November 27, 2019
as featured in today's Securities Industry Commentator:
FINRA Fines and Suspends Rep for 739 Discretionary Trades Entered Without Written Authorization. In the Matter of Carmelo Arce Alvarez, Respondent (FINRA AWC)
Guest blogger Aegis Frumento is preparing for the Thanksgiving holiday, and being the party animal and overall fun guy that he is, he muses that "nothing is ever as important as you think it is while you are thinking about it." When we contemplate a set of bad facts, Aegis believes that the act of contemplation makes us feel worse about the facts than they really are; and, likewise, pondering good happenings makes us feel better about them than they really are. It's a mind trick, Aegis says, and it screws us up all the time. Meanwhile, Aegis hasn't quite figured out why he never gets a lot of invitations for holiday dinners, and why folks, who know him, ask him to please not use the towels in their bathrooms.
Wayne Arthur York II pled guilty in the United States District Court for the Eastern District of California to conspiracy to commit wire fraud. Co-Defendant Marco Antonio Ramirez Zuno pled guilty in 2017 and awaits sentencing, and Co-Defendant Juan Carlos Montalbo is scheduled to go to trial on February 24, 2020. As alleged in part in the DOJ Release:
[Y]ork, while working in boiler rooms located in Puerto Vallarta, Mexico, would call timeshare owners to offer to arrange for the sale of Mexican timeshare vacation rentals. York would falsely claim that he and his coconspirators represented companies that had already secured or arranged for buyers who were ready to pay for the timeshares. In truth, no buyers had actually been arranged. Instead, York and others would convince the victims of the fraud to wire money from bank accounts in the United States and Canada to bank accounts in Mexico for alleged up-front payments including taxes, fees, and commissions to make the sale of the timeshare occur. The defendant and his coconspirators would assure victims that the non-existent buyers had already deposited money into trust accounts and that the sellers' up-front fees would be fully reimbursed from those funds after the sale was complete. During York's involvement, he was aware of or could have reasonably foreseen approximately $458,628.11 in inbound international wires being processed into bank accounts that he was aware of as part of his role in the conspiracy.
The CFTC issued an Order filing and simultaneously settling charges against Goldman Sachs & Co. LLC
for failing to make and keep certain audio recordings as required under CFTC regulations for swap dealers; and requiring the firm to pay a $1,000,000 civil monetary penalty and to cease and desist from further violations. Somewhat ominously, the Order found that Goldman's failure impeded an unrelated investigation conducted by the Division of Enforcement, As alleged in part in the CFTC Release:
The order finds that Goldman, to comply with its recordkeeping obligations as a swap dealer, began using recording hardware to record the phone lines of trading and sales desks in March 2013. In January 2014, after the installation of a software security patch in one of Goldman's offices, the recording hardware in that office restarted prematurely and, as a result, failed to record audio. Goldman was unaware of the error for approximately three weeks, until it conducted an unrelated spot-check of the affected office's recording system, at which point Goldman identified the failure and re-engaged the recording system.
The Division subsequently opened an unrelated investigation that concerned the affected office and requested that Goldman produce certain audio recordings for dates within the period of the recording failure. Because of the recording failure, Goldman was unable to produce a significant number of the requested recordings. The Division only learned of Goldman's failure to keep and maintain the recordings when Goldman informed the Division it was unable to produce them in the context of the Division's unrelated investigation. Goldman's recordkeeping failure impeded that investigation, because the Division was unable to obtain the information that should have been captured in the missing recordings through any other means.
Bill Singer's Comment: In order for a whistleblower to qualify under Dodd-Frank for an Award, the original information provide via a tip must lead to a successful CFTC/SEC enforcement action resulting in over $1 million in sanctions upon which the 10% to 30% bounty is calculated; however, if the sanction imposed is "at least $1 million," then a whistleblower may be able to seek a bounty in any "related action" involving sanctions imposed by other agencies that relied on the underlying tip. I will be monitoring the SEC and other regulators for settlements involving Goldman; and it will be interesting to see what exactly constituted the "unrelated investigation that concerned the affected office."
