November 13, 2019
featured in today's Securities Industry Commentator:
FINRA Fines and Suspends Rep Over a 2012 PST. In the Matter of Brian J. Lockett, Respondent (FINRA AWC)
A fascinating piece that thoughtfully considers the history and current state of SEC whistleblowing:
In an Indictment filed in the United States District Court for the Southern District of New York
https://www.justice.gov/usao-sdny/press-release/file/1216986/download, former Park Avenue Bank Director and an attorney,Mendel Zilberg, and Aron Fried were each charged with one count of conspiracy to commit bank fraud, one count of bank fraud, one count of making false statements to a bank, and one count of conspiracy to make false statements to a bank; and Zilberg was further charged with one count of embezzlement and misappropriation of bank funds. As alleged in part in the DOJ Release:
In or about 2009, ARON FRIED and a co-conspirator not named in the Indictment ("CC-1") sought to obtain a fraudulent loan from the Bank in Manhattan in order to finance an investment in a home health care business. However, knowing that CC-1 would not be credit-worthy and had a criminal record, FRIED and CC-1 used a straw borrower (the "Straw Borrower") for the loan application who was recruited by CC-1. To effectuate the scheme, FRIED and CC-1 partnered with MENDEL ZILBERBERG, then a director of the Bank, who had the power to personally shepherd the fraudulent loan through the Bank's approval process and guard it from scrutiny. Together, the defendants concocted a false premise for the loan, supported the loan application with false representations, and set up pass-through bank accounts to funnel the proceeds of the fraudulent loan to themselves. Specifically, the defendants made or otherwise caused false statements to be made to the Bank regarding, among other things, (a) that the borrower on the loan was the Straw Borrower, when in fact the actual borrowers and beneficiaries of the loan were ZILBERBERG, FRIED, and CC-1; and (b) that the purpose of the loan was for business investments by the Straw Borrower, when in fact the actual purpose of the loan was to benefit ZILBERBERG, FRIED, and CC-1.
Based on the false representations made to the Bank and ZILBERBERG's involvement in the loan approval process, the Bank issued a $1.4 million loan to the Straw Borrower, which was quickly disbursed to the defendants through multiple bank accounts and transfers. In total, ZILBERBERG received at least approximately $466,000 of the loan proceeds, FRIED received at least approximately $434,000 of the loan proceeds, and CC-1 received the remainder of the loan proceeds. The loan ultimately defaulted, resulting in a loss of over $1 million.
A jury in the United States District Court for the Southern District of New York found trading firm Avalon FA Ltd., Nathan Fayyer, and Sergey Pustelnik liable on all counts, including that they violated the antifraud provisions of Section 17(a) of the Securities Act, and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, that Avalon and Fayyer violated the market manipulation provision of Section 9(a)(2) of the Exchange Act, and that Avalon, Fayyer, and Pustelnik were each liable as a control person for the violations of others, according to Section 20(a) of the Exchange Act. READ the SEC Complaint
As alleged in part in the SEC Release:
[N]athan Fayyer and Sergey Pustelnik used their trading firm, Avalon FA Ltd., to illegally profit from two manipulative trading schemes. First, the defendants engaged in a layering scheme, a trading practice which involved placing and canceling orders to trick others into buying or selling stocks at artificial prices. Second, they engaged in cross-market manipulation, which involved buying or selling stocks to artificially impact options prices. These schemes generated more than $25 million in ill-gotten profit for Avalon. Fayyer was Avalon's named owner, and Pustelnik kept his controlling interest in Avalon undisclosed while embedding himself as a registered representative at Lek Securities Corp., a New-York based brokerage firm, in order to facilitate Avalon's trading. Lek Securities and its Chief Executive Officer, Sam Lek, who settled with the SEC prior to trial last month, admitted that the trading occurred and was manipulative.
A jury in the United States District Court for the Southern District of New York found
Portfolio Advisors Alliance ("PAA") and its owner Howard J. Allen guilty of 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 thereunder;
Allen and Wasserman for aiding and abetting PAA, the private placement offering of American Growth Funding II, LLC ("AGF II"), and Johnson's violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5;
PAA's President Kerri L. Wasserman for aiding and abetting Allen's violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5; and
Allen and Wasserman as control persons of PAA under Section 20(a) of the Exchange Act for PAA's violations of Section 10(b) of the Exchange Act and Rule 10b-5.
The SEC obtained a final judgment against AGF II and Johnson in which they consented to the entry of permanent injunctions from future violations of the antifraud provisions of the securities laws, and Johnson agreed to pay $363,669 in disgorgement and prejudgment interest and a $75,000 civil penalty. Further, another final judgment enjoins PAA, Allen, and Wasserman from future violations of the antifraud provisions; and orders PAA and Allen to pay jointly $1,059,721 in disgorgement and prejudgment interest, Allen to pay an additional $205,076 in disgorgement and prejudgment interest, and PAA, Allen and Wasserman to pay civil penalties of $200,000, $120,000, and $100,000, respectively. READ the SEC's Complaint
Jeffrey Craig Yohai pled guilty to two cases in the United States District Court for the Central District of California to two counts of conspiracy to commit wire fraud; and he was sentenced to 110 months in prison and ordered to pay $6.7 million in restitution. As alleged in part in the DOJ Release:
The first case, which resulted in a guilty plea in February 2018, involved more than $6 million in real estate loans and investments that supposedly would be used to purchase and rehabilitate properties in the Hollywood Hills and New York City. Yohai defaulted on the loans and the properties went into foreclosure - which Yohai tried to delay with bankruptcy filings.
