June 25, 2019
Today's blog features a sad and disturbing case in which an elderly Morgan Stanley customer appears to have been the victim of elder abuse. In a protracted and heated dispute, her estate seeks recompense from the brokerage firm and stockbroker. As the facts develop, however, the case proves to be nuanced and complicated. We have to consider the role of a convicted felon who preyed upon the elderly woman. We have to ask whether the brokerage firm and broker were also victims of a pernicious fraud -- or did they owe a duty of care to their elderly client and simply failed to do what was reasonable to protect her? In the end, two courts latch on to the Arbitration Chair's failure to disclose a conflict and the FINRA Arbitration Panel's unreasonable denial of a postponement. As with many things in life and litigation, it's all like a traffic accident that's ugly but you just can't seem to not look as you drive by.
The CFTC announced a whistleblower award of approximately $2.5 million to be paid to an individual whistleblower. In ordering the award, the CFTC took into account the significance of early reporting of misconduct, however, the award was reduced because of the whistleblower's delay in reporting to the CFTC. READ the full-text CFTC Award
. https://whistleblower.gov/sites/whistleblower/files/2019-06/19-WB-03.pdf As noted in part in the CFTC Release:
"Today's award goes to a whistleblower who assisted the CFTC at every step of the investigation," said James McDonald, Director of the CFTC's Division of Enforcement. "Although this award was substantial, it was reduced because of an unreasonable delay in reporting the violations. We hope this case illustrates the importance of reporting violations to the CFTC as soon as reasonably possible. Reporting early lessens the harm violators can inflict on the public and hastens our investigations to bring the culprits to justice."
Christopher Ehrman, Director of CFTC's Whistleblower Office, said, "We understand that whistleblowers may have reasons to delay reporting suspected Commodity Exchange Act violations, however, there is a point at which a delay becomes unreasonable. Timeliness is critical because it plays a vital role in our assessment of whistleblower awards. The facts in this case indicated that the whistleblower unreasonably delayed in reporting information, which resulted in a diminished award."
In a Complaint filed in the United States District Court for the Southern District of New York
https://www.sec.gov/litigation/complaints/2019/comp24511.pdf, the SEC charged Donald S. LaGuardia, Jr. (the former founder and managing principal of investment adviser L-R Managers, LLC) with violating the antifraud provisions Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. LaGuardia is charged with control person liability under Exchange Act Section 20(a) for L-R Managers' antifraud violations of the Exchange Act. The SEC is seeking permanent injunctions and financial penalties against LaGuardia, and the return of allegedly ill-gotten gains with prejudgment interest. As set forth in part in the SEC Release:
[B]eginning in at least 2013, Donald S. LaGuardia, Jr., a resident of Lavallette, New Jersey, who controlled the investment adviser, L-R Managers, LLC, misappropriated investor money from private funds advised by L-R Managers and from subscriptions intended to be invested in one of the funds. LaGuardia then allegedly concealed part of this misappropriation through a sham receivable and promissory note. According to the complaint, LaGuardia used the money to pay for personal and L-R Managers expenses, including home renovations, salaries, and rent. The complaint also alleges that LaGuardia and L-R Managers used other accounting devices to inflate the capital account balances and returns reported to investors and made material misrepresentations about fund audits, expenses and performance. L-R Managers filed for bankruptcy in June 2017.
In a Complaint filed in the United States District Court for the District of Massachusetts
https://www.sec.gov/litigation/complaints/2019/comp24510.pdf, the SEC charged former hedge fund manager Avi Chiat, Yasuna Murakami, and their advisory entities, MC2 Capital Management, LLC and MC2 Canada Capital Management, LLC. The Complaint alleged that Murakami misappropriated investor funds for business and personal expenses and made approximately $1.3 million in Ponzi-like payments; and that Chiat helped Murakami raise money from investors while providing investors with fabricated account statements that grossly overstated investment performance. Murakami, Chiat, MC2 Capital Management, LLC, and MC2 Canada Capital Management, LLC were charged with violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Also, the SEC charged Murakami and Chiat with aiding and abetting MC2 Capital Management, LLC's and MC2 Canada Capital Management, LLC's violations of the Investment Advisers Act.
In August 2018, the Court entered a final judgment against Murakami and the two advisory entities that ordered them to pay more than $7.9 million in disgorgement and prejudgment interest, deemed satisfied by a restitution order entered in a related criminal case against Murakami; and the Court permanently enjoined the Defendants from violating the charged provisions of the federal securities laws and Murakami from participating in securities transactions on behalf of others. On June 21, 2019, the Court entered final judgement against the last remaining defendant, Chiat, who agreed to pay $345,158 in disgorgement and prejudgment interest, and a civil penalty of $184,767; and he will be permanently enjoined from violating the charged provisions of the federal securities laws or participating in securities transactions on behalf of others.
FINRA Suspends and Fines Stockbroker in Over-Concentration and ETN AWC. In the Matter of Michael Allen Kamperman, Respondent (FINRA AWC 2016050400401)
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, Michael Allen Kamperman submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Michael Allen Kamperman a $20,000 fine and an 18-month suspension from association with any FINRA member firm in any capacity. As set forth in part in the AWC:
From May 2010 to June 2016, Kamperman made unsuitable investment
recommendations in the 401(k) and IRA retirement accounts of eight customers.
