victims in the United States and around the world has been dismantled as part of an international law enforcement operation.  GozNym infected tens of thousands of victim computers worldwide, primarily in the United States and Europe.  The operation was highlighted by the unprecedented initiation of criminal prosecutions against members of the network in four different countries as a result of cooperation between the United States, Georgia, Ukraine, Moldova, Germany, Bulgaria, Europol and Eurojust. 

The DOJ Release explains in part that the Defendants conspired to:
  • infect victims' computers with GozNym malware designed to capture victims' online banking login credentials; 
  • use the captured login credentials to fraudulently gain unauthorized access to victims' online bank accounts; and, 
  • steal money from victims' bank accounts and launder those funds using U.S. and foreign beneficiary bank accounts controlled by the defendants.  

Alligators in Nirvana: Smart Regulation and the Future of Financial Services-Public Policy Conference (Speech by SEC Commissioner Hester M. Peirce at the George Mason University Antonin Scalia Law School / May 16, 2019)
In her latest installment of her I'm-a-regulator-but-that-doesn't-mean-regulation-works body of work, SEC Commissioner offers yet another provocative commentary on the state of financial services regulation. As always, if you are an industry participant or a serious investor, I urge you to read Commissioner Peirce's speech. She may get your blood boiling. You may find yourself nodding away in agreement. If nothing else, she will force you to challenge your opinions. Among her observations is that:

[P]undits and politicians, and more troublingly, policymakers often suggest that the possessing pure intentions and putting the right government employees to work obviate the need to interrogate assumptions about how policy will work in practice. As we have grown more confident in our ability to collect and process data, perhaps the problem has increased over time. Our attempts to facilitate a national equity market system, for example, have tried to substitute government prescriptions, such as the Order Protection Rule of Regulation NMS, for decision-making by market participants. Non-optimal decisions about which stock exchange to send an order to were replaced with a mandate that orders must be executed at the best displayed price. The result is also not optimal, and likely not any more efficient, for a number of reasons, including because it prohibits traders from taking into account non-price considerations and has created artificial incentives to operate exchanges. As I read Spufford's description of cybernetic price-setting, I also could not help but think of modern financial regulatory efforts to formulate neat models into which centrally determined risk weights are plugged and from which optimal capital or margin or liquidity formulas emerge. Models have a place in regulation, but we must recognize their limitations.

Contract Allegedly Breached But FINRA Won't Say How Or Why It Wasn't. In the Matter of the Arbitration Between Jefferies LLC, Claimant, v. Brandon Wahl, Respondent (FINRA Arbitration Decision 18-03913 / May 16, 2019)
In a FINRA Arbitration Statement of Claim filed in November 2018, FINRA member firm Jefferies LLC asserted breach of contract and sought $25,000 in compensatory damages plus interest, costs, and fees. Associated person Respondent Wahl generally denied the allegations and asserted affirmative defense. As set forth in part in the FINRA Arbitration Decision, Respondent requested in part that the Panel find that:

Claimant's Employment Agreement to be a contract of adhesion and rendering it null and void; [and]

[R]elevant paragraphs within Claimant's Employment agreement, including paragraph II(c), to be unenforceable by virtue of it being a contract of adhesion and/or against public policy . . .

The sole FINRA Arbitator denied Claimant Jefferies' claims. 
Bill Singer's Comment: Grrrr . . . I really wish that the Decision provided us with some explanations about what constituted the nature of Jefferies alleged breach of contract by Wahl. Minimially, the Decision should have set forth the provisions of the agreement that Jefferies alleged had been breached. We are informed of nothing of substance, which is ridiculous. Yeah, I know, there are those of you out there who think it's okay to conduct mandatory intra-industry arbitration in secret. If Respondent Wahl had no objection to keeping all aspects of the underlying facts of this dispute confidential, then I have no complaint; however, in the absence of his consent (which I note is not indicated in the Decision), I still find FINRA's mandatory-intra-industry-arbitration-docket to be unadulterated bull-shit and nothing more than the shameful tolerance by Wall Street's self-regulatory-organization of a process that denies important information to both the industry's associated persons and the investing public. Why did Wahl argue that Jefferies' Employment Agreement was a "contract of adhesion" and what specific paragraphs were cited in support of that assertion? Did the sole arbitrator agree, disagree, or reach a mixed conclusion on that important dispute? Notwithstanding that Wahl came away with what seems a dramatic victory, similarly situated Jefferies' associated persons are denied the ability to understand whether they too are subject to an unenforceable contract of adhesion. Further, similarly situated associated persons at other FINRA member firms are denied the ability to make meaningful extrapolation from Jefferies v. Wahl and consider whether their various agreements include similar issues. Then again -- isn't that exactly what FINRA and its member firms were hoping to achieve by mandatory arbitration?

