Securities Industry Commentator by Bill Singer Esq

October 24, 2019

featured in today's Securities Industry Commentator:


In a Superseding Indictment filed in the United States District Court for the Eastern District of New York, GPB Capital Holdings, LLC's Managing Director and Chief Compliance Officer Michael S. Cohn, of GPB Capital Holdings, LLC (GPB), with obstruction of justice, unauthorized computer access and unauthorized disclosure of confidential information. As alleged in part in the DOJ Release:

[C]ohn previously worked as a Securities Compliance Examiner and Industry Specialist in the SEC's Enforcement Division, where he assisted investigations into violations of securities laws. In approximately October 2018, Cohn left the SEC to join GPB, a private equity firm based in Manhattan and Garden City, New York, that manages over $1.5 billion in assets. However, prior to leaving the SEC, Cohn accessed information on SEC servers relating to an Enforcement Division investigation into GPB.  Cohn was not authorized to access this highly sensitive material, which included confidential information, privileged attorney-client work product and contacts with law enforcement and other regulatory agencies.  During discussions with GPB personnel about obtaining a job there, Cohn advised them that he had inside information about the SEC's investigation, and on several occasions he disclosed information to members of GPB's senior management about that investigation. 

After a three-week jury trial, former registered broker Michael Watts, was found guilty in the United States District Court for the Eastern District of New York on conspiracy to commit securities fraud, securities fraud, conspiracy to commit wire fraud, money laundering conspiracy and money laundering.  Watts is the 13th defendant convicted in this case; and three others are scheduled for trial in January 2020. To date, the following four Defendants were sentenced to the note terms or imprisonment:  Ronald Hardy( 10 years); Dennis Verderosa (6 years); McArthur Jean (4 years); and Emin Cohen (2 years). As alleged in part in the DOJ Release: 
[F]rom 2014 to 2016, Watts and his co-conspirators at a Melville-based boiler room artificially inflated the price and trading volume of Hydrocarb stock.  They did so through an illegal cold-calling campaign that used lies and high-pressure sales tactics to lure victim investors, including many elderly victims, into purchasing stock.  Watts, who was one of the largest shareholders in Hydrocarb and knew that the business was failing, also used the boiler room to dump more than $2 million worth of Hydrocarb shares that he owned or controlled on unsuspecting investors in the months leading to the company's April 2016 bankruptcy.  The government has alleged that the conspiracy's market manipulation fraudulently inflated the stock price of Hydrocarb and four other companies by more than $147 million.
The SEC's Office of Investor Education and Advocacy (OIEA) issuede an Investor Alert about phony Certificates of Deposit (CDs) promoted through internet advertising and "spoofed" websites. In part the Investor Alert points to the following red flags when purchasing CDs from sites found only through internet searches: 
  • Offer interest rates higher than you can find at any other financial institution, with no penalties for early withdrawals;
  • Promote only CDs and no other financial products, such as banking or brokerage accounts, loans, or commercial banking services;
  • Require high minimum deposits, often $200,000 or more;
  • Direct potential investors to wire funds to an account located outside the U.S., or to a U.S.-based account that has a different name than the financial institution claiming to sell the CD; 
  • Claim that the spoofed financial institution is a Federal Deposit Insurance Corporation (FDIC) member and that deposits are FDIC-insured; and
  • Identify "clearing partners" that they claim are registered with the SEC. 
  • Be Skeptical and Ask Questions
  • If you are considering an investment in CDs, conduct internet searches for the financial institution to see if you find any search results other than the website initially identified. Call the financial institution using a telephone number found somewhere other than the suspect website to determine the legitimacy of the investment opportunity.
Sometime around 1990, Aegis Frumento and his friend Gordon were lunching in the stately old Oak Room of the Plaza Hotel. Midway through dessert, in walks this guy in a dark winter overcoat. The man looked around, shuffled over to a table, and sat down. The man in the coat was Donald Trump, then married to Ivana. The woman at the table was Marla Maples. We are not told what Aegis and Gordon ate for lunch or who paid. Then again, Aegis is known for bolting many a restaurant without actually paying for his meal -- likely Gordon got stuck with the tab. 

SEC Suspends AML Compliance OfficerIn the Matter of Eugene Terracciano (Initial Decision, SEC, Init. Dec. Rel. No. 1388; Admin. Proc. File No. 3-189414 / October 22, 2019)
As stated in Terracciano's July 6, 2018, Offer of Settlement, he willfully aided and abetted and caused violations by Aegis Capital Corporation of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder. Rule 17a-8 requires broker-dealers to comply with the reporting, recordkeeping, and record retention requirements of the Bank Secrecy Act, which include filing SARs, as required by 31 C.F.R. § 1023.320. 17 C.F.R. § 240.17a-8. Failing to file SARs, as required by 31 C.F.R. § 1023.320, is a violation of Exchange Act 17(a) and Rule 17a-8. In addressing those violations, the SEC Division of Enforcement proposed a Bar with the right to reapply after two years. Administrative Law Judge Carol Fox Foelak ordered a 12-month:
  • suspension from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and from participating in an offering of penny stock; and
  • prohibition from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter.
As asserted in part under the "Findings of Fact" heading of the Initial Decision [Ed: footnotes omitted]:

[A]s detailed in the Settlement Order, the proceeding involves anti-money laundering (AML) failures at Aegis Capital Corporation, a FINRA registered broker dealer and Commission registered investment adviser, by Terracciano, who was the firm's AML Compliance Officer (AMLCO) from September 2013 to approximately September 2015. Despite red flags and even despite alerts from Aegis's clearing firm, Aegis failed to file Suspicious Activity Reports (SARs), as required by 31 C.F.R. § 1023.320, on hundreds of suspicious transactions during that period. At most, after being alerted by the clearing firm, Terracciano closed customer accounts after allowing their high-volume questionable transactions in low-priced securities to settle and after becoming aware that no one at Aegis was flagging such transactions despite their raising red flags spelled out in Aegis's written supervisory procedures. 