Specifically, Kamperman over concentrated the customers' accounts in high risk,
speculative oil and gas energy sector securities. He also recommended that one
customer purchase and hold a leveraged inverse ETN, which was only meant to
be held for one trading day1 in his 401(k) retirement account for nearly 16
months. Kamperman's investment recommendations were unsuitable for each
customers based on the customer's financial situation and needs, risk tolerance,
investment experience, and investment objectives. Additionally, Kamperman had
no reasonable basis to believe that his recommendation that the one customer
purchase and hold a short-term leveraged inverse ETN in his retirement account
for an extended time period was suitable for any customer. The customers suffered over $407,000 in trading losses as a result of implementing
Kamperman's investment recommendations.2
By virtue of the foregoing, Kamperman violated NASD Rule 2310 (for conduct
on or before July 8, 2012) and FINRA Rules 2111(a) (for conduct on or after July
9, 2012), and 2010.
Footnote 1: The prospectus for the ETN states that it is designed to be used as a tactical trading tool, not as a buy-and-hold investment. The prospectus also states that the note promises to provide 3x exposure to its reference index for a oneday holding period.
Footnote 2: The eight customers filed an arbitration regarding their trading losses. The matter has been resolved through settlement with Prospera and Vest.
Stockbroker Wins Expungement of Deceased Customer's "Letter of Concern." In the Matter of the Arbitration Between Lee Walter Miller, Claimant, v. Wells Fargo Clearing Services, LLC, Respondent (FINRA Arbitration Decision 18-04260)
In a FINRA Arbitration Statement of Claim filed in December 2018, associated person Claimant Miller sought the expungement of a customer complaint from his Central Registration Depository record ("CRD"). Respondent Wells Fargo did not oppose the requested relief. In recommending expungement, the sole FINRA Arbitrator made a FINRA Rule 2080 finding that Miller was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds.In pertinent part, the FINRA Arbitration Decision states that:
The evidence demonstrated that the deceased customer wrote a letter of
concern regarding the value of his account, which he later withdrew. There was
no evidence of investment-related sales practice violations. The information
appearing on Claimant's CRD is false. No Statement of Claim was filed by the
customer. The customer did not suffer any loss as a result of Claimant's conduct.
FINRA Fines and Suspends Rep over False Credit Card Applications and Willful Non-Disclosures on Form U4. In the Matter of Adriana Marcela Agha, Respondent (FINRA AWC 2017055302801)
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, Adriana Marcela Agha submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Adriana Marcela Agha a $10,000 fine and an 18-month suspension from association with any FINRA member firm in any capacity. The AWC includes a finding that Agha had willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this omission makes her subject to a statutory disqualification with respect to association with a member. As set forth in the AWC's "Overview":
In setting out the details of Agha's alleged false credit card applications, the AWC asserts in pertinent part that:
Agha improperly obtained credit for herself in another individual's name by
submitting two false credit card applications to her bank employer using the name
and credit history of an acquaintance, FF. As a result, Agha exposed FF and the
credit card issuer to the risk of financial loss. By virtue of this conduct, Agha
violated FINRA Rule 2010.
Agha also willfully failed to timely amend her Uniform Application for Securities
Industry Registration or Transfer ("Form U4") to disclose one judgment and three
compromises with creditors, in violation of Article V, Section 2(c) of the FINRA
By-Laws and FINRA Rules 1122 and 2010.
In May 2013, Agha used a firm computer to submit an online application for a
credit card from her bank employer using FF's name and credit, and listed herself
as an authorized user on the application. Where the online credit card application
requested information about the primary accountholder, Agha provided FF's
name and social security number, but listed her own mailing address, rather than
FF's address. Agha also falsely certified that all of the information on the
application was true and correct. Agha was unable to qualify for the credit card
on her own because she had poor credit history.
Agha obtained FF's permission to apply for this credit card by telling FF, an
acquaintance who used to work for Agha in a restaurant Agha used to own, that
the credit card would help build FF's credit history. Agha promised FF that she,
rather than FF, would be financially responsible for the first credit card.
However, on the credit card application, Agha certified that FF would be liable
for all account balances, and that as an authorized user Agha would have no
financial responsibility for the account.
Agha knew that she had reached the credit limit on and defaulted on credit cards
in the past, and that if this reoccurred in connection with this credit card it could
negatively impact FF's credit. Agha also knew that FF could have built her own
credit history by applying for and using a credit card for her own benefit. Agha's
actions also exposed FF and the credit card issuer to the risk of financial loss if
Agha failed to pay the amounts owed on the credit card.
Subsequently, in June 2013, without notifying FF or obtaining FF's permission,
Agha used a firm computer to submit an online application for a second credit
card to her bank employer in FF's name, and listed herself as an authorized user.
On the second credit card application, Agha falsely stated that her own mailing
address, email address, and phone number were FF's mailing address, email
address, and phone number.
The bank declined the application for the second credit card, but approved the
application for the first credit card. Agha then used the credit card for her
personal expenses and typically carried a full balance on the credit card from
month to month. In February 2016, FF asked Agha to pay off the balance on the
credit card because it was preventing FF from obtaining pre-approval on a
mortgage to purchase a home. Agha paid off the balance on the card
approximately two weeks later. In March 2016, FF complained to the bank about
the credit card being open in her name, and the hank closed the account and
notified the credit-reporting agency so that any activity relating to the credit card
would not affect FF's credit. . . .
FINRA Fines Member Firm Over Mutual Fund Switches. In the Matter of Crown Capital Securities, L.P., Respondent (FINRA AWC 2014038990602)
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, Crown Capital Securities, L.P. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Crown Capital Securities, L.P. a Censure and $75,000 fine. As set forth in the AWC's "Summary":
Between June 2011 and July 2014 (the "relevant period"), Crown Capital failed to
establish and maintain a supervisory system, including written supervisory
procedures, for reviewing and monitoring mutual fund switches reasonably
designed to achieve compliance with FINRA suitability requirements and failed to
reasonably supervise short-term switches of Class A mutual fund shares
conducted by two firm registered representatives, and thus Crown Capital violated
NASD Rule 3010(a), NASD Rule 3010(b), and FINRA Rule 2010.