Securities Industry Commentator by Bill Singer Esq

January 24, 2020

Russian National Pleads Guilty to Running Online Criminal Marketplace (DOJ Release)

OCC Issues Notice of Charges Against Five Former Senior Wells Fargo Bank Executives, Announces Settlement With Others (OCC Release)
Charges were filed by the Office of the Comptroller of the Currency ("OCC") against former Wells Fargo Bank, N.A executives, seeking the relief noted below:
  • Carrie Tolstedt (Head of the Community Bank): Prohibition Order and $25,000,000 Civil Money Penalty (CMP)
  • Claudia Russ Anderson (Community Bank Group Risk Officer) Prohibition Order and $5,000,000 CMP
  • James Strother (General Counsel): Personal Cease & Desist (PC&D) Order and $5,000,000 CMP
  • David Julian  (Chief Auditor) PC&D Order and $2,000,000 CMP
  • Paul McLinko (Executive Audit Director):PC&D Order and $500,000 CMP
As noted in part in the OCC Release:

The notice of charges alleges these executives failed to adequately perform their duties and responsibilities, which contributed to the bank's systemic problems with sales practices misconduct from 2002 until October 2016. The misconduct of these individuals allowed the practices to continue for years, affecting millions of bank customers and thousands of lower level bank employees. Additionally, the notice states that Ms. Russ Anderson also made false and misleading statements to the OCC and actively obstructed the OCC's examinations of the bank's sales practices.

Based on the facts and circumstances of each individual's actions, the relief sought may include a lifetime prohibition from participating in the banking industry, a personal cease and desist order, and/or CMP. A personal cease and desist order would require the individual to take certain affirmative actions or refrain from certain conduct in any future involvement in the banking industry. Pursuant to federal law, the respondents may request a hearing challenging the allegations and relief sought by the OCC.

The OCC also announced today the issuance by consent of a prohibition order and a $17,500,000 CMP against former bank Chairman and CEO John Stumpf; a personal cease and desist order and a $2,250,000 CMP against the bank's former Chief Administrative Officer and Director of Corporate Human Resources Hope Hardison; and a personal cease and desist order and assessment of a $1,250,000 CMP against its former Chief Risk Officer Michael Loughlin for their roles in the bank's sales practices misconduct.

Also see:
I applaud the federal court for its spot-on characterization of FINRA as "a private organization funded by the securities industry." All public-customer advocates and those who defend the industry's associated persons should frequently cite in boldface, upper-case, 16-point type, the Court's somewhat pejorative characterization. Indeed, FINRA is not a governmental organization, but, as the Court so aptly notes, "a private organization." Moreover, FINRA is a private organization that is "funded by the securities industry," which certainly places the self-regulatory-organization in the proper light. 

Founder Of Meridian Capital Asset Management Sentenced To Two Years In Prison For Stealing Over $1 Million Of Investor Funds (DOJ Release)
After pleading guilty in the United States District Court for the Southern District of Ne York to conspiring to commit securities and wire fraud,  John Geraci, 62, was sentenced to 24 months in prison plus three years of supervised release; and he was ordered to forfeit $1,098,971.38 and to pay restitution. As set forth in part in the DOJ Release:

GERACI was the principal and founder of Meridian Capital Asset Management.  In or about February 2015, GERACI was introduced to Nicholas Mitsakos, who purported to operate a hedge fund called Matrix Capital ("Matrix").  Mitsakos told GERACI that Matrix had tens of millions of dollars under management and had achieved annual returns between 19.4% and 66.3% from 2012 to 2014.  GERACI and Mitsakos subsequently entered into an arrangement whereby GERACI would raise money for Mitsakos, Mitsakos would manage that money through a new vehicle, the Meridian Matrix Fund, and GERACI and Mitsakos would then split any fees that the Meridian Matrix Fund generated.  As part of this arrangement, GERACI solicited Victim-1 and Victim-2 to invest approximately $2 million in the Meridian Matrix Fund, in large part by relying on Mitsakos's claims about his supposed fund's assets under management and performance returns.

By in or about December 2015, however, GERACI learned that Mitsakos had only invested approximately $1.2 million of Victim-1 and Victim-2's investment, and had misappropriated significant portions of the remaining money.  GERACI also learned that Mitsakos never had any actual assets under management, and that his performance returns were accordingly fictitious and misleading.  Nonetheless, GERACI never told Victim-1 or Victim-2 that their investment was in jeopardy or had been solicited with misleading information.  To the contrary, GERACI sent Victim-1 and Victim-2 updates that hid Mitsakos's misappropriation and falsely claimed that their investment had appreciated.  GERACI sent these fictitious updates even after GERACI had liquidated the Meridian Matrix Fund's trading positions in or about June 2016.  Beginning in or about November 2015, GERACI also misappropriated hundreds of thousands of dollars of Victim-1 and Victim-2's money for himself. 

