Securities Industry Commentator by Bill Singer Esq

February 17, 2020

Hedge Fund Manager Sentenced To 140 Months In Prison For Defrauding Investors Of Millions Of Dollars (DOJ Release)

Man Charged with Defrauding Banks and Investors of $5 Million (DOJ Release)

Brazil's crypto-market takes a hit as regulations force exchange closures (AMBCrypto by Rakshitha Narasimhan)

CFTC Charges Colorado Resident with Fraud in Digital Asset-Linked Ponzi Scheme (CFTC Release)

CFTC Charges Unregistered Commodity Pool Operator and Its Principal with Fraud and Misappropriation (CFTC Release)

Stockbroker Fined and Suspended for Bookkeeping and Accounting Services. In the Matter of Angela Marie Chatfield, Respondent (FINRA AWC)

SEC Proposes to Modernize Key Market Infrastructure Responsible for Collecting, Consolidating, and Disseminating Securities Market Data / Seeks to Introduce Competitive Forces to Core Components of the System for the First Time (SEC Release)

Statement on Proposed Updates to the National Market System for the Collection, Consolidation, and Dissemination of Information With Respect to Quotations for and Transactions in National Market System Stock by SEC Commissioner Elad L. Roisman

Statement on Proposed Rule on Market Data Infrastructure by SEC Commissioner Allison Herren Lee
It's a very risky proposition for a brokerage firm to accept purchase orders from a customer without sufficient funds on hand or covering margin equity -- and if a customer only has a Cash Account, then margin would not be an option. In two recent FINRA Arbitrations, brokerage firm Ustocktrade sought damages after two customers failed to deposit sufficient funds to cover securities purchases. Those debits raise lots of questions about the customers' intentions and the industry's compliance and regulatory practices.
Nicholas Joseph Genovese, the founder of hedge fund Willow Creek Investments LP, pled guilty in the United States District Court for the Southern District of New York to one count of securities fraud; and he was sentenced to 140 months in prison plus three years of supervised release, and he was ordered to pay $11,211,704 in restitution plus the forfeiture of his proceeds. As alleged in part in the DOJ Release:

In or about 2015, GENOVESE began soliciting individuals to invest in the hedge fund that became Willow Creek, which was based in New York, New York.  In doing so, GENOVESE represented, among other things, that he was part of the Genovese family that had owned the Genovese Drug Store chain in the New York area and was an heir to this family's fortune from the sale of that business for hundreds of millions of dollars in the late 1990s; that he had graduated from Dartmouth College's Tuck School of Business; and that he had extensive Wall Street experience.  In particular, GENOVESE claimed that he had been a Goldman Sachs partner and a Bear Sterns portfolio manager before forming Willow Creek.  Based in part on these claims, victims invested $11,211,704 with GENOVESE. 

These representations were false.  GENOVESE is not related to the Genovese family that owned and sold the Genovese Drug Store Chain, did not attend the Tuck School of Business, and had never worked for Goldman Sachs or Bear Stearns.  GENOVESE also did not tell his investors that he had multiple prior felony convictions for fraud-related offenses including forgery, identity theft, and grand larceny.

When investors began to ask for their money back, GENOVESE put them off.  He told one investor that he would only return that investor's funds after "the stars have aligned," or else there would be a risk that almost all the money would be lost as a result of the purported impracticalities of unwinding unspecified trading positions.  Records indicate that GENOVESE lost approximately $8 million trading in TD Ameritrade accounts between January 2015 and December 2017.  GENOVESE also used proceeds of his fraud to purchase various luxuries for himself.
In a Superseding Indictment filed in the United States District court for the Northern District of Oklahoma, William Brian Mulder was charged with 26 counts of Bank Fraud; 41 counts of Causing the Interstate Transmission of Moneys Taken by Fraud, and 5 counts of Engaging in Unlawful Monetary Transactions. As set forth in part in the DOJ Release:

[M]ulder is alleged to have repeatedly represented himself to banks and investors as a person of high net worth who owned and controlled assets that, in fact, did not exist.  Mulder pledged these assets as collateral for loans and lines of credit that totaled approximately $4 million.  Among the phony assets were life insurance policies that Mulder represented to have been worth hundreds of thousands of dollars. 

The superseding indictment also charged Mulder with having fraudulently obtained over $1 million from investors. Mulder allegedly told the investors that they could invest through his own family trust and also in specific ventures, such as the financing of a doctor's home that, Mulder claimed, was being built in the Joplin, Missouri, area.  The superseding indictment alleges that, in fact, the purported investment opportunities were bogus and that Mulder used the investor funds for his own purposes. 

