Securities Industry Commentator by Bill Singer Esq

October 23, 2019

featured in today's Securities Industry Commentator: Agarwal pled guilty in the United States District Court to an Information charging him with two counts of obtaining information from computers and one count of aggravated identity theft. Agarwal consented to a forfeiture judgment requiring him to forfeit numerous computers, storage devices, and related equipment. As alleged in part in the DOJ Release, starting in February 2017, Agarwal:

physically trespassed onto a company's premises in New Jersey (Company One) and illegally installed hardware key-logger devices onto the company's computers. The key-logger devices covertly recorded the keystrokes of the company's employees and provided Agarwal with their usernames and passwords. Agarwal also surreptitiously installed his personal computer and a hard drive onto the company's computer network. Using the fraudulently obtained logon credentials, Agarwal hacked into the company's computer network and targeted various employees, including employees developing an emerging technology. Agarwal admitted that he stole, transferred, and exfiltrated Company One's data and information, including its emerging technology. Agarwal also created a computer malicious code, which he installed onto the company's computer systems and used to steal and transfer the date to himself.

Agarwal also admitted that he hacked into, targeted, and stole data and information from a second company in New Jersey (Company Two). Using the same general scheme, Agarwal physically trespassed onto Company Two's premises, illegally installed hardware key-logger devices onto the company's computers, installed his personal computer and a hard drive onto the company's computer network, and stole, transferred, and exfiltrated Company Two's data and information, including an emerging technology that Company Two was developing.

Agarwal also obtained unauthorized access into an employee's computer system and then fraudulently created an access badge for himself. This fraudulently obtained access badge, bearing another individual's name, allowed Agarwal to physically trespass onto Company Two's premises.

Four Indictments were unsealed in the United States District Court for the Southern District of New York alleging that insiders at multiple investment banks obtained material, nonpublic information  about publicly traded companies and provided that information, sometimes through middlemen, to securities traders who paid for that information.  Members of the ring allegedly took steps to evade detection through the use of unregistered "burner" cellphones and encrypted applications. The defendants are variously charged with differing numbers of counts and in differing combinations of some or all of conspiracy to commit securities fraud and fraud in connection with a tender offer; conspiracy to commit wire fraud and securities fraud; securities fraud; fraud in connection with a tender offer; and wire fraud. Named in the Indictments are:

In the Cohen-Nikas SEC Complaint, the SEC charged Cohen and Nikas with violations of the antifraud provisions of Section 17(a) of the Securities Act, Sections 10(b) and 14(e) of the Securities Exchange Act and Rules 10b-5 and 14e-3 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. As alleged in part in the Cohen-Nikas SEC Release:

[C]ohen allegedly shared this information with at least one foreign individual who traded on the information and further tipped it to George Nikas who resides in New York, New York and Athens, Greece. According to the SEC's complaint, Nikas used the information to net over $2.6 million in illicit profits resulting from trades in stock, American Depositary Shares, and Contracts for Difference, which were traded or hedged on U.S. exchanges.

In the Taylor,-Windsor-El-Kouri SEC Complaint, the SEC charged Taylor, Windsor, and El-Kouri violations of the antifraud provisions of Sections 10(b) and 14(e) of the Securities Exchange Act and Rules 10b-5 and 14e-3 thereunder. The SEC seeks disgorgement of ill-gotten gains plus interest, penalties, and injunctive relief.As alleged in part in the Taylor-Windsor-El-Khouri SEC Release:

[T]aylor and Darina Windsor, obtained nonpublic information about at least fifteen potential acquisitions and tender offers through their respective positions as investment bankers in the London offices of two investment banks. During the early phases of the scheme, Taylor obtained confidential deal information from his own employer and provided tips in exchange for cash payments. Taylor also regularly obtained information from his then-girlfriend Windsor who actively sought out confidential information including by accessing documents about transactions on which she was not staffed. As alleged in the complaint, Taylor tipped the information directly or indirectly to Joseph Abdul Noor El-Khouri and/or another trader who collectively traded in advance of at least fifteen different acquisition announcements. El Khouri, who resides in Monaco and London, allegedly used the information to net over $2 million in illicit profits trading Contracts for Difference and spread bets based on securities of at least six U.S. companies that were about to be acquired.
James T. Booth, 74, pled guilty in the United States District Court for the Southern District of New York to one count of securities fraud. As alleged in part in the DOJ Release:

From 2013 through 2019, BOOTH solicited money from clients of Booth Financial and falsely promised to invest their money in securities offered outside of their ordinary advisory and brokerage accounts.  Specifically, BOOTH directed certain of his clients to write checks or wire money to an entity named "Insurance Trends, Inc."  Instead of investing his clients' funds, BOOTH, who controlled the bank account of Insurance Trends, Inc., subsequently misappropriated his clients' funds to pay his personal and business expenses.