FINRA Arbitrators Offset Award to Wells Fargo. In the Matter of Wells Fargo Clearing Services, LLC, Claimant/Counter-Respondent, v. John Anthon Hand, III, Respondent/Counter-Claimant/Third-Party Claimant v. Wells Fargo Advisors, LLC, Third-Party Respondent (FINRA Arbitration Decision 17-02626)
In a FINRA Arbitration Statement of Claim filed in October 2017, Claimant Wells Fargo asserted breach of contract and unjust enrichment arising from two promissory notes dated 2007 and 2016. Claimant Wells Fargo sought $310,148.67 on the Notes plus interest, costs, and fees. Respondent Hand generally denied the allegations, asserted affirmative defenses, and filed a Counter-claim and a Third-Party Claim seeking $5.8 million in compensatory damages plus punitive damages, costs, and fees, and asserting:

conversion; fraud; breach of agreement; conspiracy; libel and slander; negligence; general averments and regulatory claims, including failure of supervision; and respondeat superior. The causes of action relate to compensation owed to Respondent as part of promises allegedly made to Respondent to entice him to become a financial advisor with Claimant. 

The FINRA Arbitration Panel found Respondent Hand liable to and ordered him to pay to Claimant Wells Fargo $349,401.46 in compensatory damages. Separately, the Panel found Wells Fargo liable to and ordered it to pay to Hand $99,401.46 in compensatory damages. The Panel offset the amount for a net award in Claimant Wells Fargo's favor of $250,000 plus interest. Additionally the Panel ordered Hand to pay to Wells Fargo $62,500 in attorneys' fees and $5,425 in costs.

NYS Appellate Division remanda to FINRA Arbitration in National Securities Corporation Class Action. Nico Rutella, individually and on behalf of other persons similarly situated who were employed by National Securities Corporation, National Holdings Corporation and/or any other entities affiliated with or controlled by National Securities Corporation and/or National Holdings Corporation, Plaintiffs, v. National Securities Corporation, National Holdings Corporation and/or any other entities affiliated with or controlled by National Securities Corporation, National Holdings Corporation, and/or any other entities affiliated with or controlled by National Securities Corporation and/or National Holdings Corporation, Defendants (Order; NYS Supreme Court / Nassau County; Index No. 601067-16 / October 3, 2016)
In Rutella v. National Securities Corporation we are confronted with the following allegations in the Complaint] [Ed: Footnote omitted:

Plaintiff Nico Rutella ("Rutella") was employed by Defendant from approximately August of 20 I 3 through February of 201 6. Plaintiff alleges, upon information and belief, that National Securities and National Holdings are a "single integrated enterprise', (Comp. at !f 9) under New York Labor Law that employed and/or jointly employed Plaintiff and those similarly situated. National securities is allegedly a wholly owned subsidiary of National Holdings and Defendants "share a common business purpose[], ownership, corporate officers, offices, and maintain common control, oversight and direction over the work performed by Plaintiff' (comp. at !l 10). 

The Class Allegations are that 1) this action is brought on behalf of Plaintiff and a putative class consisting of every other person who worked for Defendants selling or marketing financial products in any capacity within the State of New York at any time between February 2010 and the present; 2) the putative class is so numerous that joinder of all members is impracticable, the size of the putative class is believed to be in excess of 50 individuals, and the names of all potential members of the putative class are not known; 3) the questions of law and fact common to the putative class predominate over any questions affecting only individual members; 4) the claims of Plaintiff are typical of the claims of the putative class; 5) Plaintiff and his counsel will fairly and adequately protect the interests of the putative class; and 6) a class action is superior to other available methods for the fair and efficient adiudication of this controversy. 