While free on bond and awaiting sentencing in the first federal case, Yohai committed additional crimes. The second case, which resulted in a guilty plea in June 2019, involved a loan fraud scheme related to two of the properties at issue in the original federal case. Here, Yohai submitted a loan request that contained inflated appraisals. He also attempted to defraud another lender as he attempted to refinance the two properties, and Yohai contacted yet another lender with dramatically inflated appraisals to obtain refinancing - an effort that was rebuffed when that third lender learned of Yohai's guilty plea earlier this year.
Also in the second case, Yohai defrauded the owner of a rental property and attempted to lull the owner by showing him a $60,000 check he falsely claimed had been remitted from his ex-wife's account. There are additional fraudulent acts outlined in the complaint which, including a scam in which he sold non-existent artist passes to the music festival in Coachella.
In a FINRA Arbitration Statement of Claim filed in September 2018, associated person Claimant Muir asserted wrongful termination in violation of Americans with Disabilities Act ("ADA"); wrongful denial and termination in violation of the FAmily Medical Leave Act ("FMLA"); violation of the Florida Civil Rights Act of 1992 ("FCRA"); breach of implied covenant of good faith and fair dealing; adverse employment actions resulting in wrongful termination in violation of both public policy and FINRA standards of conduct; and slander and defamation on her Form U5. The FINRA Arbitration Decision characterizes Claimant's causes of actions as related to Respondent RBC's alleged failure "to accommodate her disability by not allowing her a short postponement from taking her Series 7 exam." At the close of the hearing, Claimant Muir sought $341,748 in compensatory damages, punitive damages, costs, and attorneys' fees. Without any statement of the arbitrators' rationale, the Decision discloses that all of Claimant's claims were denied.
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, Jun Zhou submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, for violations of FINRA Rules 3280 and 2010, FINRA imposed upon Jun Zho a Bar from association with any FINRA member in any capacity. The AWC asserts that Jun Zho entered the industry in 1996 and by November 2015, was registered with The Leaders Group, until her discharge on August 2, 2018. The AWC asserts that Zhou "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization." As set forth in part in the AWC:
Between April 2017 and June 2018, Zhou, both individually and through a small real
estate company she wholly owned and controlled, participated in the sale of $9,050,000
in membership interests in private real estate funds managed by a third party and
$5,000,000 in a promissory note with that third-party fund manager. The fund
membership interests and the promissory note were securities. The sales involved 15
transactions with seven investors, one of which was an entity owned by two Firm
customers. Zhou's real estate company received $179,000 in compensation from the
third-party fund manager.
In addition, on June 4, 2018, Zhou formed Zhou Fund I LLC ("Zhou Fund"), a private
real estate fund managed by Zhou's real estate company. Zhou subsequently filed, on
behalf of Zhou Fund, a notice of exempt offering of securities with the Securities and
Exchange Commission related to twelve transactions in June and July 2018 through
which Zhou and her real estate company sold $2,000,000 in membership interests in
Zhou Fund to twelve investors, including three Firm customers. In connection with these
transactions, Zhou's real estate company received from Zhou Fund a sourcing fee of
$20,000 and, beginning the first quarter of 2019, a quarterly asset management fee.
Zhou did not disclose her participation in these private securities transactions in writing
or otherwise to Leaders Group and did not receive approval from her Firm to participate
in the transactions.
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, John G. Hoagland submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, for violations of FINRA Rules 2510(b) and 2010, FINRA imposed upon John G. Hoagland a $5,000 fine and a three-month suspension from associating in any and all capacities with any FINRA member firm. The AWC asserts that Hoagland entered the industry in 1969, and was registered with FINRA member firm Morgan Stanley from June 2009 until January 18, 2018. The AWC asserts that Hoagland "has no relevant disciplinary history." As set forth in part in the AWC under the heading "Overview:"
In September and October 2017, Hoagland executed nine unauthorized trades totaling
$99,171 in the account of an elderly customer, EB. On June 20, 2014, Hoagland also
executed an unauthorized trade for $34,451 in the account of customer SP. In addition,
from September 1, 2017 through November 30, 2017, Hoagland exercised discretion
without written authorization, effecting 96 trades in the accounts of five other customers.
As a result, Hoagland violated FINRA Rule 2010 for unauthorized trading and NASD
Rule 2510(b) and FINRA Rule 2010 for exercising discretion without written
authorization. . .
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, Brian J. Lockett submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, for violations of NASD Rule 3040(b) and FINRA Rule 2010, FINRA imposed upon Brian J. Lockett a $5,000 fine and a 45-day suspension from association with any FINRA member firm in any capacity. The AWC asserts that Lockett entered the industry in 2002, and was registered with FINRA member firm Geneos Wealth Mangagement, Inc. from June 2009 until November 2013; and, thereafter, he was registered with another FINRA member firm. The AWC asserts that Hoagland " does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization." As set forth in part in the AWC:
In July 2012, one of Lockett's customers (the "Customer") invested a total of $50,000 in
a private placement offering. Lockett participated in the transaction by introducing the
transaction to the Customer; summarizing the reasons he liked the investment; meeting
with the Customer to review and sign the paperwork; and, causing the paperwork to be
submitted. Lockett did not receive compensation for his participation in the transaction.
Prior to his participation, Lockett did not provide the Firm with written notice of the
transaction. In addition, in March 2013, Lockett attempted to conceal his role in the
transaction by suggesting to the Customer that the Customer communicate about the
transaction with Lockett in the future via Lockett's personal email address.
After the Customer complained to the Firm, the Firm entered into a settlement to resolve