In total, BOOTH raised approximately $4.9 million from approximately 40 investors.  BOOTH lured many of his victims with false promises of safe investments with high returns.  For example:
  • BOOTH convinced a recently widowed elderly investor ("Investor-1") to move money she had received from her late husband's pension into Insurance Trends, Inc.  BOOTH falsely promised Investor-1 that she would have $1 million by the time she was 100 years old.  As a result of BOOTH's false assurances, Investor-1 invested more than $600,000 with BOOTH.

  • BOOTH similarly convinced another investor ("Investor-2") to move his money into an investment product that, according to BOOTH, would never lose its principal and would grow with the market.  Based on this false representation, Investor-2 moved money he had set aside for his child's college expenses, at least approximately $60,000, to BOOTH.  BOOTH subsequently failed to provide Investor-2 with documentation of his investment or to allow Investor-2 to redeem his investment.

  • BOOTH convinced another elderly investor ("Investor-3") to withdraw money from an annuity established for the care of his disabled sibling, approximately $18,000, and invest that money with BOOTH.  Investor-3 gave the money to BOOTH with the understanding that BOOTH would invest that money for the benefit of Investor-3's sibling's continued care.
To prevent investors from seeking a return of their money, and to induce additional investments, BOOTH provided investors with fabricated account statements that falsely indicated that BOOTH had purchased certain securities on their behalf and that those investments had generated a profit.  BOOTH further concealed the truth from investors by using money obtained from new investors to make redemption payments to previous investors, in a Ponzi-like fashion.
Certified Public Accountant Ronald J. Roach and general contractor/electrician Joseph W. Bayliss pled guilty in the United States District Court for the Eastern District of California to their respective roles in a $1 billion solar energy company fraud. As alleged in part in the DOJ Release:

[B]etween 2011 and 2018, the solar energy company manufactured mobile solar generator units (MSG), solar generators that were mounted on trailers. The company touted the versatility and environmental sustainability of the MSGs and claimed that they were used by cellphone companies to provide emergency power to cell towers in the case of a power failure. They were also claimed to be used to power lights at sporting and other events.

The company solicited investors by claiming that there were very favorable federal tax benefits associated with investments in alternative energy. The company structured the transactions in order to maximize the tax benefits to the investors. Investors would buy the MSGs without ever taking possession of them. They would pay a percentage of the sales price and finance the balance with the company. Then the investors would lease the MSGs back to the company, which in turn leased them to third parties. A portion of the lease revenue would be used to pay the investors' debts to the company and to the investors. The third‑party leases, however, generated little income and the company paid early investors with funds contributed by later investors.

According to court documents, Ronald J. Roach, 53, of Walnut Creek, a certified public accountant, provided accounting and tax services to the solar energy company. To trick investors, Roach prepared years of financial statements that falsely characterized investments to purchase MSGs as revenue earned from the rental of those MSGs. Roach and his co-conspirators used those fraudulent financial statements to hide from investors the company's use of later investor payments to pay financial obligations the company made to earlier investors-in a classic, Ponzi-like scheme. Roach also pleaded guilty to securities violations associated with the same investment fraud scheme.

Joseph W. Bayliss, 44, of Martinez, a general contractor and electrician who provided services to the solar energy company, pleaded guilty to conspiring with Roach and others in connection with the same scheme to defraud investors. Bayliss admitted to preparing thousands of false reports certifying the existence and operating specifications of thousands of MSGs sold to investors. Bayliss admitted that, for at least two years, he signed many of those false reports knowing that the MSGs associated with them did not exist, and knowing investors would rely on those false reports. Bayliss also admitted that, at the direction of a co-conspirator, he flew to Las Vegas to destroy evidence after the execution of search warrants at the company's headquarters and other locations in December 2018.

In a FINRA Arbitration Statement of Claim filed in December 2018, associated person Claimant Cox sought the expungement from his Central Registration Depository record ("CRD") of a non-settled customer complaint, which is referenced in the FINRA Arbitration Decision as Occurrences Number 1870548. Respondent Morgan Stanley took no position regarding the requested relief and participated in the hearing. The customers involved with the underlying complaint did not participate in the hearing. As preliminarily noted by the sole FINRA Arbitrator:

[R]espondent requested expungement in the underlying arbitration hearing on behalf of Claimant, who was not a party to the underlying arbitration. That request was denied by the underlying panel. As Claimant was not a party and did not participate in the underlying hearing, including not testifying in support of Respondent's request for expungement, this matter is not considered to be a "second request for expungement."

