Securities Industry Commentator by Bill Singer Esq

September 16, 2019

Remarks at Central Michigan University (Speech by SEC Chair Jay Clayton)
In his remarks, SEC Chair Clayton laid out his main topics transparent market prices, small business growth, and the value of teamwork. Notwithstanding that somewhat ho-hum table of contents, Clayton did raise some interesting and provocative issues, .e.g.:

In Silicon Valley, New York, the Route 128 Corridor, Austin and a few other places, entrepreneurs can connect with the combination of (1) vast sources of capital, (2) diverse and skilled labor markets, (3) a broad array of other growing and mature businesses, and (4) a pool of professionals skilled at navigating the thicket of regulation, including securities regulation, that can be particularly daunting for small businesses.

In short, we have a handful of geographically small and highly functioning "networks" or "ecosystems" for small business growth. Why are these networks important? As we've learned from the field of economics, networks greatly reduce the costs of information access, verification, contracting, the protection of rights and the pursuit of remedies. We are focused on what can be done to expand the number of these entrepreneurial ecosystems, particularly between the coasts. Here are a few statistics that illustrate the opportunity before us: 85 percent of venture capital is concentrated in Silicon Valley, Boston, and New York. By contrast, our broad Mississippi River Valley has hundreds of large public companies and world leading universities, yet it has only a handful of established venture capital firms.

So we're taking a look at what we can do to foster more entrepreneurial ecosystems, in places like where we are, right here. If you have ideas, or you'd like to share your own experiences or challenges in raising money for small businesses, let us know.

SEC Charges Investment Adviser for Defrauding Advisory Clients by Charging Improper Transaction Costs (SEC Release)
In a Complaint filed in the United States District Court for the Easternd District of Pennsylvania, the SEC charged McDermott Investment Advisors, LLC ("MIA") and its principal/sole owner Dean Patrick McDermott with directly and indirectly violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The Complaint names MIS as a relief defendant, and seeks a permanent injunction, joint and several disgorgement and prejudgment interest, civil monetary penalties, and any further relief the court may deem just and proper. As set forth in part in the SEC Release:

[M]IA and McDermott unlawfully invested their clients in a version of unit investment trusts (UIT) that carried significant transactional sales charges when another version of the same UITs was equally available without those costs. MIA and McDermott chose among two versions of the UITs on behalf of their clients: a "fee-based version," made available to advisory clients who paid a periodic advisory fee for advisory services, and a "standard" version for retail broker-dealer clients that were not in an advisory program and paid for their investing services on a transaction-by-transaction basis. The more expensive, standard version of the UITs included a "transactional sales charge." The SEC's complaint alleges that MIA and McDermott, selected the "standard" version of various UITs on behalf of many of MIA's advisory clients, thereby causing those advisory clients to pay unnecessary transactional sales charges to MIA's affiliated broker-dealer, McDermott Investment Services, LLC (MIS), without making appropriate disclosures. The complaint further alleges that McDermott and the other investment adviser representatives that made those purchases were also the registered representatives of MIS that reaped the benefits of the transactional sales charges that were generated. As a result, the complaint alleges that MIA and McDermott violated their duties to seek best execution and to disclose all material conflicts of interest.
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC alleged that Adam Mattessich and Joseph a/k/a "Jay" Ludovico aided and abetted books-and-records violations by Cantor Fitzgerald & Co. concerning trader compensation by using personal checks to split commissions on certain accounts, in violation of the firm's policies and procedures. The Defendants moved to dismiss the SEC's claims, which SDNY denied. As set forth in part in the SEC Release:

[I]n a matter of first impression, the court found the SEC alleged, for the purpose of stating a claim, a primary violation of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(19)(i) thereunder by Cantor Fitzgerald because, as alleged, the firm's books and records did not reflect all transaction-level commissions "attributable" to each broker as a result of Mattessich's and Ludovico's off-book payment scheme. The court further found the SEC adequately pleaded that Mattessich and Ludovico knowingly aided and abetted Cantor Fitzgerald's violation by alleging they knew their conduct was prohibited by firm policy and continued to write and deposit personal checks in order to effect commission splits for certain customer accounts. expungement/
In a recent FINRA expungement arbitration, the associated person Claimant throws the ball to the arbitrator on first, who drops the ball, so the Claimant runs to the former employer, who picks up the ball and throws it to What. What throws it to I Don't Know. I Don't Know throws it back to Tomorrow -- a triple play.

