The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

April 9, 2020



FINRA Bars Rep Over Power of Attorney for Elderly Client with Dementia. In the Matter of Steven Jun Lu, Respondent (FINRA AWC)

Accountant from Silver City, New Mexico pleads guilty to federal wire fraud and identity theft charges (DOJ Release)

Cryptocurrency Miner Features Fraudulent COVID-19 Charity Sales Pitch (TSSB Release)

SEC Charges Seven in Microcap Fraud Scheme (SEC Release)
FINRA Statement on SEC's OCIE Risk Alerts for Reg BI and Form CRS (FINRA Release)https://www.finra.org/media-center/newsreleases/2020/finra-statement-secs-ocie-risk-alerts-reg-bi-and-form-crs 
As set forth in pertinent part in the FINRA Release:

On April 7, 2020, the SEC's Office of Compliance Inspections and Examinations (OCIE) released Risk Alerts for Reg BI and Form CRS.  These Risk Alerts set forth OCIE's expectations for firms' compliance with Reg BI and Form CRS and provide broker-dealers with information about the scope and content of OCIE's initial examinations following the compliance date of June 30, 2020.  FINRA will take the same approach as set forth in the SEC Risk Alerts when FINRA examines broker-dealers and their associated persons for compliance with Reg BI and Form CRS.  This initial approach will focus primarily on assessing whether firms have made a good faith effort to establish and implement policies and procedures reasonably designed to comply with Reg BI and Form CRS.  However, as always, FINRA will take action in the event FINRA observes indications of customer harm or conduct that would have violated current standards (e.g., suitability).

We also emphasize that we stand ready to work with firms and the SEC on issues that may arise in the course of examinations for compliance with Reg BI and Form CRS and understand that the coronavirus disease (COVID-19) has created challenges for firms.  As with the SEC, we appreciate that implementation will be an iterative process, and our focus will be on firms continuing good faith and reasonable efforts, including taking into account firm-specific effects from disruptions caused by COVID-19.

Bill Singer's Comment:

Despicable. 
Shameful. 
Tone deaf. 
Outrageous. 
Insensitive. 
Stupid. 
Pandering. 
Asinine. 

Okay . . . I think that about covers my response to both the SEC's effort to push on with its Reg BI and Form CRS June 30, 2020, deadline, and FINRA's misplaced desire to pucker up and kiss the SEC's ass. In NYC, where Wall Street is actually a street, we are reeling from hundreds of COVID-19 deaths a day. The financial industry is largely reduced to folks working from home, or out of work, or unsure of when or if they will get a next paycheck. How comforting it is to know that FINRA understands that the "coronavirus disease (COVID-19) has created challenges for firms." 

Challenges? 

You think that this murderous pandemic has simply created challenges for firms? 

Where the hell is Wall Street's self-regulatory-organization's compassion for the industry's hundreds of thousands of employees and millions of customers? 

If you would like for me to put the carnage into perspective, the NASDAQ Composite Index is about 8,000 points today. The COVID-19 US Death Index is about 13,000. Perhaps FINRA would like to create some puts and calls options for the COVID-19 Index? Maybe you could roll that out by June 30, 2020?

Perhaps the folks at FINRA have little else to do these days than churn out insensitive press releases in order to justify their jobs. Do you have any sense of what's going on out here? You think anyone gives a shit about the SEC's June 30th deadline or your intention to see that it is complied with? New York Governor Andrew Cuomo just said that "I don't think we return to normal. I don't think we return to yesterday. I think if we're smart, we achieve a new normal." Take note that Governor Cuomo is not targeting June 30, 2020, as the start-date for the new normal. Perhaps the SEC and FINRA could just open their eyes and hearts and cut us all some slack. If that's asking too much, maybe you folks could grab the nearest shovel and dig graves the dead, who are now stacked up in freezer trucks. If you could bury all the dead by June 30, 2020, that would be a great demonstration of meeting the challenge.