Plaintiff alleges that, beginning in or around February 2010, Defendants employed numerous individuals to perform tasks related to selling and/or marketing financial products. Plairitiff and, upon information and belief members of the putative class ("Putative Plaintit's") were regularly required to perform work for Defendants without receiving minimum wages or overtime compensation for all hours worked. Rutella worked for Defendants [sic] from approximately August of 2013 to February of 2016. While working for Defendants, Rutella primarily made telephone calls to individuals in an attempt to sell financial services and products. Rutella typically worked approximately 55 hours per week consisting of work l) from Monday through Friday, 8:00 a.m. to 6:00 p.m., and 2) on Saturday from 9:00 a.m. to 2:00 p.m. 

During his employment, Rutella was not paid an hourly wage. Instead, Rutella was paid on commission. Rutella received a monthly payment of $1,800.00 from Defendants, but this monthly payment was deducted from any commissions that he earned. As a result. Rutella routinely worked more than 40 hours each week, but did not receive over time wages at time and one-half his regular rate of pay for hours in excess of 40 that he worked. In addition, Rutella did not receive minimum wages for all of the hours that he worked. while employed by Defendants, Rutella 1) "did not have any meaningful duties" (comp. at P 27), and was not responsible for decisions regarding the hiring, firing, demotion or promotion of employees; 2) did not exercise independent judgment and discretion on matters of significance; and 3) was subject to control by Defendants with respect to the means used to complete the tasks that he performed for Defendants. Plaintiff alleges, upon information and belief, that Defendants wilfully disregarded and purposefully evaded record keeping requirements or applicable New York law by failing to maintain proper and complete time sheets or payroll records. The complaint contains two (2) causes of action: 1) Defendants violated New York Labor Law ("Labor Law'') Article 19 S 663 and 12 NYCRR S 142-2.1 by wilfully failing to pay plaintiff and other putative plaintiffs minimum wages for all hours worked; and 2) Defendants violated Labor Law Article 19 S 663 and 12 NYCRR S 142-2.2 by wilfully failing to pay overtime compensation to Plaintiff and other Putative Plaintiffs. .  .

Defendants moved in NYS Supreme Court / Nassau to compel arbitration pursuant to NYS CPLR Sections 2201 and 7503(a). Defendants cited the existence of:

the Registered Representative Independent Contractor Agreement ("Agreement") between Rutella and National securities (Ex. B to Buzzetta Aff. in supp.). The first paragraph of the Agreement states that it is entered into by and between National securities, referred to as the "Company," and Rutella, referred to as the "Contractor." Section XXVI of the Agreement, titled "Arbitration" ("Arbitration Provision") provides as follows: 

Any controversy between the Company and the Contractor arising out of or relating to this Agreement or the breach thereof, shall be settled by FINRA arbitration. The award of the arbitrators shall be final, and judgment upon the award may be entered in any court, state or federal, having jurisdiction. All statutes of limitation that would apply if the controversy were resolved in court shall be applied and enforced by the arbitrators.

Additionally, Defendants provided a copy of:

Rutella's Form u-4, dated August 20, 2013 with confidential personal information redacted pursuant to 22 NYCRR S 202.5(e) (Ex. A to Buzzetta Reply Aff.). Paragraph 5 on page 13 of that document reads as follows:

I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the SROs [Self-Regulatory organizations] indicated in Section 4 (SRO REGISTRATION) as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgment in any court of competent jurisdiction. 

In opposition, Plaintiff asserts that FINRA rules provide that class action claims may not be arbitrated under the FINRA Code, and, as such, the Court should not so compel the arbitration of the class action claims. Further, Plaintiff argues that he had never agreed to arbitrate class action claims. In granting Defendants' motion to compel arbitration, the NYS Supreme Court / Nassau held, in part, that:

The Court grants Defendants' motion to the extent that the Court stays the Instant Action pending the arbitration of the individual claims of Plaintiff Nico Rutella; and 2) denies Plaintiff s motion with leave to renew following a determination of the arbitration as directed herein. The Court is mindful of the holdings in Abed and, Gomez, but also mindful of the policy favoring arbitration, and the Arbitration Provision in the Instant Action which clearly reflects the parties' intent to arbitrate the dispute raised in the Complaint. The Court is of the view that the holdings in Abed and, Gomez do not prohibit the resolution fashioned by the Court herein.