Terracciano was employed in the securities industry in a capacity requiring FINRA (or predecessor) registration starting in 1988. Resp. Ex. 1; Eugene William Terracciano BrokerCheck Report, available at (last visited Oct. 11, 2019). His first compliance-related position started in 1995. Tr. 19; Resp. Ex. 1; Terracciano BrokerCheck Report. His last such employment was with Merrill Lynch, Pierce, Fenner & Smith, with which he was registered from November 2015 to January 2017. Tr. 41-45; Resp. Ex. 1; Terracciano BrokerCheck Report. He was let go by Merrill as a result of the investigation that led to this proceeding. Tr. 42-45. He has been unemployed since January 2017. Tr. 17, 50. Since then, he has sought, fruitlessly, employment in the securities industry. Tr. 46-47. None of the positions for which he applied related to AML compliance. Tr. 46. He realizes that if he were barred from the securities industry, even with a right to reapply after a specific time, his career in the securities industry would be over, due to the disincentive to any firm to sponsor him for reregistration. Tr. 49. If he were suspended for a fixed period, he would attempt to reenter the industry as a compliance officer. Tr. 50. 

Terracciano initially joined Aegis as a director of compliance; when he was interviewed for the position, there was no mention of AML responsibilities. Tr. 22-23. Soon after his arrival at Aegis, he was asked by the Chief Compliance Officer to be AML CO, which he was reluctant to accept. Tr. 23-24. Eventually he yielded to the importunity of the Chief Compliance Officer, who promised support and training, which never materialized. Tr. 24-26, 31-32, 35-36. Terracciano knew that low-price securities, such as those for which SARs should have been filed, might be used in questionable ways. Tr. 53. Terracciano now realizes that actions that he thought sufficient at the time - closing accounts to stop the activity - were insufficient and not a substitute for filing SARs. Tr. 40. He would not now seek or accept a position with AML reporting responsibilities. Tr. 50. In view of the consequences that he experienced from unwillingly accepting the AML responsibilities at Aegis, his representation that he would not do so again is credible.

at Pages 1 -3 of the Initial Decision

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, Donna M. Pitts submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Donna M. Pitts a Bar from association with any FINRA member in any capacity. The AWC asserts that Pitts entered the indusry in 1992 and by 2008, she was registered with FINRA member firm RCH Securities, LLC and was employed by Retirement Clearing House Shareholders Services, LLC ("RCHSS"). The AWC alleges that RCH terminated Pitts on August 7, 2019, for the conduct cited in the AWC. As alleged in part in the AWC:

In her role as Mutual Fund Operations Manager at RCHSS, Pitts had access to funds deposited into RCHSS by employers on behalf of former employees rolling over money from those employers' retirement plans. Pitts electronically transferred specific amounts earmarked for employer-sponsored plan participants to her personal checking and savings accounts. She then created fictitious accounting entries in the auto-reconciliation tool used by RCHSS to cancel out the funds moved to her personal accounts. As a result, RCHSS unwittingly funded the participants' plans with its own money. 

During the Relevant Period, Pitts converted approximately $100,079 by transferring the proceeds earmarked for approximately 25 plan participants into her personal checking and savings accounts. Pitts knew that the funds did not belong to her, and she made each of the transfers without RCHSS's knowledge or consent. After admitting her misconduct to RCHSS and the Firm, on August 9, 2019, Pitts repaid RCHSS the full amount she had converted.  

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, Steven T. Yellen submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Steven T. Yellen a $25,000 fine and a one-year suspension from association with any FINRA member in any capacity. The AWC asserts that Yellen entered the industry in 1984 with FINRA member firm Morgan Stanley, where he remained until his February 2016 termination. As alleged in the "Overview" section of the AWC:

From March 2013 through December 2015, Yellen exercised discretion while associated with Morgan Stanley in one of Customer A's accounts without written authorization or acceptance of the account as a discretionary account in violation of NASD Rule 2510(b) and FINRA Rule 2010. 

Yellen also established a second account for Customer A at Morgan Stanley, funded the account with a transfer from Customer A's original account, and placed two trades in the second account - all without Customer A's knowledge or authorization and in violation of FINRA Rule 2010. 

After Yellen associated with Ameriprise, Yellen again engaged in unauthorized trading from June 2016 to November 2017. Specifically, Yellen entered 16 trades for 10 customers that were beyond the option trading risk levels authorized by the customers in violation of FINRA Rule 2010. 

Furthermore, between June and November 2016, Yellen mismarked 319 options order tickets as "unsolicited" when they were solicited, causing Ameriprise's books and records to be inaccurate, in violation of FINRA Rules 4511 and 2010. 

Finally, in March 2016 when Yellen moved to Ameriprise, he took with him non-public personal customer information regarding his Morgan Stanley customers, without the customers' or Morgan Stanley's consent. As a result, Yellen violated FINRA Rule 2010 by causing Morgan Stanley to violate the SEC's Regulation S-P: Privacy of Consumer Financial Information and Safeguarding Personal Information ("Regulation S-P").