The Fed is lifting Wells Fargo's asset cap so it can help lend to small business (CNBC by Jeff Cox)
https://www.cnbc.com/2020/04/08/the-fed-is-lifting-wells-fargos-asset-cap-so-it-can-help-lend-to-small-business.html
As noted in the CNBC article:

The Fed had imposed the restrictions following the bank's fake account scandal in which it created millions of accounts for customers without their knowledge. Associates were under sales pressure in a program that Wells Fargo has since abandoned.

https://www.bloomberg.com/news/articles/2020-04-08/farmers-are-panic-buying-to-keep-america-s-95-million-cows-fed?srnd=premium
As part of my ongoing fascination with the impact of the COVID-19 pandemic of the food chain, I noted in part that the Bloomberg article reports that:

Keeping America's 95 million cows, 77 million pigs, and 9 billion chickens fed isn't as simple as it may seem. Farmers are worried their feed mills could close as employees get sick or that their slaughterhouses could slow production, forcing them to keep animals for longer. They're also concerned that a shortage of trucks, which are being waylaid to supply supermarkets, could make it harder for farm supplies to reach them.

Even the plunge in gasoline demand affects the feed supply. As ethanol plants shut down-because the fuel additive isn't needed when gas isn't selling-the animal feed market is being starved of an important ingredient called dried distillers grains (DDGs) that are a byproduct of ethanol production. Distillers grain is a key ingredient in rations for beef cattle and dairy cows.

The Fox Business News articles reports in part that:

Thousands of acres of fruits and vegetables grown in Florida are being plowed over or left to rot because farmers can't sell to restaurants, theme parks or schools nationwide that have closed because of the coronavirus.

Other states are having the same issues - agriculture officials say leafy greens in California are being hit especially hard, and dairy farmers in Vermont and Wisconsin say they have had to dump a surplus of milk intended for restaurants.

As set forth in part in the SEC Order
https://www.sec.gov/rules/exorders/2020/ic-33837.pdf:

The outbreak of coronavirus disease 2019 (COVID-19) has had far-reaching and unanticipated effects, including in our financial markets, and, in particular, our credit markets. In light of the current situation, we are issuing this Order providing exemptions from certain requirements of the Investment Company Act. The exemptions provide additional temporary flexibility for closed-end investment companies that have elected to be regulated as business development companies ("BDCs") to issue and sell senior securities and participate in certain joint enterprises or other joint arrangements that would otherwise be prohibited by section 57(a)(4) of the Investment Company Act and Rule 17d-1 thereunder. BDCs were created to provide capital to smaller domestic operating companies that otherwise may not be able to readily access the capital markets (we refer to such companies as "portfolio companies"). The Commission recognizes that, in the current environment, many BDCs may face challenges absent these exemptions in providing capital to their affected portfolio companies, and therefore, in fulfilling their statutory mandate. A BDC may face such challenges if (i) it is unable to satisfy the asset coverage requirements under the Investment Company Act due to temporary markdowns in the value of the loans to such portfolio companies, or (ii) certain of its affiliates are prohibited from participating in additional investments in the BDC's portfolio companies due to restrictions in its current exemptive order permitting co-investments. In recognition of the current facts and circumstances, and for the reasons identified above, the Commission has determined that certain BDCs may be unable to meet their statutory mandate. Therefore, the temporary exemptions herein are necessary and appropriate in order for BDCs to continue providing credit support to portfolio companies impacted by COVID-19. 
As set forth in part in the SEC Order
https://www.sec.gov/rules/final/2020/33-10771.pdf:

The Securities and Exchange Commission (the "Commission") is adopting rules that will modify the registration, communications, and offering processes for business development companies ("BDCs") and other closed-end investment companies under the Securities Act of 1933. As directed by Congress, we are adopting rules that will allow these investment companies to use the securities offering rules that are already available to operating companies. These rules will extend to closed-end investment companies offering reforms currently available to operating company issuers by expanding the definition of "well-known seasoned issuer" to allow these investment companies to qualify; streamlining the registration process for these investment companies, including the process for shelf registration; permitting these investment companies to satisfy their final prospectus delivery requirements by filing the prospectus with the Commission; and permitting additional communications by and about these investment companies during a registered public offering. In addition, we are amending certain rules and forms to tailor the disclosure and regulatory framework to these investment companies. These amendments also will modernize our approach to securities registration fee payment by requiring closed-end investment companies that operate as "interval funds" to pay securities registration fees using the same method as mutual funds and exchange-traded funds and extend the ability to use this payment method to issuers of certain continuously offered, exchange-traded products ("ETPs"). Additionally, we are expanding the ability of certain registered closed-end funds or BDCs that conduct continuous offerings to make changes to their registration statements on an immediately effective basis or on an automatically effective basis a set period of time after filing. Lastly, we are adopting certain structured data reporting requirements, including for filings on the form providing annual notice of securities sold pursuant to the rule under the Investment Company Act of 1940 that prescribes the method by which certain investment companies (including mutual funds) calculate and pay registration fees.

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, Steven Jun Lu submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Steven Jun Lu was first registered in 2017 with FINRA member firm J.P. Morgan Chase Securities LLC, and had also worked as a relationship banker for J.P. Morgan Chase Bank, N.A. The AWC reports that Lu had voluntarily resigned with under internal review on May 11, 2018. The AWC alleges that Steven Jun Lu "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 Steven Jun Lu had violated FINRA Rule 2010; and the self regulator imposed upon him a Bar from association with any FINRA member firm in any capacity. As set forth in part in the AWC:

On March 17, 2018, Lu first met MP, an 87-year old retiree living alone, when she entered the Altadena, California, Chase bank branch where he worked. MP was holding account statements from a bank other than Chase and asked to speak to someone because she had questions about her account. At that time, MP was not a customer of the Firm or Chase, and was visibly confused when she met Lu. 

Instead of taking MP to a branch of the other bank, calling the bank or otherwise helping her with her account at the other bank, on March 21, 2018, Lu met with another JPMS broker to discuss moving MP's investment accounts at another institution to the Firm. Lu told the other broker that MP was a close family friend who wanted to open an account and to name him as trustee on the account. After conferring with his manager, the other broker declined to open the account. 

Lu shortly thereafter took MP to an attorney so she could execute documents giving him power over her financial affairs. While at the attorney's office, with Lu present, MP entered into a durable power of attorney, naming Lu as attorney-in-fact with broad powers to manage MP's financial affairs. The power of attorney included a provision allowing Lu to make gifts to himself of the greater of $5,000 or five percent of MP's assets. MP also entered into a trust agreement in which she appointed herself and Lu as co-trustees. The terms of the trust agreement gave Lu the authority to withdraw trust funds from any trust account. Pursuant to the terms of the trust agreement, Lu also stood to inherent 75 percent of the trust assets upon MP's death. 

Thereafter, Lu made two attempts to open accounts at Chase for MP's trust that he would control. In his attempts to open the accounts, Lu made multiple misrepresentations to JPMS and Chase employees. Lu twice told JPMS brokers that MP was a close family friend. Lu also told a Firm employee that MP was a good friend of his mother. This was not true. 

After a Chase employee questioned him about the nature of his relationship with MP and his Chase supervisor instructed him to stop trying to open a trust account for MP, Lu told his bank supervisor that a Code of Conduct specialist gave him permission to open the account, which was not true. Lu also failed on multiple occasions to tell Firm or Chase employees that he was the 75 percent beneficiary of the trust upon MP's death. 

Lu's attempts to open an account for MP were escalated within Chase, and its internal investigations group questioned Lu about his repeated attempts to open trust accounts for MP. During that call, Lu resigned and refused to answer any questions. The investigations group reported the matter to state government authorities, who subsequently appointed a guardian for MP and brought legal action to revoke the power of attorney and trust agreement. Within six months after meeting Lu, MP was diagnosed with Alzheimer's disease.