Nico Rutella, etc., Appellant, v. National Securities Corporation, et al., Respondents (Decision and Order, NYS Suptreme Court/Appellate Division; 2019 NY Slip Op 03833; 2017-03539; Index No. 601067/16)
As set forth in the Appellate Division's Decision and Order ("AppDiv Decision"), Plaintiff Nico Rutella had

executed a Registered Representative Independent Contractor Agreement (hereinafter the Agreement) pursuant to which he allegedly worked selling or marketing financial products on behalf of the defendants, which were both members of the Financial Industries Regulatory Authority (hereinafter FINRA). The Agreement provided that any disputes arising out of or relating to the Agreement would be "settled by FINRA arbitration." The plaintiff also executed a Uniform Application for Securities Industry Registration or Transfer (hereinafter Form U4), by which he registered with FINRA as a general securities representative of the defendant National Securities Corporation. Pursuant to the Form U4, the plaintiff agreed to arbitrate any dispute arising between him and his "firm . . . that is required to be arbitrated under the rules, constitutions, or by-laws of [FINRA]."

Plaintiff Rutella filed a class action to recover damages for violations of New York Labor Law Article 6: Payment of Wages and Article 19: Minimum Wage Act. The class action sought damages arising from the alleged failure to pay required minimum and overtime wages. In response to the class action, Defendants moved pursuant to CPLR 7503 to compel arbitration of Plaintiff Rutella's individual claims and to stay all proceedings the class action pending the resolution of said arbitration. Plaintiff argued his claims were asserted as class claims, and, accordingly, did not fall within the parties' arbitration agreement. On October 3, 2016, the Supreme Court, Nassau County ordered Plaintiff to proceed to arbitration. On appeal, the AppDiv reversed the lower court's remand to arbitration and lifted the stay. In part, the AppDiv offered this rationale:

Here, the plaintiff correctly contends that the parties did not agree to arbitrate the claims asserted by the plaintiff in this putative class action. The parties' agreement required that any controversy between the parties arising out of the Agreement would be "settled by FINRA arbitration." Any claim settled by FINRA arbitration must be settled according to FINRA rules (see Abed v John Thomas Fin., Inc., 107 AD3d 578, 579; Gomez v Brill Sec., Inc., 95 AD3d 32, 37; Lloyd v J.P. Morgan Chase & Co., 791 F 3d 265, 268). Under FINRA Rule 13204(a)(4), the defendants are not permitted to enforce an arbitration agreement against a member of a putative class action with respect to any claim that is the subject of the putative class action, unless, among other things, class certification is denied. By agreeing to apply this rule to any arbitration between the parties, the defendants agreed not to arbitrate any claim that is the subject of a putative class action (see Abed v John Thomas Fin., Inc., 107 AD3d 578; Gomez v Brill Sec., Inc., 95 AD3d 32; Nielsen v Piper, Jaffray & Hopwood, Inc., 66 F 3d 145; see also Lloyd v J.P. Morgan Chase & Co., 791 F 3d 265).

The defendants' contention that the Agreement contained a broad and unequivocal arbitration provision that required the parties to arbitrate all disputes without exception ignores the clause "settled by FINRA arbitration" and the implications of agreeing to arbitrate before that forum. The defendants further contend that the plaintiff is using the class action as a device to avoid arbitration and that he should not be permitted to avoid arbitration so easily, particularly given the public policy favoring arbitration. However, the prohibition against enforcing arbitration agreements against members of a putative class action becomes inapplicable if class certification is denied. Thus, to actually avoid arbitration, the plaintiff cannot merely allege class claims in a complaint. The plaintiff must ultimately establish his entitlement to class certification. To do so, the plaintiff must prove, among other things, that "a class action is superior to other available methods for the fair and efficient adjudication of the controversy" (CPLR 901[a][5]; see CPLR 902). In short, the defendants' contention that the assertion of a class action provides a ready means to circumvent the parties' arbitration agreement is without merit. . . 

