Securities Industry Commentator by Bill Singer Esq

December 13, 2019

featured in today's Securities Industry Commentator:

SEC Obtains $3 Million Settlement in Insider Trading Action (SEC Release)

Former West Covina Man Charged with Selling Bogus Memorabilia Containing Phony Autographs of Sports Stars, Celebrities (DOJ Release)
In a recent criminal appeal, an appellant/defendant and the federal court seem to think that FINRA is a state governmental agency. Is this a mere typo by the Court? Did something actually transpire by which FINRA was transmogrified from a mere SRO into a state agency? Did something actually transpire by which an important line was crossed, and FINRA, a non-governmental actor with no criminal enforcement powers, was deemed to be standing in the shoes of a state prosecutor? How's that impact so-called Grand Jury secrecy? Whatever the explanation, what's written in the Opinion/Order doesn't make sense. 

In a FINRA Arbitration Statement of Claim filed in June 2018 and as amended, associated person Claimant Munizzi asserted that his Form U5, as filed by Respondent UBS, and as part of his Central Registration Depository record ("CRD"), constituted defamation per se; and he further asserted violation of the Illinois Wage Payment and Collection Act and tortious interference with prospective economic advantage. Claimant Munizzi alleged that UBS owed him severance and that the Form U5 interferes with his ability to obtain commensurate employment. At the hearing, Claimant sought an expungement/modification of the Form U5 and; $3,149,656 in compensatory damages, interest, $496,753.50 in attorneys' fees, $23,419.13 in costs, and 10 times the compensatory damages via punitive damages. 

Respondent UBS generally denies the allegations and asserts affirmative defenses.

The FINRA Arbitration Panel recommended the expungement of Claimant Munizzi's U5. Pointedly, the Panel recommended, in part, that the "Reason for Termination" be changed to "Other" and the "Termination Explanation" to "Terminated without cause."

Further, the Panel found Respondent UBS liable to and ordered the firm to pay to Claimant Munizzi $3,149,656 in compensatory damages, $112,500 in interest, $496,753.36 in attorneys' fees, $24,381.40 in costs, $375 in reimbursed FINRA filing fees; and $7,500,000 in punitive damages. 

Bill Singer's Comment: Compliments to Claimant Munizzi's legal team: Steven P. Gomberg, Esq. and Mindy Schwab, Esq., of Lynch Thompson LLP, Chicago, Illinois. Hopefully, the law firm had this one on a contingency!
In May 2011, Defendant Eaton began employment as a Financial Consultant with E*Trade, where he remained until his July 2017 resignation, at which time he joined Morgan Stanley. In response to Eaton's departure, Plaintiff E*Trade filed a FINRA Arbitration Statement of Claim alleging Eaton's breach of his duties under a Nonsolicitation/Nondisclosure Agreement. Additionally, Plaintiff E*Trade sought and was granted a Preliminary Injunction on April 24, 2018, by the United States District Court for the District of Arizona ("DAZ"). On August 30, 2019, Defendant Eaton moved DAZ to vacate its April 2018 injunctive Order. As set forth in part in the DAZ 2019 Order:

[D]efendant alleges that for nearly two years, Plaintiff concealed the existence of another agreement Defendant had signed contemporaneously with the Nonsolicitation Agreement, and that Plaintiff and its attorneys misrepresented such non-existence to Defendant, Defendant's counsel, and the Court. (Mot. at 4.) That agreement, also signed on May 16, 2011 and titled Agreement Regarding Employment and Proprietary Information and Inventions ("Employment Agreement"), contained a California choice of law provision. The Nonsolicitation Agreement, on the other hand, specified no choice of law. The Court therefore applied Arizona law in ruling on the preliminary injunction motion. 

Defendant argues that the Employment Agreement's California choice of law provision should have governed the parties' dispute. He further contends some of the Nonsolicitation Agreement's restrictive covenants, on which the Court partially predicated its Preliminary Injunction Order, would have been unenforceable under California law. Accordingly, Defendant now moves to set aside the Preliminary Injunction Order under Federal Rule of Civil Procedure 60(d)(3). 

= = = = =

Footnote 1: Defendant learned of the Employment Agreement and its California law provision in May 2019, when he received it in response to a Request for Production of his E*Trade personnel file that he served in October 2018 in the FINRA arbitration. Plaintiff did not request his personnel file during discovery in this action. (See Resp. Ex. E.)