Bill Singer's Comment:

Words fail me. How about we sentence Lu to one year cleaning bed pans in a COVID-19 ICU without benefit of any PPE?

https://www.justice.gov/usao-nm/pr/accountant-silver-city-new-mexico-pleads-guilty-federal-wire-fraud-and-identity-theft
Pursuant to a Plea Agreement entered into in the United States District Court for the District of New Mexico https://www.justice.gov/usao-nm/press-release/file/1267251/download, Thomas Laws pled guilty to four counts of wire fraud and one count of aggravated identity theft in a scheme to steal more than $1.5 million from his victims. As set forth in part in the DOJ Release:

[L]aws worked as a licensed accountant and registered investment advisor in Silver City. He provided accounting, tax preparation and investment services to clients.  From 2008 to 2019, Laws engaged in a scheme to obtain money by false pretenses and fraudulent misrepresentations made to clients, lenders, investors and others. 

Among other things, Laws lied to two clients to convince them to invest in a real estate development project. Laws fabricated and forged mortgage documents purporting to show that $650,000 these clients invested in the project was secured by a mortgage.  In reality, Laws had previously mortgaged the property to other lenders, defaulted, and a court had ordered foreclosure and judicial sale of the property. Rather than developing the real estate, Laws channeled the $650,000 to pay part of a settlement with an earlier victim of his scheme. 

Laws also scammed two other investors out of $550,000 that Laws claimed would be used for a mining project. Instead, Laws used the money to pay off earlier victims of his scheme, including partial restitution to a corporation from which he, as the corporation's chief executive officer, had embezzled more than one million dollars.

As part of his fraudulent scheme, Laws made, or caused others to make, several wire transfers of funds.  Laws also used stolen money to pay personal expenses for himself and his family, including credit cards debts, travel, communication and media services, firearms and cash. His scheme caused total financial losses of more than $1.5 million to the victims.

https://www.ssb.texas.gov/news-publications/cryptocurrency-miner-features-fraudulent-covid-19-charity-sales-pitch
As alleged in a TSSB Emergency Ceast and Desist Order
https://www.ssb.texas.gov/sites/default/files/ENF_20_CDO_1801.pdf,  cryptocurrency miner Ultra BTC Mining LLC is promising to double investors' money in one year while also claiming to contribute money to UNICEF to "fight COVID-19." As alleged in part in the TSSB Release:

The company is promising eye-opening returns. According to the order, they are telling potential investors that a $10,000 investment in computing power will return nearly $10,500 per year. A $50,000 investment will return nearly $52,000 per year.

Ultra Mining is also running what amounts to a recession special, according to the order. It is offering new investors an extra 30% of purchased cryptocurrency mining power for an initial deposit of $10,000. The reason? "Hard times" in the economy, according to the order.

The company is also operating an affiliate program that pays commissions to individuals who recruit new investors, according to the order. Affiliates receive 5% of the deposits from these new investors.

Ultra Mining's "partners," however, are in line for larger payments. According to the order, partners are responsible for advertising the Ultra Mining investments in YouTube videos and can receive commissions up to 20% of the deposits received from new investors. 

https://www.sec.gov/litigation/litreleases/2020/lr24791.htm
In a Complaint filed in the United States District Court for the District of Massachusetts
https://www.sec.gov/litigation/complaints/2020/comp24791.pdf, the SEC named Douglas Leighton, Bass Point Capital, LLC, Azure Capital Corp., Michael Sullivan, David Hall, Zachary Harvey, Paul Dutra, Jason Harman, and Jessica Geran as Defendants. As alleged in part in the SEC Release:

Leighton orchestrated the fraud after acquiring millions of shares in MassRoots, Inc., a cannabis-social-media company now based in Los Angeles, California. As alleged, when MassRoots began selling its shares to the public in April 2015, Leighton directed Michael Sullivan, David Hall, Zachary Harvey, Paul Dutra, Jason Harman, and Jessica Geran to manipulate the public market for MassRoots stock, including by making open-market purchases at specific volumes and prices to create an appearance of active trading in and increase the price of MassRoots stock. According to the complaint, Sullivan also used accounts at two separate broker dealers to further create an appearance of volume in and affect the price of MassRoots stock. The complaint further alleges that Leighton acquired and sold shares through Dutchess Opportunity Fund II LP, Azure Capital Corp., and Bass Point Capital LLC, which along with Leighton and the other defendants never disclosed to the investing public, through required SEC filings, their sales and significant ownership of MassRoots stock.

