Securities Industry Commentator by Bill Singer Esq

December 9, 2019

featured in today's Securities Industry Commentator:





http://www.brokeandbroker.com/4953/kelly-schwab-impersonation/
A California Superior Court jury found investment advisor Michael Patrick Kelly guilty of false personation of another, unauthorized use of personal identifying information, and disobeying a court order.  Frankly, that's doesn't quite have the spell-binding ring of a well-crafted literary teaser. Once we dig down into what went on to prompt Kelly's conviction, we are presented with a jaw-dropping fact pattern.

https://www.justice.gov/opa/pr/california-man-pleads-guilty-role-million-dollar-scheme-targeting-thousands-us-servicemembers
Trorice Crawford pled guilty in the United States District Court for the Western District of Texas to one count of conspiracy to launder monetary instruments.  As part of his plea, Crawford admitted conspiring with Robert Wayne Boling and others from May 2017 to July 2019 in furtherance of staling money belonging to U.S. Servicemembers and veterans.  In his plea, Crawford admitted to recruiting at least 30 individuals who provided their bank account information to receive funds stolen from military affiliated individuals. Crawford kept a percentage of the withdrawn funds and oversaw the transmission of the remaining amounts by means of international money remittance services to Boling and others in the Philippines. As further alleged in part in the DOJ Release:

In October, co-defendant Frederick Brown, age 38 of Las Vegas, Nevada, pleaded guilty to federal charges in connection with this scheme.  Brown, a former civilian medical records administrator for the U.S. Army at the 65th Medical Brigade, Yongsan Garrison, South Korea, admitted that while logged into the Armed Forces Health Longitudinal Technology Application, he illegally captured on his cell phone personal identifying information (PII) of thousands of military members, including names, social security numbers, DOD ID numbers, dates of birth, and contact information.  Brown further admitted that he subsequently provided that stolen data to Boling so that Boling and others could exploit the information in various ways to access Department of Defense and Veterans Affairs benefits sites and steal millions of dollars. 

As asserted in the federal grand jury indictment, Boling, together with his Philippines-based co-defendants Allan Albert Kerr (Australian citizen) and Jongmin Seok (South Korean citizen), specifically used the stolen information to compromise a Department of Defense portal designed to enable military members to access benefits information online. Once through the portal, the defendants are alleged to have accessed benefits information.  Access to these detailed records enabled the defendants to steal or attempt to steal millions of dollars from military members' bank accounts. The defendants also stole veterans' benefits payments. Evidence of the defendants' scheme was detected earlier this year, advancing the investigation that led to the indictment.

Boling, Kerr and Seok are charged with multiple counts of conspiracy, wire fraud, and aggravated identity theft. . . .

https://www.justice.gov/usao-sdny/pr/ericsson-agrees-pay-more-1-billion-resolve-foreign-corrupt-practices-act-case
-and-
SEC Charges Multinational Telecommunications Company With FCPA Violations (SEC Release)
https://www.sec.gov/news/press-release/2019-254

Swedish telecommuincations company Telefonaktiebolaget LM Ericsson and its subsidiary Ericsson Egypt Ltd. were charged in the United States District Court for the Southern District of New York with conspiring to violate the Foreign Corrupt Practices Act ("FCPA"). Ericsson Egypt pled guilty to one count of conspiring to violate the anti-bribery provisions of the FCPA; and Ericsson was charged in a two-count Information with one count of conspiracy to violate the anti-bribery provisions of the FCPA and one count of conspiracy to violate the internal-controls and books-and-records provisions of the FCPA.

Ericsson entered into a Deferred Prosecution Agreement ("DPA") whereby it admitted to participating in the conspiracy, and agreed to pay a total criminal penalty of $520,650,432 (which includes a $9,520,000 criminal fine that will be paid on behalf of Ericsson Egypt).  Further, Ericsson agreed to implement internal controls, retain an independent compliance monitor for a term of three years, and cooperate fully with DOJ in any ongoing investigations. For further details see:
As alleged in part in the DOJ Release:

From approximately 2000 to 2016, ERICSSON and ERICSSON EGYPT, through various executives, employees, and affiliated entities, used third-party agents and consultants to bribe foreign government officials and/or manage off-the-books slush funds in countries where it pursued contracts to conduct telecommunications business.  The agents were often engaged through sham contracts and paid pursuant to false invoices, with those payments accounted for improperly in ERICSSON's books and records.

