Securities Industry Commentator by Bill Singer Esq

August 7, 2019

Why did I post this? I guess we all just need a break from the darkness. Look at this -- this is love.

( Blog)
Charles Schwab & Co., Inc. apparently employs "Chat Representatives." That's nice. I like to chat. Frankly, most lawyers like me who charge hundreds of dollars an hour love to chat provided we're on the clock. In any event, after some 37 years on Wall Street, I don't actually know what a Chat Representative is or does. I looked up all the official categories of representatives on FINRA's website and, go figure, there's nothing about a Chat Representative and there isn't even an examination that you can take to become one. In any event, apparently a Schwab customer had a not-so-lovely chat with one of the brokerage firm's Chat Representatives because the customer sued claiming that the chatting rep had failed to place a sell order.

SEC ALJ Tackles Adverse Inference Arising From Invocation of Fifth Amendment. In the Matter of Traci J. Anderson, CPA, Timothy W. Carnahan, and CYIOS Corporation (SEC Order Drawing Adverse Inferences and Admitting Exhibits, Admin. Proc. Rul. Rel. No. 6650, Admin. Proc. File No. 3-16386) Respondent Carnahan invoked his Fifth Amendment privilege against self-incrimination and refused to answer questions, which permitted SEC Administrative Law Judge James E. Grimes to draw an adverse inference. In addressing the exercise by an SEC ALJ of the discretion to draw an adverse inference, ALJ Grimes noted in part that [Ed: footnotes omitted]:

In deciding whether to draw an adverse inference in Commission administrative proceedings, an administrative law judge must consider "the nature of the proceeding, how and when the privilege was invoked, and the potential harm or prejudice to" the Division. And because a respondent may invoke the Fifth Amendment to "hinder" a proceeding, the Commission has cautioned its administrative law judges to "be especially alert to the danger that the litigant might have invoked the privilege primarily to . . . gain an unfair strategic advantage over opposing parties." 

Having observed the Division's examination of Carnahan and considered the Division's submission, I determine that it is appropriate to draw adverse inferences based on Carnahan's refusal to answer the Division's questions, although I reserve decision on whether an adverse inference is appropriate or necessary for each specific question until I review the parties' post-hearing briefs. First, Carnahan invoked the Fifth Amendment privilege as to all questions without regard to the question or whether there was any possible risk that answering the question might tend to incriminate him. He thus refused to answer background questions about his education and foundational questions such as whether he recalled another witness's testimony, remembered that a document had been previously discussed, or could see what was written in a particular document. Invoking as to all questions, especially as to background and general questions, is improper and tends to show that Carnahan did not fear incrimination but was instead invoking strategically.

Second, Carnahan testified previously-both during the Division's investigation and in a previous hearing before my predecessor-without invoking his Fifth Amendment privilege. Carnahan's decision to invoke the Fifth Amendment during the hearing, without warning and after not previously invoking, particularly in light of his refusal to answer simple, nonincriminating questions, further suggests that he invoked strategically to hinder the Division. 

Third, because he previously testified without invoking, the Division had no reason to suspect he would do so at the hearing. It thus had no reason to believe it would need to call other witnesses in order to admit evidence or offer testimony it expected to present through Carnahan. Carnahan's strategic invocation at the last minute thus unfairly prejudiced his opponent. Not drawing an adverse inference would invite gamesmanship. 

The Division's motion is granted. I will draw adverse inferences based on Carnahan's refusal to testify, subject to the Division identify . . .
Without admitting or denying the allegations of the complaint, Gregg E. Jaclin consented to the entry of a judgment permanently enjoining him from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder and the registration provisions of Sections 5(a) and 5(c) of the Securities Act, and aiding and abetting violations of Section 15(d) of the Exchange Act and Rules 12b-20, 15d-1, and 15d-13 thereunder. Jaclin was ordered to pay $40,473 in disgorgement and prejudgment interest and imposes a penny stock bar. No civil penalty was imposed in light of Jaclin's anticipated sentence in a parallel criminal action. Separately, without admitting or denying the allegations, Jaclin agreed to the entry of an SEC Order permanently suspending him from appearing and practicing before the SEC as an attorney; and he is prohibited from representing clients in SEC matters, including investigations, litigation, or examinations, and from advising clients about SEC filing obligations or content. The litigation against Husain is ongoing. As set forth in part in the SEC Release:

In May 2016, the SEC charged Jaclin and Imran Husain of Santa Monica, California with running the shell factory scheme. As alleged in the SEC's November 2016 amended complaint Husain and Jaclin created nine shell companies and sold seven using essentially the same pattern. Husain and Jaclin filed registration statements for initial public offerings, falsely claiming that a particular business plan would be implemented and that private investors had already purchased shares of the companies' stocks. Deliberately omitted from the registration statements was any mention of Husain's control of the company. Husain and Jaclin filed quarterly and annual reports, signed by a puppet CEO, which repeated many of the false and misleading statements in the registration statements. The SEC previously issued stop orders and suspended the registration statements of the last two created companies - Counseling International and Comp Services - before investors could be harmed and the companies could be sold.

On May 18, 2017, a federal grand jury returned an indictment against Jaclin on charges related to the shell factory scheme and with obstruction of justice of two SEC investigations.
In a Complaint filed in the United States District Court for the District of Massachusetts, the SEC alleges that Tanmaya a/k/a Tan Kabra and LLC. violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder and seeks a permanent injunction from future violations, disgorgement of allegedly ill-gotten gains with pre-judgment interest, and civil penalties. Also, the SEC seeks an asset freeze against both Kabra and and a temporary restraining order, among other relief. In a parallel action, the federal criminal charges were filed against Kabra for wire and bank fraud.As set forth in part in the SEC Release:

[K]abra, through, LLC, told investors they could make double-digit returns in a matter of months with no risk by providing Kabra with short-term infusions of cash to be invested in one or more startup companies that Launchbyte purportedly had an ownership interest in. In fact, these "investment" opportunities were fabrications, the SEC alleges; upon receiving investor funds, Kabra diverted them almost immediately to his own use-in one instance, to pay for a boat Kabra had agreed to purchase, and, in other instances, to pay back earlier investors in Ponzi-like distributions. The SEC alleges that Kabra repeatedly lied to investors to keep them from discovering his fraud.