Brazil's crypto-market takes a hit as regulations force exchange closures (AMBCrypto by Rakshitha Narasimhan )
An intriguing article that clearly highlights the vulnerabilities of the cryptocurrency exchanges. As reported by Rakshitha Narasimhan in ABMCrypto, Brazilian banks are bucking their own government's efforts to pave the way for more acceptance of cryptocurrency. In Brazil, which ranks among the top five countries in terms of cryptocurrency holders and is seventh in terms of the numbers of crypto-exchanges, we find that:

[Banco Bradesco] fears that digital assets might pose serious money laundering risks and it reportedly refused to abide by any demands from the Brazilian Association of Cryptocurrencies and Blockchain [ABCB] regarding account closures for crypto-exchanges. In fact, some sources have revealed that many other commercial banks are planning to shut down accounts belonging to crypto-exchanges.

Digital asset brokers in Brazil are thus willing to give up as they are failing to comply with new reporting requirements under which they face fines, as well as the stricter rules introduced in the EU by the bloc's Fifth Anti-Money Laundering Directive (AMLD5). In fact, several crypto-startups have already closed down or relocated to other jurisdictions in order to preserve their business models and keep their customer base.
In a Complaint filed in the United States District Court for the District of Colorado, the CFTC charged Breonna Clarkand Venture Capital Investments Ltd.with fraud and failing to register with the CFTC. As alleged in part in the CFTC Release: 

The complaint charges that the defendants solicited U.S. residents to trade foreign currency (forex) contracts as well as Bitcoin and other digital assets through a commodity pool operated by the defendants. In connection with these solicitations, the defendants collected $534,829 from approximately seventy-two individuals. Rather than trade, the defendants used at least $418,000 of the funds for personal expenses-including acquiring a BMW automobile-and to make Ponzi-type payments to other pool participants. 

The complaint also alleges that the defendants fraudulently solicited prospective pool participants by misleading customers about their experience, expertise, and investment track record while promising future profitability trading forex and digital assets. The complaint further alleges that to conceal their misappropriation, the defendants sent pool participants false account statements, which purported to show trading gains.  In addition, the defendants were charged with failing to appropriately register with the Commission pursuant to the Commodity Exchange Act and regulations.
In a Complaint filed in the United States District Court for the Eastern District of Missouri, the CFTC charged Joshua Christian McDonald and his company, Perfection PR Firm LLC ("PPR") with fraud and misappropriation related to an off-exchange foreign currency (forex) trading scheme in which they solicited funds totaling at least $440,000 from at least 12 investors. Previously, McDonald was indicted on four counts of wire fraud. As alleged in part in the CFTC Release: 

According to the complaint, the defendants pooled investors' funds in bank and trading accounts in their own names. In soliciting funds for and operating the pooled investment vehicle, PPR acted as an unregistered commodity pool operator and McDonald acted as an unregistered associated person of PPR. 

The complaint further alleges that beginning in at least August 2017, the defendants falsely represented to prospective investors that McDonald was profitably trading forex and promised investors their accounts would grow between 10% and 50% in value per month, among other claims. As alleged in the complaint, however, McDonald did not in fact trade forex as successfully as he claimed and actually lost money. Moreover, the complaint alleges the defendants misappropriated investors' funds and transferred them into digital asset accounts in McDonald's name, or used them to pay McDonald's personal expenses. According to the complaint, investors have lost most or all of their invested funds as a result of the defendants' fraud and misappropriation.

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,Angela Marie Chatfield submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Angela Marie Chatfield a $5,000 fine and a three-month suspension from association with any FINRA member firm in any capacity. As set forth in part in the AWC, during the relevant period from January 2016 through July 2017:

[T]hrivent's written supervisory procedures ("WSPs") required its registered representatives ("RRs") to submit a written request and receive approval from the Firm prior to engaging in any outside business activity. The WSPs defined outside activities to include, among other things, positions that required RRs to make financial or business decisions or direct another party to make such decisions. 

Chatfield participated in three undisclosed outside business activities for which she received compensation. As the principal and owner of AA, a limited liability company she established in December 2008, Chatfield provided bookkeeping and accounting services to small businesses and individuals. As the office manager for DCH, a veterinary practice and animal hospital, Chatfield provided bookkeeping, accounting, real estate management and/or personal management services to the hospital, its owner SH, and related entities. Chatfield also served as a director and treasurer for DCH. Finally, as trustee for SH's estate, Chatfield facilitated the completion of the estate documents, including a will and trust document, which provided for her to receive trustee fees. 