In Djibouti, from approximately 2010 to 2014, ERICSSON, via subsidiaries, paid approximately $2.1 million in bribes to high-ranking government officials in order to obtain a contract valued at approximately 20.3 million.  To conceal the bribe payments, an ERICSSON subsidiary entered into a sham contract with a consulting company and approved fake invoices to conceal the bribe payments, and ERICSSON employees completed a draft due diligence report that failed to disclose that the owner of the consulting company was married to a high-ranking official in Djibouti's government.

In China, from approximately 2000 to 2016, ERICSSON, via subsidiaries, paid various agents, consultants, and service providers tens of millions of dollars, a portion of which was used to fund an expense account that covered gifts, travel, and entertainment for foreign officials.  ERICSSON used the expense account to win business with Chinese state-owned customers.  In addition, from approximately 2013 to 2016, ERICSSON subsidiaries paid third-party service providers approximately $31.5 million pursuant to sham contracts for services that were never performed.  The payments were intended to allow ERICSSON's subsidiaries to continue to use and pay third-party agents in China in contravention of ERICSSON's policies and procedures.  ERICSSON knowingly mischaracterized the payments and improperly recorded them in its books and records.

In Vietnam, from approximately 2012 to 2015, ERICSSON, via subsidiaries, paid a consulting company approximately $4.8 million in order to create off-the-books slush funds.  The slush funds were then used to make payments to third parties who would not be able to pass ERICSSON's due diligence processes.  ERICSSON knowingly mischaracterized these payments, which were made pursuant to sham contracts for services that were never performed, and improperly recorded them in ERICSSON's books and records. 

In Indonesia, from approximately 2012 to 2015, ERICSON, via a subsidiary, paid a consulting company approximately $45 million in order to create off-the-books slush funds.  ERICSSON took active steps to conceal the payments, which were made pursuant to sham contracts for services that were never performed.

In Kuwait, from approximately 2011 to 2013, ERICSSON, via a subsidiary, paid a consulting company approximately $450,000 at the request of a sales agent who had given ERICSSON inside information about the bidding process for a lucrative contract with a state-owned telecommunications company.  ERICSSON made the payment after one of its subsidiaries was awarded the contract, which was valued at approximately $182 million.  The payment was made pursuant to a sham contract for services that were never performed.

In a Complaint filed in the United States District Court for the District of New York  https://www.sec.gov/litigation/complaints/2019/comp-pr2019-254.pdf, the SEC alleges that Telefonaktiebolaget LM Ericsson violated the anti-bribery, books and records, and internal controls provisions of the federal securities laws. In settling the SEC's charges,  Ericsson has agreed to pay over $539 million in disgorgement and prejudgment interest. Separately, the firm agreed to settle parallel  federal criminal charges via the payment of a $520 million criminal penalty and enter into a deferred-prosecution agreement. Additionally, an Ericsson subsidiary, Ericsson Egypt, pled guilty to conspiracy to violate the anti-bribery provisions of the FCPA.  As alleged in part in the SEC Release:

[S]weden-based Telefonaktiebolaget LM Ericsson was charged with engaging in a large-scale bribery scheme involving the use of sham consultants to secretly funnel money to government officials in multiple countries. The bribes netted Ericsson hundreds of millions in profits. To resolve these alleged violations of the Foreign Corrupt Practice Act (FCPA) and charges from a parallel criminal investigation, Ericsson has agreed to pay more than $1 billion to the SEC and the U.S. Department of Justice and to install an independent compliance monitor.

The SEC's complaint alleges that from 2011 through 2017, Ericsson subsidiaries obtained business valued at approximately $427 million by using third parties to bribe officials in Saudi Arabia, China, and Djibouti. As alleged, Ericsson also had third parties pay for lavish trips and entertainment for government officials or their family members. In exchange for the bribes, Ericsson received lucrative contracts from state-owned telecommunications entities in these countries. The complaint alleges that Ericsson's subsidiaries further violated the FCPA in Vietnam, Indonesia and Kuwait, by maintaining slush funds, using code names, and creating sham transactions and invoices.

In a FINRA Arbitration Statemetn of Claim filed in May 2019, associated person Claimant Wakefield sought the expungement of a customer complaint from his Central Registration Depository record ("CRD"). Although notified of the expungement hearing, the customer's attorney indicated that the client would not opposed the requested relief and would not participate in the hearing. Respondent Merrill Lynch took no position on the requested relief and did not participate in the hearing. The FINRA Arbitration Panel recommended the expungement of the matter from Claimant's CRD based upon a Rule 2080 finding that the customer's claim, allegation, or information is factually impossible or clearly erroneous, and false. Now for the fun part. Consider this rationale provided in the FINRA Arbitration Decision:

The preponderance of the evidence presented demonstrated that expungement is warranted under Rule 2080 because the claims and allegations against Claimant are clearly erroneous and/or false. Claimant recommended a temporary change to the customer's portfolio to allow her to purchase a second home, to which she had already committed, although she lacked the resources to obtain a mortgage. Claimant's recommendation allowed the customer to accomplish her objective and was suitable based on the customer's objectives and risk tolerance. 

