Securities Industry Commentator by Bill Singer Esq

August 6, 2019
Former Wells Fargo bank branch manager Hakop Zakaryan pled guilty to one count of bank fraud in the United States District Court for the Central District of California. As set forth in part in the DOJ Release:

[Z]akaryan called the bank's loss prevention department and provided false information to unfreeze the bank accounts, even though he knew that the schemers were using fraudulent identities, according to the plea agreement. Zakaryan admitted that he assisted the schemers because they paid him thousands of dollars in cash. 

For example, in July 2014, Zakaryan called the bank's loss prevention department and provided false information to unfreeze the bank account, which helped the schemers to withdraw $29,453 in cash from that account. Zakaryan admitted that he unfroze the account in exchange for approximately $3,000 in cash from the schemers.

The underlying Stolen Identity Refund Fraud (SIRF) scheme involved schemers who used false identities and fake Republic of Armenia passports to open hundreds of bank accounts that were used to launder funds fraudulently received from the IRS. A total of 18 defendants, including Zakaryan and Glendale lawyer Arthur S. Charchian, have been charged in that scheme, which involved approximately 7,000 fraudulent tax returns that cumulatively sought about $38 million in refunds. The IRS issued about $14 million in refunds. The fraudulent tax returns were filed and the bank accounts were opened with personal identifying information that had been stolen from thousands of victims.
Any seasoned litigator will tell you that sometimes a client wins by losing and loses by winning. It's all very nuanced. You can be found guilty but ordered to pay a fraction of what was demanded in the last settlement offer. You can win but the legal fees bankrupt you.  When it comes to the walking-wounded emerging from litigation, it's often tough to discern who won and who lost. It seems like everyone is limping. A recent FINRA intra-industry arbitration presents an example of how a party won her claim but still looks banged-up for the effort.

SEC Charges Two Former Executives for Fraudulent Corporate Expense Abuses (SEC Release)
In a Complaint filed in the United States District Court for the District of New Jersey, the SEC alleged that SITO Mobile, Ltd's former Chief Executive Officer Gerard F. Hug and former Chief Financial Officer Kurt W. Streams (erroneously described in the SEC Release as the former CEO) violated the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; the internal controls and books and records provisions of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder; the Sarbanes-Oxley certification provision of Exchange Rule 13a-14; and the lying to the auditors provision of Exchange Act Rule 13b2-2. Further, the Complaint alleges taht Hug and Streams aided and abetted SITO's violations of the reporting, internal controls, books and records, and proxy statutory provisions of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act, and Rules 12b-20, 13a-1, 14a-3, and 14a-9 thereunder. ejudgment interest, civil penalties, and officer and director bars. Additionally, without admitting or denying the SEC's findings, SITO agreed to an SEC Order finding it violated the reporting, internal controls, books and records, and proxy statutory provisions of the federal securities laws and ordering it cease and desist from future violations. In determining to accept SITO's offer and not impose a penalty, the SEC considered SITO's alleged significant remediation and cooperation in its investigation. As set forth in part in the SEC Release alleged that Hug and Streams:
improperly used more than $300,000 to pay non-business related expenses. As alleged, Hug expensed at least $100,000 worth of personal charges, including family trips and designer clothes, on SITO's corporate charge card and concealed the expenses from accounting personnel by coding them as legitimate business expenses. Similarly, the complaint alleges Streams fraudulently used SITO funds to pay for at least $200,000 of personal living expenses, including his Netflix and Amazon Prime subscriptions, pet groomers, eyewear and vacations. The complaint further alleges that Streams improperly withdrew cash from a SITO account to pay for personal expenses.

The SEC's complaint alleges that the executives' personal use of corporate funds were inaccurately recorded as business expenses in SITO's books and records. As a result, SITO's annual reports and definitive proxy statements failed to disclose these payments to Hug and Streams as compensation. The complaint further alleges Hug and Streams falsely certified that SITO's annual reports contained no material misstatement or omission and provided false management representation letters to SITO's independent auditors.

FINRA Arbitrators Hit Schwab with about $350,000 in Damages and Costs In Competition Dispute. In the Matter of the Arbitration Between Laguna Financial Group, Inc. and Joseph John Ziomek, Claimants, v. Charles Schwab & Co., Inc. and Purshe Kaplan Sterling Investments, Respondents (FINRA Arbitration Decision 16-03252)
Associated person Claimant Ziomek and Non-Member Claimant Laguna Financial Group ("LFG") filed a FINRA Arbitration Statement of Claim against member firms Charles Schwab and Purshe Kaplan Sterling Investments in November 2016 asserting  breaches of contract, covenant of good faith and fair dealing, and fiduciary duty; aiding and abetting breach of fiduciary duty; conspiracy; interference with contractual relations and with prospective economic advantage; intentional infliction of emotional distress; and equity. At the close of the hearing, Claimants sought between $1.241 and $1.850 million in damages, $450,774.50 in attorneys' fees, and $47,001.12 in costs. As set forth in the FINRA Decision:

The causes of action relate to Respondents' knowledge of and involvement with LFG's former Chief Compliance Officer and her alleged violation of duties to Claimants and her resignation from LFG to start her own business and directly compete with Claimants. 