Leighton, Azure Capital, Bass Point, Sullivan, Hall, Harvey, Dutra, Harman, and Geran have agreed to settle the matter by consenting, without admitting or denying the SEC's allegations, to the entry of final judgments, which are subject to court approval. The judgments would permanently enjoin all of the defendants from violating the beneficial ownership reporting provisions of Sections 13(d) and 16(a) of the Securities Exchange Act of 1934 and Rules 13d-3 and 16a-1 thereunder; Leighton, Bass Point, Azure, and Sullivan from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933; Leighton, Bass Point, and Azure from violating the antifraud provisions Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and Leighton and Sullivan from violating the market manipulation provisions of Section 9(a)(2) of the Exchange Act. In addition, the judgment would bar Leighton from serving as an officer or director of a public company and order him to pay a civil penalty of $160,000, and would bar Leighton, Azure Capital, and Bass Point from trading in penny stocks, impose a conduct-based junction restricting their future trading in any stock, and order them jointly and severally to pay disgorgement plus prejudgment interest of nearly $1 million. Leighton has also agreed to settle a follow-on administrative proceeding that bars him from the securities industry. Sullivan has agreed to be barred from trading in penny stocks for five years and to pay a civil penalty of $40,000 and disgorgement plus prejudgment interest of $63,228. The final judgments would order Hall, Harvey, Dutra, Harman, and Geran to pay civil penalties of $15,000 each, and would order payments of disgorgement plus prejudgment interest of $67,080 by Hall, $32,720 by Harvey, and $28,906 by Dutra.

https://www.sec.gov/litigation/litreleases/2020/lr24792.htm
In a Complaint filed in the United States District Court for the Northern District of Texas
https://www.sec.gov/litigation/complaints/2020/comp24792.pdf, the SEC alleged that from at least December 2015 through June 2017, former  Ironclad Performance Wear Corp. Chief Executive Officer Jeffrey D. Cordes, Chief Financial Officer William M. Aisenberg, and Senior Vice President Thomas J. Felton violated the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rules 10b-5(a) and 10b-5(c) thereunder; or in the alternative, that Felton aided and abetted these violations by Cordes and Aisenberg. Additionally, the Complaint alleges that Cordes and Aisenberg violated Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder; and that Cordes, Aisenberg, and Felton with violated the reporting, books and records, and internal accounting control provisions of Sections 13(a), 13(b)(2)(A), and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, and 13b2-2 thereunder, and Cordes and Aisenberg with violating Section 13(b)(2)(B) of the Exchange Act and Rule 13a-14 thereunder. Without admitting or denying the allegations, Cordes and Aisenberg consented to the entry of final judgments that impose permanent injunctions and officer and director bars, and require each to pay a $173,437 civil penalty. The SEC's litigation against Felton is ongoing. As alleged in part in the SEC Release, from at least December 2015 through June 2017, the Defendants:

collaborated to inflate Ironclad's revenues by prematurely recognizing revenue before it was earned and recognizing revenue that was never earned, including booking nearly $1 million in revenues from a single client for gloves the client never bought, and that Ironclad never shipped. The complaint further alleges that the defendants took affirmative steps to hide their conduct by, among other things, moving products to a warehouse across the street, delaying moving returned product back into inventory, shipping product to different clients, and altering documents, which inflated the quarterly revenues Ironclad publicly reported during the relevant period by as much as 24 percent.

[In]Securities Guest Blog: Hello In There by Aegis Frumento Esq (BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/5160/aegis-frumento-insecurities-handshake/
Wall Street lawyer Aegis Frumento shakes hands with the "new normal" of this COVID-19 world -- on second thought, that's probably the last thing he's going to do. Frumento notes that the pandemic is forcing us to re-think how we greet each other, and he explores many alternatives to pressing palms and transferring the killer virus. 

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