Although she was actively engaged in all of the outside business activities when she joined Thrivent as a GSR, and knew she was required to disclose any outside activity, Chatfield did not disclose or otherwise seek approval for any of these activities until March 2017, when she filed a request for approval of her service as DCH's office manager. However, Chatfield did not disclose her other positions with DCH, her appointment as trustee, or the accounting and booking services she provided through AA. 

By engaging in three outside business activities without providing prior written notice to the Firm, Chatfield violated FINRA Rules 3270 and 2010.  

[T]he proposal would update and expand the content of NMS market data to better meet the diverse needs of investors in today's equity markets. The Commission has not significantly updated the rules that govern the content and dissemination of NMS market data since their initial implementation in the late 1970s. The proposal would also seek to introduce competitive forces into this core component of the national market system for the first time. The introduction of and competition among these new data consolidators could, in turn, allow all market participants, including investors, to access and benefit from the expanded content of NMS market data.

As further summarized in the SEC Release:

The Commission preliminarily believes that the content of NMS market data and the model for collecting, consolidating and disseminating NMS market data have not kept pace with technological and market developments.As a result, the Commission is concerned that current NMS market data may no longer satisfy the needs of many investors, broker-dealers and other market participants. The proposal seeks to address this concern in two fundamental ways.

First, as illustrated in the examples provided in the chart below, the proposal would update and expand the content of NMS market data to include:  (1) information about orders in share amounts smaller than the current round lot size (e.g., 100 shares) for higher priced stocks; (2) information about certain orders that are outside of an exchange's best bid and best offer (i.e., certain depth of book data); and (3) information about orders that are participating in opening, closing and other auctions.
. . .

Second, the proposal would introduce a decentralized consolidation model under which competing consolidators, rather than the existing exclusive SIPs, would collect, consolidate, and disseminate certain NMS information. To support this decentralized model, the proposal would require each SRO to make available all of its data that is necessary to generate NMS market data to two new categories of entities:  (1) competing consolidators, which would be responsible for collecting, consolidating and disseminating consolidated market data to the public; and (2) self-aggregators, which would be brokers or dealers that elect to collect and consolidate market data solely for their internal use.

SROs, as currently registered, and non-SROs could operate as competing consolidators. SRO competing consolidators would not be required to register separately with the Commission. Non-SRO competing consolidators would be required to register with the Commission under proposed new Rule 614 of Regulation NMS. All competing consolidators would be subject to certain standards with respect to the promptness, accuracy, reliability and fairness of their operations, including Regulation SCI. Self-aggregators would be registered broker-dealers subject to the full broker-dealer regulatory regime and would not be required to register with the Commission in a separate capacity. . . .
In announcing his support for the Proposed Rule, Commissioner Roisman notes in part that:

[T]oday, firms' appetites for data are only increasing, and transmission speeds are more critical than ever.  In this regard, I understand many businesses have evolved such that they increasingly rely on proprietary exchange data feeds for the decisions they make every microsecond of the trading day, rendering the consolidated data distributed by the exclusive SIPs less useful to a growing number of market participants.

In contrast to this evolution, our rules governing dissemination of quote and transaction data mostly have remained static.  Today, I support the Commission's proposal to make headway in this area.  Nevertheless, I believe several aspects of the proposal will merit continued consideration.  The proposal includes numerous questions to elicit public feedback on many such important issues.  I would like to highlight a few of these areas in which I am particularly interested.

Statement on Proposed Rule on Market Data Infrastructure by SEC Commissioner Allison Herren Lee
In announcing her support for the Proposed Rule, Commissioner Lee notes in part that:

[I]n a trading world where the race to trade on market information can be won by a margin of milliseconds or even microseconds, slower SIP data is often too stale.  Those relying on the SIP to trade are therefore unable to compete in today's fast-moving markets.[7]  Consequently, many market participants find that they must buy the faster, more expensive proprietary data streams.  The proposed rule would address the speed or "latency" difference between SIP and proprietary data.  It would require core data and proprietary data sold by an exchange to be transmitted from that exchange using the same format, hardware, and method of transmission.  Basically, it seeks to reduce latency by requiring both core data and proprietary data to leave the starting gate at the same time and on the same track.