Securities Industry Commentator by Bill Singer Esq

June 16, 2020

Mid-State Securities Broker Charged With Stealing From Elderly Clients / Two Seniors Defrauded of More Than $900,000 (DOJ Release)

Rep's Wife and Adult Children Named as Elderly Customer's Insurance Beneficiaries ( Blog)

Six Former eBay Employees Charged with Aggressive Cyberstalking Campaign Targeting Natick Couple (DOJ Release)

SEC Obtains Judgments Against Recipient Of Ponzi Scheme Proceeds (SEC Release)

In the Matter of Claims for Award by [REDACTED] In Connection With Notice of Covered Action No. [REDACTED] ( CFTC Order Determining Whistleblower Award Claims)

Stockbroker Barred For Prearranged Trading Scheme With Prop Trader
In the Matter of Brian Colin Doherty, Respondent (FINRA NAC)
As reported in part by CNBC's Fitzgerald:

"For all the mocking of Robinhood investors, their timing back into the market looks impeccable, with a significant pick-up in holdings as equity markets bottomed in mid-March," Societe General global quantitative research analyst Andrew Lapthorne told clients. 
Bill Singer's Comment: The "mocking" isn't about the timing of Robinhood investors. The "mocking" is that they tend to fully leverage with margin, tend to put it all on one stock, and then not only lose the seed capital but also get slammed with margin calls. And while your looking at the chart about how the small fry purportedly nailed the bottom, note that they also failed to sell at the top and largely road the crash down. Also READ THIS: Heartbreaking story of rookie trader who racked up $700K in debt: 'Finance isn't worth losing your life over' (Marketwatch by Shawn Langlois)

Mid-State Securities Broker Charged With Stealing From Elderly Clients / Two Seniors Defrauded of More Than $900,000 (DOJ Release)
Former Raymond James & Assoc., Inc. Investments Vice President, Fredrick M. Stow, 65, was charged in a criminal Information filed in the United States District Court for the Middle District of Tennessee with securities fraud, wire fraud, and aggravated identity theft.  Separately, Stow was was charged in an SEC civil action. As alleged in part in the DOJ Release: 

[B]eginning in 1982, Stow acted as the registered representative for three brokerage accounts owned by a client who was a retired airline pilot and WWII era veteran.  Stow changed firms numerous times and the client elected to move his accounts with Stow each time, ultimately transferring his accounts to Raymond James when Stow joined the firm in 2013.  Over time, Stow inserted himself into the personal and financial affairs of this client and in the later years of the client's life, he frequently visited him at his home, where he lived alone but received full-time nursing care. 

In October 2015, Stow began misappropriating funds from this client's IRA account by forging wire transfer letters of authorization to permit transfers from the client's IRA account to a SunTrust Bank account that Stow owned jointly with his wife.  Stow also began selling securities in the client's IRA account and transferring the proceeds to Stow's own bank account. 

At the time of this client's death at the age of 98 in March 2018, Stow had made 74 unauthorized transfers and had stolen more than $900,000 from him.  The charging documents also allege that within weeks of this client's death, Stow stole $32,000 from another elderly brokerage customer, by transferring money from the customer's brokerage account to another SunTrust bank account that Stow owned. 

( Blog)
There are circumstances by which an elderly client may indeed form a genuine, close relationship with a financial professional. Maybe the elderly client has known the investment adviser for 40 years. Maybe the client goes to the same church as the stockbroker. Maybe they've lived next door for 30 years. Maybe. Maybe. Maybe. And depending upon all the maybes, perhaps a lonely client decides to name the financial professional as a beneficiary in her Will or in a life insurance policy. On the other hand, notwithstanding all those maybes, perhaps there's something wrong and predatory going on with the beneficiary thing. Then again, maybe not.
Former eBay Senior Director of Safety & Security, James Baugh and former eBay Director of Global Resiliency, David Harvilee, were charged in a criminal Complaint with conspiracy to commit cyberstalking and conspiracy to tamper with witnesses. Additionally, charged in a criminal Information with conspiracy to commit cyberstalking and conspiracy to tamper with witnesses:
  • Stephanie Popp, eBay's former Senior Manager of Global Intelligence; 
  • Stephanie Stockwell, eBay's former manager of Global Intelligence Center (GIC); 
  • Veronica Zea, former eBay contractor who worked as an intelligence analyst in the GIC; and 
  • Brian Gilbert, former Senior Manager of Special Operations for eBay's Global Security Team. 
As alleged in the DOJ Release -- and, trust me, there's no way I can synopsize this in a manner that you would believe, so, hell, here's the direct quote from the pertinent part of the DOJ Release:

According to the charging documents, the victims of the cyberstalking campaign were a Natick couple who are the editor and publisher of an online newsletter that covers ecommerce companies, including eBay, a multinational ecommerce business that offers platforms for consumer-to-consumer and business-to-consumer transactions. Members of the executive leadership team at eBay followed the newsletter's posts, often taking issue with its content and the anonymous comments underneath the editor's stories. 

It is alleged that in August 2019, after the newsletter published an article about litigation involving eBay, two members of eBay's executive leadership team sent or forwarded text messages suggesting that it was time to "take down" the newsletter's editor.

