Securities Industry Commentator by Bill Singer Esq

August 29, 2019 expungement nephew/
A Morgan Stanley customer surrendered her annuity. About a year after the surrender, the customer's nephew complains that that the transaction was unsuitable for his aunt. The aunt didn't complain to Morgan Stanley -- only her nephew did. In response, Morgan Stanley denied the claim without offering any settlement whatsoever from either the firm or the stockbroker. Notwithstanding those facts, Morgan Stanley reported the matter as a "customer complaint" and marked up the stockbroker's industry record. 

Former Bennett Group Financial Services, LLC employee and former DJB holidngs d/b/a Chief Financial Officer Bradley Mascho plead guilty in the United States District Court for the District of Maryland to conspiracy to commit securities fraud and making a false statement, and he was sentenced to 30 months in prison plus three years of supervised release, and ordered to pay $4,824,131 in restitution. Previously, Dawn J. Bennett, was convicted by a federal jury on conspiracy, securities fraud, wire fraud, bank fraud, and making false statements on a loan application, and she was sentenced to sentenced to 20 years in prison plus five years of supervised release, and ordered to pay $14,504,290 in restitution. and a $14,306,842 forfeiture. As set forth in part in the DOJ Release:

[B]etween December 2014 and April 2017, Bennett and Mascho solicited individuals, including BGFS clients, to invest money in DJB Holdings, offering an annual interest rate of 15% via convertible or promissory notes.  In order to entice individuals to invest, Bennett and Mascho made false and misleading statements, including: how investors' funds were being used; the risks of investing in DJB Holdings; and concealing the true financial condition of DJB Holdings from investors.  Bennett and Mascho convinced several investors to withdraw a significant portion of their retirement accounts to invest in, and loan money to, DJB Holdings.  

Between December 2014 and July 2017, Bennett and Mascho solicited and received over $20 million from more than 40 different investors.  The evidence showed that Bennett, and to a lesser extent Mascho, misappropriated investor funds, using them to pay their personal expenses and to repay previous investors with funds received from new investors.  This is consistent with a Ponzi scheme--a fraudulent investment scheme in which the operator of the scheme solicits investors by promising high rates of return with little risk.  The scheme operator then funds payments to the earlier investors through funds obtained through new investors. Typically, the operator of the scheme will use investment funds for purposes other than what was conveyed to the investors.

Further Mashco admitted that on June 19, 2017, he lied under oath in a deposition related to an investigation by the U.S. Securities and Exchange Commission (SEC) into Bennett and DJB Holdings' unlawful issuance of convertible notes to investors.  Mascho admitted that before the deposition, he spoke with Dawn Bennett extensively about his testimony and that his false statements to the SEC were all made under Bennett's direction and at her insistence.

From 2014 through 2016, Mascho received compensation from BGFS and Bennett personally of approximately $209,000 to $219,000.
The former Controller of the College of New Rochelle ("CNR"), Keith Borge, pled guilty in the United States District Court for the Southern District of New York to failure to pay over $20 million in payroll taxes and for securities fraud; and he was sentenced to 36 months in prison plus three years of supervised release and ordered to pay a $25,000 fine. As set forth in part in the DOJ Release:

From in or about 2011 to in or about August 2014, BORGE was the vice president for financial affairs at CNR, a private college with its main campus in New Rochelle, New York.  From in or about August 2014 to in or about June 2016, BORGE was CNR's controller.  CNR had approximately 500 to 900 paid employees, depending on the time of year.  The college withheld from its employees' pay both federal income tax and its employees' contributions to Social Security and Medicare.  Federal law required that the college pay over those withheld taxes and contributions within one week of the day it paid its employees.  During that one-week period, CNR held those withheld taxes and contributions in trust for the federal government.

As controller, BORGE managed CNR's financial affairs and was responsible for paying over withheld payroll taxes and contributions.  From the third quarter of 2014 through the second quarter of 2016, BORGE failed to do so.  By the end of the second quarter of 2016, BORGE had failed to pay over more than $20 million in combined federal and state payroll taxes and contributions.

BORGE also made false entries into CNR's books and records to conceal the college's actual financial condition.  As a result, CNR's financial statements for its fiscal year ending June 30, 2015, reported the college had net assets of $25 million, which was an overstatement by at least $24 million.  Among other things, BORGE caused the financial statements to understate CNR's liability for federal and state payroll taxes by approximately $11 million; to overstate accounts receivable by approximately $9.2 million by recognizing pledged donations twice; to understate accounts payable by at least $1.5 million by failing to enter unpaid vendor invoices into CNR's books and records; and to overstate investment assets by at least $2.2 million by recognizing assets that did not exist and by failing to enter his withdrawals from CNR's investment accounts into the college's books and records.

BORGE caused CNR's inaccurate financial statements for the fiscal year ending June 30, 2015, to be released to the public by, among other things, providing the financial statements to the Municipal Securities Rulemaking Board for publication on the Electronic Municipal Market Access web site, where they could be reviewed by the investing public.  As a result, investors in bonds issued by the college through the City of New Rochelle Industrial Development Agency were defrauded by BORGE's materially false and misleading statements in CNR's financial statements.
RBC Capital Markets mis-priced the value of some shares in a customer's account. The error prompted the payment of proceeds that were about $1 million higher than the fair market value. The lucky recipient of this screw-up was an RBC stockbroker -- go figure, right? Ultimately, RBC recovered every penny of its mistake. Unfortunately, FINRA barred the stockbroker. How did that happen?  Ahhhh . . . that's the fascinating tale we tell in today's blog.