Securities Industry Commentator by Bill Singer Esq

December 16, 2019

featured in today's Securities Industry Commentator:

Two Florida Men Facing Federal Indictment in Maryland for Allegedly Scamming Elderly Victims of More Than $1.5 Million / Allegedly Collected Tens of Thousands of Dollars in Cash Payments by Falsely Telling the Victims that a Relative-Typically a Grandchild-Needed Money for Bail, Legal Fees, and Other Expense (DOJ Release)

Individual Found Guilty Of Operating "Ponzi" Scheme, Securities And Bank Fraud / Forfeiture allegation of $2,900,000 dollars (DOJ Release)

The Temptations of Collecting Data at the SEC ( Blog)

FINRA Censures and Fines Jefferies Execution Services Over Layering/Spoofing Supervision. In the Matter of Jefferies Execution Services, Inc. n/k/a Jefferies LLC, Respondent (FINRA AWC)

Report from FINRA Board of Governors Meeting - December 2019 / Board Approves Rule Proposals, Reaffirms Financial Guiding Principles (FINRA Release)

Two New York Men Charged with Manipulating Publicly Traded Stock (DOJ Release)
Joseph Fabiilli and Christopher Knight were charged in an Indictment filed in the United States District Court for the  Eastern District of Pennsylvania with conspiracy to commit securities fraud and securities fraud. As alleged in part in the DOJ Release:

[F]abiilli, Knight and others manipulated the stock of Mainstream Entertainment, Inc., a publicly traded security, through fraudulent press releases, a fraudulent securities disclosure filed with the U.S. Securities and Exchange Commission, and other fraudulent communications, and through manipulative stock trading.  The defendants and others were thus able to fraudulently inflate the price of Mainstream Entertainment stock, and then sell their own shares at inflated prices, reaping illicit proceeds - a scheme which is commonly referred to as a "pump and dump".
David James Green and McArnold Charlemagne were indicted in the United States District Court for the District of Maryland on seven counts of mail fraud and conspiracy to commit mail fraud. As alleged in part in the DOJ Release:

[F]rom January 2018 through August 2019, the defendants were part of a conspiracy to defraud elderly victims by persuading them to send thousands of dollars in cash to members of the conspiracy by falsely stating that the money would be used to help the victims' relatives pay legal or other expenses in connection with crimes and other incidents that had not occurred.  Charlemagne and Green's co-conspirators allegedly telephoned elderly victims throughout the United States, posing as a police officer, lawyer, or other individual, falsely telling the victim that a relative, typically the victim's grandchild, had been incarcerated in connection with a car accident or traffic stop involving a crime, and needed money-often tens of thousands of dollars-for bail, legal fees, and other expenses. 

As stated in the indictment, during the telephone calls, the co-conspirators directed victims to send cash to a particular address via an overnight delivery service.  The co-conspirators allegedly even posed as the victims' relatives to further induce them to send the cash.  Once the victims did send money, the co-conspirators called the victims asking for more cash, regularly obtaining tens of thousands of dollars from the retirement savings of victims.  To prevent the victims from sharing the information with anyone, the co-conspirators allegedly told the victims that a "gag order" had been placed on the case requiring secrecy, or that the situation was embarrassing for the grandchild and they didn't want anyone else to know about it.

The indictment further alleges that in order to conceal the crime, Charlemagne, Green, and other co-conspirators identified residential locations across the country where the cash should be sent, including in Maryland, Pennsylvania, Delaware, and Florida.  Charlemagne and Green allegedly identified locations that were either vacant or for sale, so that no one would be at those locations at the time of the deliveries, then retrieved the packages of cash when they were delivered.  Charlemagne, Green and other co-conspirators recruited and instructed additional people to assist in retrieving packages of cash from specified locations.
Carlos Maldonado, owner of Business Planning Resources International Corporation, Glorimar Fashions, and Tailoring, LLC, Global Business Insurance Agency Inc., and associated under the incorporation documents with Pet Card Systems, Inc., and Datavos Corporation, was found guilty after a jury trial in the United States District Court for the District of Puerto Rico of 16 counts of securities fraud and bank fraud. As alleged in part in the DOJ Release: 

[F]rom on or about the year 2007 through the year 2012, Carlos Maldonado along with other individuals raised over $5,000,000 on behalf of BPRIC, from over one hundred individuals, and other businesses and investments; resulting in losses to investors exceeding $2,900,000. As part of the solicitation, individuals throughout Puerto Rico and the Continental US received Investment Contracts that were signed by Maldonado and his associates.