In a Complaint filed in the United States District Court for the Southern District of New York https://www.sec.gov/litigation/complaints/2019/comp-pr2019-243.pdf, the SEC charged biotech company MiMedx Group Inc., its former Chief Executive Officer Parker H. "Pete" Petit, former Chief Operating Officer William C. Taylor, and former Chief Financial Officer Michael J. Senken with violating the antifraud, reporting, books and records, and internal control provisions of the federal securities laws. Also, Petit, Taylor, and Senken were charged with lying to MiMedx's outside auditors. Without admitting or denying the allegations, MiMedx has agreed to a settlement and to pay a $1.5 million penalty. As alleged in part in the SEC Release:
[F]rom 2013 to 2017, MiMedx prematurely recognized revenue from sales to MiMedx's distributors and exaggerated MiMedx's revenue growth. According to the SEC's complaint, MiMedx improperly recognized revenue because its former CEO Parker H. "Pete" Petit and former COO William C. Taylor entered into undisclosed side arrangements with five distributors. These side arrangements allowed distributors to return product to MiMedx or conditioned distributors' payment obligations on sales to end users. Petit, Taylor, and former CFO Michael J. Senken allegedly covered up their scheme for years, even after MiMedx's former controller raised concerns about MiMedx's accounting for specific distributor transactions. The SEC also alleges that Petit, Taylor, and Senken all misled MiMedx's outside auditors, members of MiMedx's Audit Committee, and outside lawyers who inquired about these transactions.
https://www.sec.gov/litigation/complaints/2019/comp-pr2019-244.pdf, the SEC alleged that alleged the International Investment Group LLC ("IIG") had grossly overstated the value of defaulted loans in the fund's portfolio to conceal losses in its flagship hedge fund; and in furtherance of said deception, IIG allegedly doctored the firm's records to show that the defaulted loans had been repaid and that the proceeds had been used to make new loans. In fact, the SEC alleged that there was no such repayment and the new loans were bogus. Further, in seeking to raise money to meet investor redemption requests and other liabilities, IIG allegedly sold at least $60 million in fake trade finance loans to other clients, and said sales were further by fake documentation purportedly substantiating the non-existent loans, including fake promissory notes and a forged credit agreement.
On November 26, 2019, the SEC issued an Order https://www.sec.gov/litigation/admin/2019/ia-5414.pdf revoking IIG's registration pursuant to the firm's consent to a bifurcated settlement. As set forth in part in the SEC Release, under the terms of the settlement, IIG is:
enjoined from future violations of the antifraud provisions of the federal securities laws. The judgment, which the court entered on Nov. 26, 2019, also imposes a preliminary asset freeze, but reserves the issue of any monetary relief, including disgorgement, prejudgment interest, and civil penalties, for further determination by the court upon motion of the SEC.
In 2009, the SEC filed a Complaint in the United States District Court for the Northern District of Illinois https://www.sec.gov/litigation/complaints/2009/comp20972.pdf alleging that Nutmeg Group LLC and its principals Randall and David Goulding had misappropriated over $4 million in client assets by transferring them to third parties; and, further, that Nutmeg did not fully document the Funds' investments, improperly commingled Fund assets, and cannot value the Funds' holdings. Following a two week trial, on October 25, 2019 Magistrate Judge Jeffrey T. Gilbert issued findings of fact and conclusions of law that Randall Goulding, Nutmeg's owner and managing member of registered investment adviser had
Goulding was permanently enjoined from future violations of, Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder; and he was ordered to pay $642,422 of disgorgement, $583,230 of prejudgment interest, and a $642,422 civil penalty.Separately, the Court entered a final judgment against Nutmeg permanently enjoining it from violating Sections 204, 206(1), 206(2), and 206(4) of the Advisers Act and Rules 204-2, 206(4)-2 and 206(4)-8 thereunder. Previously, the Court granted partial summary judgment in favor of the SEC and found that Nutmeg and Goulding had violated Sections 204, 206(2), and 206(4) of the Advisers Act and Rules 204-2, 206(4)-2, and 206(4)-8 thereunder.