Front Man Pleads Guilty to $550 Million Ponzi Scheme -- One of the Largest Ever Charged in Maryland / Kevin Merrill Also Admits to Obstructing Justice After his Arrest; SEC Has Related Civil Action (DOJ Release)
Kevin B. Merrill pled guilty in the United States District Court for the District of Maryland to conspiracy to commit wire fraud and wire fraud arising from a $550 million investment fraud scheme that operated from 2013 through September 2018; previously, co-defendant Cameron R. Jezierski pled guilty to his role in the scheme.  Kevin Merrill's wife, Amanda Merrill, was charged with conspiracy to obstruct justice. The SEC filed a parallel civil complaint in this matter.  As set forthi n part in the DOJ Release:

[B]eginning in January 2013, Merrill and his co-conspirators perpetrated a Ponzi scheme to defraud investors of more than $394 million.  Specifically, Merrill and a co-conspirator invited investors to join them in purchasing consumer debt portfolios.  "Consumer debt portfolios" are defaulted consumer debts to banks/credit card issuers, student loan lenders, and car/truck financers which are sold in batches called "portfolios" to third parties that attempt to collect on the debts.  Merrill, using the names of collection businesses he owned, including Delmarva Capital and Global Credit Recovery, among others, falsely represented to investors that he would use the investors' money to buy consumer debt portfolios and make money for them by (1) collecting the payments that people made on their debts or (2) selling the portfolios for a profit to other third-party debt buyers, in a practice called "flipping."  According to the related complaint in the civil action filed by the SEC, the victim investors included small business owners, restauranteurs, construction contractors, retirees, doctors, lawyers, accountants, bankers, talent agents, professional athletes, and financial advisors, located in Maryland, Washington, D.C., Northern Virginia, Denver, Texas, Chicago, New York, and elsewhere.  As detailed in the plea agreement, Merrill admitted that the scheme caused financial hardship to at least five victims, and Merrill knew that at least one of those was a vulnerable victim.

In the Matter of Wilson-Davis & Co. Inc., Respondent (SEC Order Instituting Administrative and Cease-and-Desist Proceedings; Making Findings; and Imposing Sanctions; '34 Act Release No. 85867; Admin. Proc. File No. 3-19167  / May 15, 2019)
In anticipation of SEC proceedings, broker-dealer Wilson-Davis & Co., Inc. submitted an Offer of Settlement without admitting or denying the findings in the ensuing SEC Order, which the federal regulator accepted. In accordance with the terms of the SEC Order, Respondent is Censured; will cease and desist from committing or causing cited violations; will pay a $300,000 civil money penalty; and will undertake to hire an independent AML Compliance Consultant to conduct and comprehensive review of the firm's AML compliance program and its implementation, and shall submit a Report to the SEC of said review, and the firm shall adopt the recommendations therein. As set forth under the heading "Summary" in the SEC Order [Ed: footnote omitted]:

From at least January 2013 through July 2017 (the "relevant period"), Respondent, a registered broker-dealer, failed to file Suspicious Activity Reports ( "SARs") when it knew, suspected, or had reason to suspect that certain penny stock transactions it executed on behalf of its customers involved the use of its firm to facilitate fraudulent activity or had no business or apparent lawful purpose. During the relevant period, Wilson ignored numerous red flags listed in its AML policies, failed to properly investigate certain conduct, and ultimately failed to file SARs on the suspicious activity. 

Numerous transactions by Wilson customers raised red flags that indicated potential market manipulation or pump-and-dump activity in low-priced securities. All of these transactions involved the deposit of physical certificates, the liquidation of the securities, and the immediate wiring of funds out of the customer's account-activity identified as a red flag of suspicious activity in Wilson's own AML policies. Many of these transactions raised additional red flags that should have heightened Wilson's suspicions. Nonetheless, Wilson failed to either identify or to investigate these red flags, despite the fact that its written AML procedures identified such activity as indicators of potential money laundering, and required their further investigation for the possible filing of a SAR. 

By failing to file SARs as required, Wilson willfully violated Section 17(a) of the Exchange Act and Rule 17a-8 thereunder.