Three Defendants Charged with $345 Million Fraud Agree to Permanent Injunctions (SEC Release)
In an Amended Complaint filed in the United States District Court for the District of Maryland, the SEC charged Kevin B. Merrill, Jay B. Ledford, and Cameron R. Jezierski with 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(a) and (c) thereunder. Further, the Amended Complaint charges Merrill and Ledford with violating Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder. Merrill, Ledford, and Jezierski agreed to bifurcated settlements, which the court has approved, that permanently enjoin them from future violations the federal securities laws. As set forth in part in the SEC Release:

[F]rom at least 2013 to 2018, defendants Kevin B. Merrill, Jay B. Ledford, and Cameron R. Jezierski attracted over 230 investors to the scheme by making false statements to investors about how their money was being used and propped up their misstatements through the creation of sham entities and fraudulent documents. The complaint alleges that rather than use investor funds to acquire and service debt portfolios as promised, defendants used the money to make Ponzi-like payments to investors and to fund Merrill's and Ledford's extravagant lifestyles. In a parallel action, Merrill, Ledford, and Jezierski have pleaded guilty to criminal charges brought by the U.S. Attorney's Office for the District of Maryland.
In a Complaint filed in the United States District Court for the Northern District of Illinois, the SEC charged Glenn C. Mueller, Northridge Holdings, Ltd., Southridge Holdings, Ltd., Eastridge Holdings, Ltd., Brookstone Investment Group, Ltd., Guardian Investment Group, Ltd., Unity Investment Group Ltd., and Amberwood Holdings L.P. with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act, and the antifraud provisions of Section 17(a) of the Securities Act, and Section 10(b) of the Securities Exchange Act and Rule 10b-5(a) and (c) thereunder, and Mueller and Northridge with violating Rule 10b-5(b). The Court entered orders on consent imposing a preliminary injunction, freezing Mueller's assets, and appointing a receiver over the assets of the other defendants. As set forth in part in the SEC Release:

[S]ince at least May 2014, the defendants have sold more than $41 million in promissory notes in unregistered transactions to over 300 investors throughout the country, many of whom were unaccredited and of retirement age. According to the complaint, Mueller and Northridge represented that investors' funds would be used to purchase and renovate multi-unit real estate properties, resulting in profits derived from higher occupancies and rents, and/or the resale of the properties or individual units. They touted their financial success and portrayed the note investments as "safe" and "low risk," calling certain notes "CDs." According to the SEC's complaint, Northridge's business was not profitable and did not generate sufficient revenues to cover its expenses and pay promised returns to investors, and investors' funds were not used as represented. The defendants used a significant portion of the funds raised from new investors to pay returns to earlier investors and to pay "finders" who referred investors to Northridge, as well as for securities trading and purported loans to members of Mueller's family.

FINRA Fines and Suspends Former J.P. Morgan Securities LLC Rep Over Private Securities Transaction. In the Matter of Robert P. Pachciarz, Respondent (FINRA AWC 2018058777101)
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,Robert P. Pachciarz submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. FINRA deemed that Pachciarz had participated in a Private Securities Transaction ("PST") in violation of  FINRA Rules 3280 and 2010; and, iIn accordance with the terms of the AWC, FINRA imposed upon Robert P. Pachciarz, a $5,000 fine and a six-month suspension from association with any FINRA member firm in all capacities.. As set forth in part in the AWC, during the relevant period between June 2018 and August 2018:

[A] JPM customer requested that Pachciarz recommend a private investment to him. In response, Pachciarz introduced the customer to the founder of a private company for the purpose of making a potential investment in the company. Pachciarz participated in the sale of a $500,000 note to the customer, which was a security. Pachciarz introduced the parties, received email communications concerning the customer's potential investment, coordinated and attended meetings where the customer's potential investment was discussed, actively participated in those discussions, formally witnessed the execution of closing documents and arranged a potential means of funding the customer's investment. 

The Firm's written supervisory procedures required registered representatives to request and obtain approval prior to engaging in private securities transactions, regardless of whether the representative would be compensated. Pachciarz, however, did not disclose his involvement in the sale of the note to the Firm nor did he seek approval from JPM to participate in the sale.