- commingled investor funds with his personal assets,
- implemented flawed internal systems and methods for valuing and reporting assets under management,
- transferred millions of dollars out of the investment pools to himself and companies controlled by family members, and
- used Nutmeg as his personal piggybank to pay his personal expenses, including personal credit cards, buy a car, and purchase an entrance fee to a poker tournament.
Following their convictions after a six-week jury trial in the United States District Court for the Southern District of New York, former Premium Point Investments L.P. ("PPI") trader Jeremy Shor was sentenced to 40 months in prison plus 3 years of supervised release; and PPI founder/Chief Executive Officer/Chief Investment Officer Anilesh Ahuga a/k/a "Neil" was sentenced to 50 months in prison plus 3 years of supervised release. As alleged in part in the DOJ Releases:
Premium Point Investments
In or about 2008, Ahuja co-founded PPI, where he was the chief executive officer and chief investment officer. PPI managed hedge funds focused primarily on structured credit products, including residential mortgage backed securities ("RMBS"). PPI's flagship mortgage credit fund (the "Hedge Fund") was launched in or about October 2009. A segregated ERISA fund held the same positions as the Mortgage Credit Fund. In 2013, PPI launched a new fund (the "New Issue Fund") that purchased and securitized pools of mortgages that were not issued or guaranteed by a government agency. At various relevant times between 2008 and 2016, PPI managed billions in assets. SHOR was employed by PPI as a trader, where he focused on non-agency RMBS - i.e., RMBS securities that were not issued by a government agency.
The Scheme to Mismark Securities
From at least in or about 2014 through at least in or about 2016, Ahuja and SHOR participated in a scheme to defraud PPI's investors and potential investors in the Hedge Fund and the New Issue Fund by deceptively mismarking each month the value of certain securities held in these funds, and thus fraudulently inflating the NAV of those funds as reported to investors and potential investors.
PPI fraudulently obtained inflated quotes, including from corrupt brokers, and manipulated its valuation process to inflate the purported value of securities held by the funds. The effect of the mismarking scheme was to materially overstate the reported NAV - at times by more than $100 million across the funds managed by PPI. This benefited PPI in at least two ways. First, PPI was able to charge its investors higher management and performance fees. Second, PPI was able to forestall redemptions by investors who would have requested a return of their funds had they known PPI's true performance and operating health.
The mismarking scheme evolved as a result of demands by Ahuja that PPI maintain its track record of success and keep pace with the performance of peer funds, regardless of market conditions or the actual performance of the funds. To achieve the goal of posting competitive returns, Ahuja, along with another partner, set an inflated "target" return for the Hedge Fund and New Issue Fund at the end of each month, which was at times based in part on the performance of peer funds. The traders at PPI were then tasked with "reverse engineering" marks to meet the "targets."
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, Carmelo Arce Alvarez 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 Carmelo Arce Alvarez a $5,000 fine and a one-month suspension from association with any FINRA member in any capacity. The AWC asserts that Alvarez was first registered in 2009, and by 2014 was reas registered with FINRA member firm Nationwide Planning Associates Inc.. The AWC asserts that Alvarez "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:
From February 2017 to February 2018, while registered through Nationwide Planning,
Arce Alvarez executed approximately 739 discretionary trades in the accounts of 16
customers. Although the customers had given Arce Alvarez implied authority to exercise
discretion in their accounts, none of the customers had provided written authorization for
Arce Alvarez to exercise discretion. Moreover, Nationwide Planning had not approved
any of the accounts for discretionary trading.