DAZ denied Defendant Eaton's Motion to Vacate. In defending against Eaton's allegations, E*Trade argued that it had never denied the existence of the California Agreement, and notwithstanding said document's existence, the Plaintiff contends that only the Nonsolicitation Agreement governs the parties' dispute. As further set forth in the DAZ 2019 Order:

[P]laintiff created-and last updated-the standard Employment Agreement when E*Trade was headquartered in California. Accordingly, E*Trade included a California choice of law provision. (Persico Decl. ¶ 7.) E*Trade then moved its headquarters to New York in 2004. According to Persico, "[f]ollowing this move, the [Nonsolicitation Agreement] should have been the only agreement governing the solicitation of customers that was provided to employees outside of California." (Persico Decl. ¶ 7.) However, when Eaton appeared for his first day of work in Scottsdale on May 16, 2011, E*Trade was apparently still administering the Employment Agreement- something Persico attributes to an "inadvertently continued and outdated company procedure." (Persico Decl. ¶ 7.) 

NOTE: Jennifer Persico, Esq. was E*Trades in-house counsel; Matthew Henneman, Esq. was Eaton's counsel.

In further compounding the error, when E*Trade's recruiter transmitted the firm's April 25, 2011 Offer Letter to Eaton, it included, in part, a copy of the Nonsolicitation Agreement but did not attach or reference the Employment Agreement. In response, Eaton asserted that E*Trades claimed ignorance of the Employment Agreement was "incredible and disingenuous." Thereafter, the following transpires, beginning with Eaton's counsel sending the following letter to E*Trade's counsel:

[Y]ou have advised that E*Trade believes Mr. Eaton has potentially breached certain obligations under a non-solicitation and non-disclosure provision in his employment agreement. This is expressly denied. To the extent such agreement is governed by California law, as previous E*Trade agreements we have reviewed have been, we note the general rule in California is that covenants not to compete are unenforceable.  

Frankly, Eaton seems to have made out a fairly compelling case against the ongoing enforcement of the 2018 injunction. Unfortunately for Eaton, I ain't the judge. As to DAZ''s rationale for denying his Motion to Vacate, in part, the Court offers this:

[F]irst, as Persico notes, the fact that Henneman had seen other E*Trade employment agreements with California law provisions might not necessarily surprise Persico because E*Trade continues to use those agreements with its California employees. (Persico Decl. ¶ 14.) Second, Persico responded to Henneman: "You also mentioned that the Nonsolicitation and Nondisclosure Agreement (‘Agreement') dated May 16, 2011, that Mr. Eaton signed, was governed by California law and was unenforceable as a result. There is no mention of California anywhere in the Agreement." (Mot. Ex. 4 at 4.) It appears Persico understood Henneman's later as referring to a choice of law provision within the Nonsolicitation Agreement, not a separate Employment Agreement.

Defendant also directs the Court to May 2019 filings that Plaintiff made in a similar case pending in the Northern District of California. There, Plaintiff explicitly and abundantly refers to both a nonsolicitation and nondisclosure agreement and an employment agreement identical to the Employment Agreement in this case. (See Reply Ex. A.) Defendant characterizes this as hypocritical, as Plaintiff then turns around and maintains in this case that it learned of Defendant's Employment Agreement for the first time in September 2019. The Court disagrees with Defendant's portrayal. As noted above, E*Trade still utilizes the employment agreements with its California employees. In the Northern District of California case, the employee lived and worked in California the entire time she was employed by E*Trade, and then moved to a California office of Morgan Stanley. (Reply. Ex. A ¶ 2.) It would therefore be in E*Trade's regular practice to have a separate employment agreement with a California law provision. (See Persico Decl. ¶ 14.)

In short, Defendant has failed to meet his demanding burden of demonstrating fraud on the court by clear and convincing evidence. The Court is careful to note that this decision does not condone what appears to be sloppiness on the part of Plaintiff during Defendant's onboarding process in 2011. However, Plaintiff's eight-year-old actions are not at issue in this motion. What the Court must decide is whether Plaintiff's actions throughout this litigation amounts to "defilement of the court itself." The Court concludes it does not.

Wall Street Is Being Hunted by Futures Cops for Government Leaks ( by Matt Robinson and Benjamin Bain)
As ominously noted in the CNBC Article:

For months, the Commodity Futures Trading Commission has been quietly ramping up efforts to hunt for suspicious transactions by using technology to pore through reams of market data, said three people familiar with the matter who asked not to be named because the examination isn't public. The goal is to assess whether some traders are getting a heads up before the release of key economic statistics or federal agencies' policy announcements.
The FBI presents the case of Michael Henschel, 70, who often defrauded the elderly or non-English speakers via a $7 million scam that involved the filing of fake deeds. As noted in the FBI Release:

The results were disastrous for the numerous victims. Some lost homes that had been in their families for generations, ended up in nightmarish civil litigation, or had to scramble to avoid homelessness. Several of the victims said they have struggled to make ends meet since Henschel swindled them.
Litigation Release No. 24690 / December 12, 2019
In Complaints filed in the United States District Court for the Western District of Oklahoma, the SEC alleged that John Kenneth Davidson learned of a potential merger involving medical device company Covidien PLC from his friend/neighbor and member of Covidien's board of directors. Allegedly, Davidson ignored a warning from the director that he should not trade on this information and purchased Covidien shares. Further, Davidson entrusted his friend and fellow oil and gas executive, John Special, with this information with the expectation that Special would keep it confidential and not use it to trade. Contrary to Davidson's expectation, Special purchased Covidien stock and options ahead of the merger in accounts that he controlled and in the account of a close friend, Michael Murphy. Following the publicly announced merger of Medtronic PLC and Covidien at a 29% premium ($93.22 per share), Special realized $1.182 million in profits in accounts under his control and his friend realized over $359,000. Davidson's insider trading yielded $19,212 in profits.

Special Complaint (Murphy Relief Defendant)

Without admitting or denying the allegations in the complaints, Special and Davidson consented to final judgments permanently enjoining each of them from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Special agreed to pay nearly $3 million in financial relief: $1,182,472 in disgorgement, $231,782 in prejudgment interest, and a $1,542,242 civil penalty. Davidson agreed to pay $19,212 in disgorgement, $3,822 in prejudgment interest, and a $19,212 civil penalty. Relief Defendant Michael Murphy consented to a final judgment ordering him to disgorge $359,770.

Former West Covina Man Charged with Selling Bogus Memorabilia Containing Phony Autographs of Sports Stars, Celebrities (DOJ Release)
In an Indictment filed in the United States District Court for the Central District of California, Anthony J. Tremayne was charge with 13 counts of wire fraud, three counts of mail fraud, and three counts of aggravated identity theft. As alleged in part in the DOJ Release:

[B]eginning in 2010 and continuing until this month, Tremayne operated businesses - including Tremayne Enterprises and Timeless Treasures - that sold memorabilia that contained the forged signatures of celebrities and sports stars. Tremayne allegedly hired and paid other people to forge the signatures. The phony goods were sold on the Internet and were shipped via U.S. mail, FedEx, or other private or commercial interstate carriers, according to the indictment. Tremayne allegedly held out that the forged signatures were real.

For example, in November 2013, Tremayne allegedly met with a buyer in Ladera Ranch. During that meeting, he allegedly sold for $100,000 approximately 100 memorabilia items with forged signatures, including "Star Wars" Darth Vader and Imperial storm trooper helmets that had forged signatures from actors in the movie series, as well as posters with forged signatures of actors from the "Hunger Games" and "Twilight" movie series.

In November 2019, Tremayne allegedly shipped to an FBI undercover buyer a "Keeping Up with the Kardashians" photograph that had forged signatures of three of the television show's personalities.

As a result of the scheme, Tremayne and his memorabilia business sold more than $1 million in memorabilia items, according to the indictment. Tremayne has been charged with 13 counts of wire fraud, three counts of mail fraud, and three counts of aggravated identity theft.

The indictment also alleges that Tremayne had moved to Mexico to avoid paying approximately $1.4 million in taxes that he owed to the U.S. government.

Executive Of Purported Caffeinated Snack Company Sentenced To 4 Years In Prison For Defrauding Investors Of More Than $2.3 Million (DOJ Release)
After pleading guilty in the United States District Court for the Southern District of New York, Barry Schwartz was sentenced to four years in prison  plus two years of supervised release; and ordered to forfeit $2,163,214. Previously, Co-Defendant Lisa Bershan pled buitly and was sentenced, in part, to seven years in prison. Co-Defendant Joel Margulies was convicted after a seven-day trial. As set forth in part in the DOJ Release:

The Starship Snack Corporation Fraud Scheme

From approximately August 2015 through August 2017, SCHWARTZ, Margulies, and a co-conspirator, Lisa Bershan, raised more than $2.3 million from investors in a company originally called the Awake Company and later renamed Starship Snacks Corporation ("Starship"), which purported to be in the business of developing and manufacturing caffeinated snack products, based on the following misrepresentations, among others: (a) that investments in Starship were guaranteed against losses by Bershan; (b) that Starship was going to be acquired by Monster Beverage ("Monster") in a one-for-one stock exchange; (c) that Starship was engaged in actual product development and had procured samples of candies infused with caffeine; (d) that SCHWARTZ and others at Starship had entered into non-disclosure agreements with Monster that prohibited them from discussing Starship's purported acquisition by Monster and its purported product development.  SCHWARTZ held himself out as Starship's corporate secretary.   

After receiving funds from Starship investors, SCHWARTZ and his co-conspirators used those funds to maintain their own extravagant lifestyles, spending hundreds of thousands of dollars on things like luxury clothing, plastic surgery, interior decorating, the rental of a high-end apartment in New York City, and the down payment for a multimillion-dollar house in Florida.