Securities Industry Commentator by Bill Singer Esq

October 22, 2019

featured in today's Securities Industry Commentator:
A few things that you may not remember about 1993. For starters, Czechoslovakia ceased to exist. Bill Clinton was sworn in as the 42nd President of the United States of America.  The World Trade Center was bombed. "Unforgiven" won the Best Picture at the Academy Awards. The Maastricht Treaty took effect and the European Union was established. President Clinton signed the North American Free Trade Agreement. Robert Michael Burns was a Junior Advisor with limited authority at Olde Discount Corporation. Who's Robert Michael Burns? What was Olde? You never realized that the Czech Republic and the Slovakia had replaced Czechoslovakia?
Computer programmer David Dorsett pled guilty in the United States District Court for the District of Kansas to two counts of making extortionate threats via the internet. Co-Defendant Brad Pistotnik pled guilty and was sentenced to pay a $375,000 fine and $55,200 in restitution.  As alleged in part in the DOJ Release: 

[D]orsett admitted he Pistotnik met with Dorsett and showed him postings on the internet that Pistotnik wanted removed, including a Kansas Supreme Court disciplinary opinion for Pistotnik and a negative consumer review. Email communications between Dorsett and Pistotnik contacted Pistotnik in September 2014 offering reputation management services. showed Postnik saying, "Any luck removing that bad website I showed you?" and "tell me how we get rid of it."

Dorsett sent a barrage of emails to two web sites, and demanding they remove information critical of Pistotnik. The emails read in part, "If you don't remove it we will begin targeting your advertisers and explain that this will stop happening to them once they pull their ads. . ." Dorsett billed Pistotnik for sending the threats and Pistotnik paid him by check the same day.

In a Complaint filed in the United States District Court for the District of Massachusetts, the SEC alleged that  traders Shuang Chen, Lirong Gao, Jing Guan, Tonghui Jia, Xuejie Jia, Vicky Liu, Shun Sui, Lujun Sun, Huailong Wang, Jiadong Wang, Jiafeng Wang, Jiali Wang, Xiaosong Wang, Linlin Wu, Lin Xing,Yong Yang, Jiancheng Zhao, and Forrest (HK) Co., Limited) violated and aided and abetted violations of the antifraud provisions of Section 17(a) of the Securities Act, Sections 9(a)(2) and 10(b) of the Securities Exchange Act, and Rule 10b-5 thereunder. In addition to the asset freeze and other emergency relief obtained, the SEC seeks disgorgement of ill-gotten gains plus interest, penalties, and injunctive relief. In a parallel action, federal criminal charges were filed against Jiali Wang and Xiaosong Wang. As alleged in part in the SEC Release, the 18 Defendants attempted to manipulate over 3,000 U.S.-listed securities for over $31 million in illicit profits:

The SEC alleges that the traders, who are primarily based in China, manipulated the prices of thousands of thinly traded securities by creating the false appearance of trading interest and activity in those stocks, thereby enabling them to reap illicit profits by artificially boosting or depressing stock prices. For example, according to the SEC's complaint, the traders used multiple accounts to place several small sell orders to drive down a stock's price before using a different set of accounts to buy larger amounts of the stock at the artificially low prices. After accumulating their position, the traders then flipped the script and placed several small buy orders to push up prices so they could then sell their stock at artificially high prices.
Kenneth Taylor pled guilty in the United States District Court for the Northern District of California to filing a false income tax return and to conspiring with Co-Defendants Sharon Ringgenberg and Craig Scott to commit wire fraud; and he was sentenced to 36 months in prison and ordered to pay $90,000 in victim restitution and $1,100,774 in restitution to the Internal Revenue Service. Previously, Ringgenberg and Scott Taylor pled guilty to conspiring to commit wire fraud and are awaiting sentencing. As alleged in part in the DOJ Release:

[T]aylor admitted that from 2009 through 2012, he conspired with his codefendants to sell to customers fraudulent standby letters of credit and proof of funds statements for submission to banks. These financial instruments were fraudulent because they reported false client creditworthiness and client balances that exceeded Success Bullion USA, LLC's (SBUSA) assets. 

The fraudulent financial instruments were issued by SBUSA, an entity for which Taylor established a website, and which falsely purported to be an authorized U.S. subsidiary of a large Hong Kong financial institution. The fraudulent financial instruments were transmitted to banks by Centerlink LLC, another entity Taylor controlled, in a format that rendered the instruments unenforceable. Taylor sent proceeds he received through SBUSA and Centerlink to an account in Belize that he controlled. Taylor admitted that he received more than $3 million from the scheme, and that his false returns caused a tax loss of more than $550,000. FINRA Release announced that pursuant to an Order Accepting an Offer of Settlement the self-regulatory-organization barred Ami Forte and Charles Lawrence for their respective roles in allegedly churning accounts belonging to a 79-year-old customer who suffered from severe cognitive impairment. As alleged in part in the FINRA Release:

Forte first met the customer (identified as "RS" in the settlement) in the late 1990s, at which time the two developed a romantic and business relationship. Forte, who maintained near daily contact with RS, used her position of trust and confidence to exploit RS and generate excessive commissions from his accounts.

FINRA found that from September 2011 through June 2012, the Forte Group, an entity Forte established in 2001, which Lawrence joined at its inception, effected more than 2,800 trades in RS's accounts, generating approximately $9 million in commissions. Over half of these transactions involved short-term trading in long-maturity bonds, including municipal bonds, intended for customers with long-term investment horizons.

This unsuitable and excessive trading continued until shortly before RS's death. On June 20, 2012, RS entered the hospital for the final time before his passing in August 2012. Despite being hospitalized and not in contact with anyone from the Forte Group, between June 20, 2012 and June 29, 2012, RS's accounts had over $14 million in transactions.
As presented by the staff of the SEC's Division of Investment Management, a FAQ addressing potential conflict inherent in investment advisers' compensation arrangements is now online. As noted in part in the SEC Release [Ed: footnotes omitted]:

These FAQs focus on the identification and disclosure of certain conflicts of interest and are not a comprehensive discussion of an investment adviser's fiduciary duty with respect to these or other conflicts. For example, an investment adviser owes its clients a duty of care that requires it to provide investment advice that is in the best interest of the client based on the client's objectives. In addition, investment advisers are required to adopt and implement policies and procedures reasonably designed to prevent violations of the Investment Advisers Act and the rules thereunder. While we do not discuss these obligations here, additional information can be found in the relevant Commission releases on these topics.