In or about August 2016, Mitsakos was charged in this District with securities fraud and other offenses.  In or about September 2016, GERACI changed course:  Instead of providing fictitious account updates to Victim-1 and Victim-2, GERACI told them, in substance and in part, that their entire investment had been wiped out through Mitsakos's fraud.  GERACI did this even though he had ultimately received approximately $1.1 million of Victim-1 and Victim-2's investment back from Mitsakos, including after liquidating the Meridian Matrix Fund's trading positions.  Rather than returning this amount to Victim-1 and Victim-2, GERACI used it to pay for his own personal and business expenses, including, for example, payments on a BMW automobile, a gym membership, gas, groceries, travel expenses, and his cellphone bill.

In addition to sending false account updates to Victim-1 and Victim-2 even after learning that Mitsakos had lied about his fund's assets and performance and that Mitsakos had stolen significant portions of Victim-1 and Victim-2's investment, GERACI continued to try to raise money from others for an investment related to the Meridian Matrix Fund.  In attempting to do so, moreover, GERACI relied on the same representations about Matrix's assets and performance that he knew to be false.   

Mitsakos pled guilty to conspiring to commit securities fraud and wire fraud on May 25, 2017, and was sentenced on November 7, 2017, to 30 months in prison by the Honorable Denny Chin, a judge on the United States Court of Appeals for the Second Circuit who was sitting by designation in the Southern District of New York. 

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, Thomas J. Crossett submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Thomas J. Crossett was first registered in 1999, and since 2014, he was registered with FINRA member firm Girard Investment Services. The AWC alleges that Crossett "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization." In accordance with the terms of the AWC, FINRA found that Crossett had violated FINRA 2010; and the self regulator imposed upon him a $5,000 fine and a three-months suspension from association with any FINRA member firm in any capacity. As alleged in part in the AWC:

In August 2015, after becoming registered with Girard Investment Services, Crossett and three individuals formed and funded a limited liability company (the "Company") for the purpose of purchasing, rehabilitating, and selling a residential property. In November 2015, Crossett applied for a line of credit ("LOC"), the collateral for which was a brokerage account at the Firm, for the purpose of obtaining additional funding for the Company. Rather than opening an individual or business line of credit, Crossett applied for a joint line of credit in the name of Crossett and his estranged wife, who was a Firm customer. In November 2015, Crossett forged her signature on the application paperwork for the LOC without her knowledge or consent; Crossett then presented the paperwork to a notary public, and falsely represented that his wife had signed it. The LOC was approved, and Crossett then withdrew $50,000 from the LOC and used the proceeds to fund the Company's business. 

Crossett's estranged wife learned of the LOC in December 2018, when she received paperwork concerning the LOC. She complained to the Firm that she had not consented to, and had no prior knowledge of, the LOC. However, Crossett's estranged wife did not experience any losses resulting from the LOC and she subsequently ratified Crossett's decision to open the LOC.
In a Complaint filed in the United States District Court for the Western District of New York, the SEC alleged that real estate developer Robert C. Morgan, and his entities Morgan Mezzanine Fund Manager LLC and Morgan Acquisitions LLC engaged in a fraudulent real estate investment scheme.  As set forth in part in the SEC Release:

As alleged, Morgan financed his real estate development projects through, among other ways, the sales of securities to more than 200 retail investors, many of whom invested through their retirement accounts.  Morgan represented to investors that their money would be used to improve multifamily properties.  Instead, as alleged in the complaint, Morgan and his entities diverted investor funds to facilitate payments to earlier investors and made misrepresentations to later investors about prior fund performance.  Upon filing this action, the SEC sought and obtained certain emergency relief, including the appointment of a receiver responsible for maximizing the monetary recovery for investors.  Since filing, Morgan voluntarily liquidated certain assets to generate funds for collection by the receiver.  On Jan. 21, 2020, the court approved the receiver's plan to distribute over $63 million to harmed investors.
I mean, geez, with a headline like that, how could you not want to know more, right? In any event, Aleksei Burkov, 29, pled guilty in the United States District Court for the Eastern District of Virginia to access device fraud and conspiracy to commit computer intrusion, identity theft, wire and access device fraud, and money laundering. As set forth in part in the DOJ Release, Burkov:

ran a website called "Cardplanet" that sold payment card numbers (e.g., debit and credit cards) that had been stolen primarily through computer intrusions. Many of the cards offered for sale belonged to United States citizens. The stolen credit card data sold on Burkov's site has resulted in over $20 million in fraudulent purchases made on United States credit cards.

Additionally, Burkov ran another website that served as an invite-only club where elite cybercriminals could advertise stolen goods, such as personal identifying information and malicious software, and criminal services, such as money laundering and hacking services. To obtain membership in Burkov's cybercrime forum, prospective members needed three existing members to "vouch" for their good reputation among cybercriminals and to provide a sum of money, normally $5,000, as insurance. These measures were designed to keep law enforcement from accessing Burkov's cybercrime forum and to ensure that members of the forum honored any deals made while conducting business on the forum.

Index Fund Giants Draw Antitrust Scrutiny in U.S. Mergers ( by David McLaughlin)
In part, the Bloomberg article notes that:

Behind the scrutiny lies growing worries about the power of giant money managers such as BlackRock Inc., Vanguard Group Inc. and State Street Corp.

Those fund companies are often called the Big Three because they are the largest index-fund companies and also the largest owners of many U.S. publicly traded firms. Economists and antitrust lawyers are raising concerns that the fund houses are harming competition among the companies whose shares they jointly own.