The Customer was aware of the recommended strategy and provided written authorization to pursue it, and confirmed her understanding and authorization in verbal and email communications. Claimant made suitable recommendations to the customer, fully and accurately representing the recommended investments and providing all material information. Claimant kept the customer informed as to all account decisions and she provided express written authorization for Claimant to act and confirmed her understanding of her financial plan. She understood that her portfolio was liquid and had requested that in writing. To the extent that the customer complained about a delay in securing a second mortgage or executing the strategy concerning that mortgage, the evidence showed Claimant was no longer her financial advisor at the time.

In a FINRA Arbitration Statement of Claim filed in May 2018, associated person Claimant Pent asserted defamation, wrongful termination and interference with a prospective business advantage. At the close of the hearing, Claimant Pent sought $1,648,419 to $2,040,079 in compensatory damages and the same amount as damages for defamation and also for punitive damages. As set forth in part in the FINRA Arbitration Decision:

Claimant alleged that he was terminated by Respondent without just cause. Claimant further alleged that the Form U5 disclosure not only defamed him, but has also prevented him from obtaining employment since his termination. 

Respondent UBS generally denied the allegations and asserted various affirmative defenses. The FINRA Arbitration Panel found Respondent UBS liable and ordered the firm to pay to Claimant Pent $200,000 in compensatory damages plus $600 in reimbursed FINRA filing fees. Further, the Panel recommended the expungement of the "Termination Comment" in Section 3 of the Form U5 (with other conforming revisions), and proposed this revision:

Employee was discharged after firm review determined that he failed to adequately supervise employees in association with the risks of an uncovered options strategy in an employee account and in an employee-related account. 

Order Determining Whistleblower Award Claims (Release No. 34-87663; File No. 2020-3)
https://www.sec.gov/rules/other/2019/34-87663.pdf
The Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of the whistleblower award applications. Claimants filed timely responses contesting the preliminary denials. Upon consideration, the SEC denied all claims of the five enumerated Claimants. The SEC Order alleges in part that [Ed: footnotes omitted]:

The CRS issued a Preliminary Determination recommending that the Commission deny each of the Claimants' award applications because none of the information provided by any of the Claimants led to the successful enforcement of the Covered Action. The record supporting that Preliminary Determination included the declarations of one of the primary Enforcement staff attorneys responsible for the Second Track and Covered Action, which stated under penalty of perjury that the Claimants' tips to the Commission were not used in the investigation, including the Second Track, or enforcement of the Covered Action. 

The CRS also preliminarily denied Claimant 1's claim on the additional independent grounds that Claimant 1 's award application was untimely and that any information Claimant 1 provided to the Commission for the first time before July 21, 2010 was not "original information." The CRS also preliminarily denied Claimant 8's claim on the additional independent ground that Claimant 8 failed to qualify as a whistleblower by not submitting Claimant 8's tips to the Commission on Form TCR. 

Order Determining Whistleblower Award Claims (Release No. 34-87662; File No. 2020-2)
https://www.sec.gov/rules/other/2019/34-87662.pdf
The Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of the whistleblower award applications. Claimants filed timely responses contesting the preliminary denials. Upon consideration, the SEC denied all claims of the six enumerated Claimants. The SEC Order alleges in part that [Ed: footnotes omitted]:

The CRS issued a Preliminary Determination recommending that the Commission deny each of the Claimants' award applications because none of the information provided by any of the Claimants led to the successful enforcement of the Covered Action. The record supporting that Preliminary Determination included the declarations of the primary Enforcement staff attorneys responsible for the First Track and Covered Action, which stated under penalty of perjury that the Claimants' tips to the Commission were not used in the investigation, including the First Track, or enforcement of the Covered Action. 

The CRS also preliminarily denied Claimant 1's claim on the additional independent grounds that Claimant 1 's award application was untimely and that any information Claimant 1 provided to the Commission for the first time before July 21, 2010 was not "original information." The CRS also preliminarily denied Claimant 8's claim on the additional independent ground that Claimant 8 failed to qualify as a whistleblower by not submitting Claimant 8's tips to the Commission on Form TCR.