Securities Industry Commentator by Bill Singer Esq

September 5, 2019
Without admitting or denying the SEC's and CFTC's findings, the Options Clearing Corporation ("OCC") agreed to pay $15 million under the SEC Order and $5 million under the CFTC's Order; and hire an independent compliance auditor to assess its remediation of the violations and subsequent compliance efforts. As set forth in part in the SEC Release:

[O]CC failed to establish and enforce policies and procedures involving financial risk management, operational requirements, and information-systems security.  The SEC's order also found that OCC changed policies on core risk management issues without obtaining required SEC approval.

As the U.S.'s sole registered clearing agency for exchange-listed option contracts on equities, OCC was designated in 2012 as a systemically important financial market utility, or SIFMU.  That designation makes OCC subject to enhanced regulation and transparency regarding its risk management systems because disruption to OCC's operations might be costly not only for itself and its members, but other market participants or the broader financial system. Today's enforcement action is the SEC's first charging violations of SEC clearing agency standards adopted in 2012 and in 2016, and the CFTC's first charging violations of Core Principles applicable to Derivatives Clearing Organizations

As set forth in part in the SEC Order:

9. In connection with examinations of OCC before it was required to comply with the Rule 17Ad-22(e) and Reg. SCI, the Commission staff notified OCC of material weaknesses with its policies and procedures that, if not corrected before the required compliance dates, could result in violations of Rule 17Ad-22(e) and Reg. SCI. 

10. Nonetheless, despite the Commission staff's advance warnings and ample time to comply, OCC failed to come into compliance with Rules 17Ad-22(b), (d) and (e) and Reg. SCI by the required compliance dates. Specifically, OCC failed to establish, implement, maintain and enforce policies and procedures reasonably designed to: 
a. review its risk-based margin models and the parameters for those models on a monthly basis; 
b. consider and produce margin levels commensurate with the risks and particular attributes of each relevant product cleared by OCC; 
c. effectively measure, monitor, and manage its credit exposure and liquidity risk; 
d. maintain a comprehensive risk management framework; 
e. protect the security of certain of its information systems; and
f. provide for a well-founded, clear, transparent and enforceable legal framework for every aspect of its activities.

OCC also failed to comply with Section 19(b) of the Exchange Act and Rule 19b-4(c) thereunder
by adopting and changing certain policies prior to obtaining Commission approval.
In a Complaint filed in the United States District court for the District of Nevada, the SEC charged John F. Thomas, Thomas Becker, Einstein Sports Advisory, LLC, QSA, LLC, Vegas Basketball Club, LLC, Vegas Football Club, LLC, Wellington Sports Club, LLC,  and Welscorp, Inc. with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities and Exchange Act and Rule 10b-5 thereunder, and the registration provisions of Section 5(a) and 5(c) of the Securities Act. Also, the Complaint charges Douglas Martin, Paul Hanson, Damian Ostertag, Executive Financial Services, Inc. charges with violating the broker-dealer registration provisions of 15(a) of the Securities Act and the registration provisions of Section 5(a) and 5(c) of the Securities Act. As set forth in part in the SEC Release:

[C]onvicted felons, John F. Thomas and Thomas Becker, and several entities they control, promised investors 250% to 600% returns from pooled investments in sports betting, using what they claimed was a proprietary handicapping system. The complaint, however, alleges that they used the majority of investor money to fund their lifestyles, pay commissions to brokers and agents, or make Ponzi-like payments to other investors. The complaint further alleges that they misrepresented to investors the investment performance of the funds that were actually invested in sports betting. The complaint also alleges that Douglas Martin, Paul Hanson, Damian Ostertag, and a company owned by Martin sold unregistered securities without being registered as brokers or associated with a registered broker.

Cumberland County Man Charged With Conspiracy To Defraud 30 Victims In Romance Fraud Scheme (DOJ Release)
In a Complaint filed in the United States District Court for the District of New Jersey, Rubbin Sarpong was charged with one count of conspiracy to commit wire fraud. As set forth in part in the DOJ Release:

Between January 2016 and Sept. 3, 2019, Sarpong and his conspirators, several of whom reside in Ghana, allegedly participated in an online romance scheme, defrauding victims in New Jersey and elsewhere. Sarpong and the conspirators set up dating profiles on various dating websites, using fictitious or stolen identities and posing as United States military personnel who were stationed overseas. They contacted victims through the dating websites and then pretended to strike up a romantic relationship with them. After establishing virtual romantic relationships with victims on the online dating platforms and via email, the conspirators asked them for money, often for the purported purpose of paying to ship gold bars to the United States. Although the stories varied, most often Sarpong and the conspirators claimed to be military personnel stationed in Syria who received, recovered, or were awarded gold bars. The conspirators told many victims that their money would be returned once the gold bars were received in the United States.

Sarpong and the conspirators used myriad email accounts and Voice Over Internet Protocol phone numbers to communicate with victims and instruct them on where to wire money, including recipient names, addresses, financial institutions, and account numbers. Victims wired money to bank accounts held by Sarpong and others at financial institutions in the United States. Occasionally, victims also mailed personal checks and/or cashier's checks to the conspirators and also transferred money to the conspirators via money transfer services, such as Western Union and MoneyGram. The funds were not used for the purposes claimed by the conspirators - that is, to transport non-existent gold bars to the United States - but were instead withdrawn in cash, wired to other domestic bank accounts, and wired to other conspirators in Ghana.