The defendant was found guilty on all counts. During trial, the government presented checks, bank records, emails, other documentary evidence, and witness and victim testimonies that proved that the defendant made or caused materially false and misleading representations to be made to investors, including: (i) that various companies were involved in legitimate business functions; (ii) failing to disclose to investors that their funds would be used to buy and trade stocks and commodities on a ScottTrade account, Foreex Capital markets, LLC, and other personal trading accounts, and for Maldonado's family and expenses; (iii) purchase goods and services at retail stores, restaurants, and spend money for travel, rent, entertainment, and personal auto loan payments.
In a fair and trenchant observation, SEC Commissioner Hester M. Peirce recently stated that: 

The temptation to collect more data only grows with the sophistication of our analytical techniques and tools.  Collecting data, however, is not free-not for us, not for the industry from which we collect it, and not for investors.  Registrants that provide the data often incur very large direct costs to produce the data in the timeframe and at the frequency we require.  They also may experience other kinds of costs if the data fall into the wrong hands. . .

It's about time that we discern between the "value" of various regulatory initiatives versus the "cost" of same. Hopefully, such concerns will spur Peirce and her colleagues to finalize the roll-out of the beleaguered CAT and to overhaul the SEC's dysfunctional Whistleblower program.

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, Jefferies submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Jefferies became a FINRA member in 1948 and that Jefferies Execution Services ("JefEx") ceased operations on October 31, 2017, and merged into Jefferies LLC, which had been a FINRA member since 1963 and has over 1,700 reps and 28 branches. The AWC alleges that JefEx "does not have any disciplinary history with the SEC, any state securities regulators, FINRA, or any other self-regulatory organization." In accordance with the terms of the AWC, FINRA found that Jefferies had violated violated NASD Rules 3010(a) and (b) (for conduct prior to December 1, 2014), and FINRA Rules 3110(a) and (b) (for conduct on and after December 1, 2014), and 2010; and the regulator imposed upon the firm a  Censure, $215,000 fine ($18,800 payable to FINRA. The AWC contemplates similar settlements with Nasda, BX, PHLX, NYSE, NYSE American, NYSE Arca, BZX, BYX, EDGA, and EDGX. As alleged in part in the FINRA AWC:

From January 1, 2014 through February 28, 2015 (the "review period"), JefEx offered its clients, which included FINRA-registered broker-dealers and institutional clients, direct market access to various securities exchanges. Nevertheless, the Firm failed to implement a reasonably designed supervisory system and written supervisory procedures to monitor for potential layering or spoofing activity by its direct market access clients. Surveillance by FINRA and other exchanges during the review period identified more than 150,000 instances of potential layering by direct market access customers of the Firm. But JefEx did not have any supervisory system or written supervisory procedures to review for potential layering or spoofing by clients until February 2015.

Bill Singer's Comment: Not to be too snarky here but, like, geez, what the hell is the point of this AWC? The conduct at issue goes back to January 1, 2014, which is just about six years ago -- and if we go by the terminus date of February 28, 2015, the last cited misconduct occurred about five years ago. On top of that, JefEx no longer exists. If the purpose of FINRA's sanctions is to protect the investing public, that horse long ago left the barn. Frankly, this seems more about beating a dead horse. If you step back and look at the fact pattern with some disinterest, we have FINRA (and other SROs) imposing fines during the last-gasp days of 2019 on a firm that no longer exists for misconduct that took place during 2014 and a couple of months into 2015. Is this about padding SROs stats for 2019?
At 2019's last FINRA Board of Governors meeting, the self-regulatory organization's 2020 proposed budget was approved and its Financial Guiding Principles was reviewed. Watch the nicely produced, short summary of the meeting's accomplishments at: 
As set forth in part in the FINRA Release:

The Board approved two rule proposals to be filed with the Securities and Exchange Commission (SEC), where they will be published for public comment and must be approved by the SEC before becoming effective:

Proposed Rule Changes Related to Firms with a Significant History of Misconduct - The Board approved a proposed Restricted Firm Obligations Rule that would require member firms that are identified as Restricted Firms to maintain a deposit in a segregated account from which withdrawals would be restricted, adhere to specified conditions or restrictions, or comply with a combination of such obligations.

Proposed Amendments to FINRA's Suitability and Non-Cash Compensation Rules to Align with SEC Regulation Best Interest - The Board approved proposed amendments to the rules governing suitability and non-cash compensation to address inconsistencies with SEC Regulation Best Interest and to mitigate potential confusion over which standards will apply with respect to recommendations to retail customers.