Respondents generally denied the allegations and asserted various affirmative defenses. In February 2018, Claimants settled with Respondent Purshe Kaplan Sterling Investments. The FINRA Arbitration Panel found Respondent Charles Schwab liable to and ordered the firm to pay to Claimants $200,000 in compensatory damages plus interest; $47,001.12 in costs; and $100,000 in attorneys' fees. 

Stockbroker Barred for Fictitious VA Applications Towards Quota. In the Matter of Karen Paek, Respondent (FINRA AWC 2018057657501)
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, Karen Paek submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA found that Paek had violated FINRA Rules 2010 and 4511, and Barred her from association with any FINRA member firm in any capacity.  As set forth in part in the AWC:

Between November 2016 and December 2017, Paek completed and submitted six fictitious VA applications to the Firm in order to meet her minimum production requirements at Pruco. The six VA applications were made in the names of three former customers at her prior employing firm, two of her Pruco insurance customers, and a prospective customer at Pruco. Paek forged the individuals' electronic signatures on all of the applications. None of the individuals were aware of or authorized the applications and the annuities were never funded. For five of the six VA applications, Paek created fictitious third-party brokerage statements, which she submitted to the Firm to give the false impression the VAs would be funded from third-party accounts. The Firm discovered Paek's falsifications and forgeries during a review of unfunded VA applications. Paek received approximately $23,000 in advance commissions for the fictitious VA applications, all of which was recovered by the Firm.

Stockbroker Fined and Suspended Over Reused Customer Signatures. In the Matter of Mengzuan Zhang, Respondent (FINRA AWC 2018059411401)
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, Mengxuan Zhang submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA found that Zhang had violated FINRA Rule 2010 and imposed a $5,000 fine and a one-month suspension from association with any FINRA member firm in any capacity.  As set forth in part in the AWC:

In June 2018, Cetera requested Zhang resubmit a customer form related to an alternative investment that was missing some necessary information. Zhang added the missing information to the form, but instead of having the form re-executed by the customer, Zhang changed the date of the original signature page. When questioned by her supervisor about the signature, Zhang initially denied re-using the signature page, but upon further questioning admitted that she had done so for the convenience of the customer, who was on a business trip. 

As a result of this admission, Cetera reviewed additional documents submitted by Zhang and discovered two other instances in which Zhang reused customer signature pages. In March 2017 and March 2018, two separate customers completed an illiquid investment acknowledgement form and an account application by hand and signed them. Their signatures attested to the fact that the customers had reviewed the forms for accuracy. Zhang then transferred the information from the handwritten forms into new, typewritten versions that could be printed from her computer. When she did this, she added information that the customers had failed to provide. Zhang did not show the new forms to the customers, nor did she have them sign the new forms. Instead, she attached the signature pages from the handwritten forms to the new forms, and submitted them to the firm. On one of the new forms, Zhang inadvertently entered incorrect information

Lubbock Adviser Fined $40,000 for Failure to Supervise Accounts (TSSB Release)
A Texas State Securities Board Disciplinary Order
%20Order%20No.%20REG19-CAF-04.pdf found that Investment adviser Lowell & Company Inc.violated its supervisory procedures by not reviewing the monthly account statements for the discretionary accounts managed by its investment advisor representative Jody Bowers, who allegedly has not been registered with the TSSB since June 2018.The firm agreed to pay a $40,000 fine and the firm's President William H. Lowell was reprimanded. As set for in part in the TSSB Order:

In two discretionary accounts for clients, Bowers was buying and selling shares of the Proshares Ultra VIX Short-Term Futures ETF, a leveraged fund.

Leveraged ETFs use financial derivatives and debt to magnify the returns of an underlying index.

The UVXY fund seeks to profit by capitalizing on volatility in the S&P 500 Index, which tracks the performance of 500 widely held large U.S. companies across the major sectors of the economy. The UVXY benefits when the S&P 500 index declines.

Although the prospectus for the UVXY states it is "intended for short-term use" and it requires almost daily monitoring, Bowers held the fund in one client's account for 987 days and sold the shares for a 93% loss. 

In a second client's account, Bowers held the UXVY for 356 days and lost 98% of the account's value. 

The firm failed to enforce its written supervisory procedures because neither William Lowell nor other supervisory personnel reviewed the monthly statements for discretionary accounts like the two accounts Bowers managed. 

If the firm had reviewed the accounts monthly, it could have determined the UXVY was being held for longer than recommended and was causing losses in the two accounts

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