Federal law enforcement agents have identified more than 30 victims, with a total loss amount exceeding $2.1 million. Sarpong allegedly personally received $823,386 in victim funds into bank accounts that he owned or controlled. Sarpong posted photographs of himself on social media posing with large amounts of cash, high-end cars and expensive jewelry.
Recently, the Business Roundtable adopted a new Statement of Purpose of a Corporation, which ordered the entity's obligations as first, to customers; second, to employees; third, to suppliers; fourth, to communities; and last, to shareholders. In response, the Council of Institutional Investors rang the alarm about corporate management trying to entrench behind the dubious refuge of so-called stakeholder governance and sustainability. In its riposte, the Council argued that it was the Government's role to define a corporation's social obligations, and managers should just focus on profits. It costs nothing to invite government regulation when you know it won't happen. 

Former Raymond James Rep Barred for False FINRA Testimony and Fabricating False Confirms. In the Matter of Stefan Pastor, Respondent (FINRA AWC 2018058316601)
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, Stefan Pastor submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. Having deemed Pastor's cited conduct to be in violation of FINRA Rules 8210 and 2010, and in accordance with the terms of the AWC, FINRA imposed upon Stefan Pastor a Bar from association with any FINRA member in any capacity. The AWC asserts that Pastor was entered the industry in 2006 and from August 2013 through April 2018, he was registered with FINRA member firm Raymond James Financial Services ("RJFS"). As set forth in part in the AWC: 

In April 2018, FINRA's Office of Fraud Detection and Market Intelligence opened an investigation based on a Form U5 filed by RJFS terminating Pastor's association with the firm. The Form U5 stated that RJFS terminated Pastor based on a customer complaint alleging that Pastor had engaged in unauthorized trading in her accounts and provided her with false sales confirmations. 

Pursuant to FINRA Rule 8210, FINRA staff took Pastor's OTR on April 17, 2019, as part of its investigation. During the OTR, Pastor claimed to FINRA staff that Customer A authorized the trades at issue. Moreover, Pastor denied providing false trade confirmations to Customer A, which purportedly demonstrated that he had reversed the unauthorized trades. Pastor's testimony was false. Customer A never authorized the trades at issue and Pastor did, in fact, provide false trade confirmations to Customer A in an attempt to prove to Customer A that he reversed the unauthorized trades. 

Five Individuals Convicted For Participating in Global Fraud Scheme (DOJ Release)
In a Complaint filed in the United States District Court for the Southern District of Florida, six Defendants were charge with their roles in a global fraud. Byramji Javat, Chairman of the Dubai-based Uniworld Group, pled guilty to one count of conspiracy to commit wire fraud. Sunil Chopra, William Armando, and Emanuel Daskos each pled guilty to one count of conspiracy to obtain pre-retail medical products worth $5,000 or more by fraud or deception. Following a jury trial, customs -roker Luis Soto was convicted of one count of conspiracy to commit wire fraud, one count of conspiracy to obtain pre-retail medical products worth $5,000 or more by fraud or deception, two counts of wire fraud, and two counts of obtaining pre-retail medical products by fraud or deception. Defendant James Sipprell awaits trial. As set forth in part in the DOJ Release:

[B]etween 2014 and 2017, Javat orchestrated a fraud scheme to purchase FDA-regulated products including medical devices from manufacturers in the United States at deeply discounted prices by lying to them about the destination and purpose of the goods.  Javat represented that he was a large supplier of medical and food products to United States troops in Afghanistan, and sought deep discounts from the manufacturers by claiming that he could provide their goods to American troops in Afghanistan or to the Afghan people.  In truth, Javat wanted to obtain these products at prices not generally offered in the United States in order to sell those products himself in this country - not abroad, and not to the military - at a significant profit.    

To execute this scheme, the conspirators insisted that products be packaged for the United States market, falsely claiming to the manufacturers that this was required by the U.S. military, the Afghan government, or the "Buy American Act."  When the products nonetheless had stickers or other packaging on them stating that the items were for export only, the conspirators secretly removed those labels.  After acquiring the products, Javat and the co-conspirators arranged for the diversion of the products to various locations in the United States.  To conceal this activity, the conspirators typically shipped the products abroad and then had them immediately shipped back to the United States, or provided the victims with fraudulent shipping documentation showing that the products were exported when actually they had never left this country.

Javat admitted the allegations of the superseding indictment during his guilty plea.  During Soto's trial, the government proved these allegations to the jury and presented additional evidence about the defendants' scheme.  For example, the conspirators often represented that they were purchasing items on behalf of the Afghanistan Reconstruction and Development Services ("ARDS"), which at one time was an agency of the Afghan Government funded in part by the United States.  That agency ceased to exist after 2014, yet the conspirators provided victims with fake documents supposedly from ARDS imposing extravagant demands that in reality only suited the conspirators' needs.  In 2016, Uniworld prepared an internal Powerpoint presentation expressly informing its staff that they had to be "good at lying."  Finally, because these goods were moving outside normal channels, they often were mishandled; for example, according to the conspirators' own emails at the time, the defendants disregarded temperature requirements when transshipping over-the-counter pain medicines, one of the defendants kept a shipment of diabetic test strips that required refrigeration in his car trunk overnight and another shipment of medical products became covered in bird droppings.  The products involved in Javat's scheme included surgical instruments, professional dental care devices, bandages, and aspirin.

The evidence at trial demonstrated that Soto knew about Javat's fraud scheme yet knowingly helped him by supplying paperwork to federal agencies including the FDA to facilitate the re-entry of the diverted products into the United States through the Port of Miami or Miami International Airport.  Chopra, Armando and Daskos also knowingly furthered the scheme by helping to transport the products and remove export labels.