The sole FINRA Arbitrator recommended the expungement of Occurrence 1870548 based upon a FINRA Rule 2080 finding that the customers's claim, allegation, or information is factually impossible or clearly erroneous, and false. The Arbitrator offered the following rationale, which is thorough and exceptionally well drafted:

The Customers had four accounts with Claimant. A review of the account-opening forms completed by the Customers reveals that each reflected no immediate income needs, the Customers' risk tolerance was moderately aggressive, and their goal was capital appreciation. Further, the Customers would need cash redemptions in 6-10 years. Despite clear documentation supporting this risk tolerance, the Customers claimed in the underlying case that the husband was on a limited fixed income and needed funds much sooner than the 6-10 years the Customers disclosed on the forms. That underlying claim clearly contradicts the evidence in this expungement hearing. 

The Customers' four accounts were non-discretionary, allowing Claimant to trade in any account only with specific permission from the Customers. Unchallenged testimony posited that this situation does not create a fiduciary duty on Claimant's part. No fiduciary duty was owed to the Customers. The claim of breach of fiduciary duty is therefore clearly erroneous. 

Claimant evaluated the Customers' investments when initially meeting them. Using Respondent's proprietary planning software which uses Monte Carlo simulations, a time-tested process, to analyze investment allocations. Claimant showed the Customers their current allocation (~80% cash and index annuities, only 9% stocks) had zero probability of meeting their goals in 6-10 years. He recommended an investment allocation of various funds wherein Respondent's proprietary planning software predicted an 82% probability of funding all their goals per their documented stated risk tolerance and goals. Claimant and Respondent, relying on the Customers' written statements, proceeded prudently with regard to the investments. Claimant's investment allocation recommendations were reasonable, based on specific goals and risk-tolerance information provided by the Customers, relying on widely-used planning tools.. No violation of FINRA Rules 2010, 2111, or federal securities laws occurred, as Claimant's investment recommendations were suitable and based on accepted allocation theories. Thus, this claim is clearly erroneous. 

Per the account-opening documents, the Customers contracted with Respondent. No document or oral agreement was suggested that bound Claimant contractually with the Customers. Their relationship was as financial advisor and client, whereby the advisor recommended investment allocations based on the investment-planning tool provided by Respondent. Trades in the Customers' accounts were contingent on their approval. No contract existed between Claimant and the Customers. Thus, the breach-of-contract claim is factually impossible and clearly erroneous.


In a FINRA Arbitration Statement of Claim filed in September 2018, associated person Claimant Bradley sought the expungement from his Central Registration Depository record ("CRD") of two customer complaints (neither of which had settled), which are referenced in the FINRA Arbitration Decision as Occurrences Number 1312338 ("Customer A") and 1113385 ("Customer B"). Respondent UBS did not contest the requested relief and participated in the hearing. Both customers were deceased. 
The sole FINRA Arbitrator denied Claimant Bradley's request to expunge Occurrence 1312388, and did not provide any rationale.
The sole FINRA Arbitrator recommended the expungement of Occurrence 1113385 based upon a FINRA Rule 2080 finding that Customer B's claim, allegation, or information is false. The Arbitrator offered the following rationale:

Based upon Claimant's credible testimony, claimant discussed with Customer B about the risks, but never claimed "Conseco had its problems resolved" and/or that his firm was recommending the stock. Also, Claimant owned Conseco stock and took a complete loss. Conseco had changed management at the top of the corporation and the expectation was that the new Chief Executive Officer would turn things around. The Arbitrator's conclusion is that if there was any public knowledge about Conseco being in danger of going into bankruptcy, Claimant would not have owned and taken the same loss that Customer B experienced. Thus, the Arbitrator concludes that Claimant's testimony, about there being no public knowledge about Conseco's situation that would indicate it was going into bankruptcy, was credible. 

Additionally, it was the 3rd party's research that led the Customer to buy the security Claimant recommended a Conseco managed fund, not the stocks of Conseco Insurance Company. Claimant's practice was not to recommend individual stocks. Claimant provided Customer B with multiple (5) options for investment, but Customer B wanted a higher yield. Customer B made the independent decision to invest in Conseco stock. 

The brokerage firm, after investigation, denied Customer B's request to make him whole for his losses in Conseco stock and did not find any merit in his claims. Furthermore, no further steps were taken by Customer B to recover his losses in Conseco stock.

Based on the forgoing, expungement is warranted.