In response, Baugh, Harville, Popp, Gilbert, Zea, Stockwell, and others allegedly executed a three-part harassment campaign. Among other things, several of the defendants ordered anonymous and disturbing deliveries to the victims' home, including a preserved fetal pig, a bloody pig Halloween mask, a funeral wreath, a book on surviving the loss of a spouse, and pornography - the last of these addressed to the newsletter's publisher but sent to his neighbors' homes.

As part of the second phase of the campaign, some of the defendants allegedly sent private Twitter messages and public tweets criticizing the newsletter's content and threatening to visit the victims in Natick. The documents allege that Baugh, Gilbert, Popp and another eBay security employee planned these messages to become increasingly disturbing, culminating with "doxing" the victims (i.e., publishing their home address). It is alleged that the very same group intended then to have Gilbert, a former Santa Clara police captain, approach the victims with an offer to help stop the harassment that the defendants were secretly causing, in an effort to promote good will towards eBay, generate more favorable coverage in the newsletter, and identify the individuals behind the anonymous comments.

The third phase of the campaign allegedly involved covertly surveilling the victims in their home and community. According to the complaint, Harville and Zea registered for a software development conference to explain their trip to Boston on Aug. 15, 2019. Baugh, Harville, and Zea (and later Popp) allegedly drove to the victims' home in Natick several times, with Harville and Baugh intending at one point to break into the victims' garage and install a GPS tracking device on their car. As protection in the event they were stopped by local police, Baugh and Harville allegedly carried false documents purporting to show that they were investigating the victims as "Persons of Interest" who had threatened eBay executives. The victims spotted the surveillance, however, and notified the Natick police, who began to investigate. The police learned that Zea had rented one of the cars used by the defendants and reached out to eBay for assistance.

Aware that the police were investigating, the defendants allegedly sought to interfere with the investigation by lying to the police about eBay's involvement while pretending to offer the company's assistance with the harassment, as well as by lying to eBay's lawyers about their involvement. At one point, for example, Baugh, Gilbert, Popp, and Stockwell allegedly plotted to fabricate another eBay "Person of Interest" document that could be offered to the police as a lead on some of the harassing deliveries. As the police and eBay's lawyers continued to investigate, the defendants allegedly deleted digital evidence that showed their involvement, further obstructing what had by then become a federal investigation. but without admitting or denying the allegations, Rhoda Burkholz consented to the entry of a final judgment ordering her to pay $258,821 in disgorgement and prejudgment interest on a joint and several basis with her husban, Neil Burkholz, representing the amount of investor funds he shared with her. Previously, Neil Burkholz consented to the entry of a final judgment  permanently enjoining him from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; and, Bianco agreed to pay $443,997 in disgorgement and prejudgment interest, and a $920,825 civil penalty. Relief Defendant Suzanne Bianco (Frank Bianco's wife) consented to the entry of a final judgment ordering her to disgorge on a joint and several basis with Bianco $49,751, representing the amount of investor funds Bianco paid her, plus prejudgment interest. Previously, the Court entered a default judgment against Neil Burkholz for violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; and, accordingly, he was permanently enjoined and ordered to pay $429, 580 in disgorgement and prejudgment interest plus a $920,825 civil penalty. As alleged in part in the SEC Release:

[N]eil Burkholz, his business partner, Frank Bianco, and their companies Palm Financial Management, LLC and Shore Management Systems, LLC solicited investors by falsely representing that their proprietary options trading strategies were highly profitable. In reality, as alleged in the complaint, the defendants invested less than half of investor funds and those investments resulted in near-total losses. The complaint alleged that the defendants misappropriated the remaining funds by using them to repay other investors and by transferring approximately $880,000 of investor funds to Ms. Burkholz and to Mr. Burkholz, Bianco, and Bianco's wife, Suzanne Bianco, for personal use. According to the SEC's complaint, the defendants sent false reports to investors to conceal their fraudulent conduct and give the investors the false impression they were generating positive returns.

In the Matter of Claims for Award by [REDACTED] In Connection With Notice of Covered Action No. [REDACTED] (CFTC Order Determining Whistleblower Award Claims)
The CFTC Claims Review Staff ("CRS") issued a Preliminary Determination recommending an Award to Claimant 1, which the CFTC adopted. Separately, the CRS recommended that an Award to Claimant 2 be denied, which the CFTC adopted. 

Stockbroker Barred For Prearranged Trading Scheme With Prop TraderIn the Matter of Brian Colin Doherty, Respondent (FINRA OHO Decision 2015047005801 / June 14, 2019)
In the Matter of Brian Colin Doherty, Respondent (FINRA NAC OHO Decision 2015047005801)

2019 FINRA OHO Decision

In August 2018, FINRA's Department of Enforcement filed a three-cause Complaint against Brian Colin Doherty 
  • alleging that he had willfully violated Section 10(b) of the Securities Exchange Act (requiring proof of "scienter"), Exchange Act Rule 10b-5, and FINRA Rules 2020 and 2010 by engaging in a fraudulent, prearranged trading scheme in May and June 2015;
  • As an alternative to cause one, cause two alleges that he had  violated FINRA Rule 2010 by negligently engaging in a prearranged trading scheme in violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act; and 
  • As an alternative to causes one and two, cause three alleges that Doherty violated FINRA Rule 2010 by aiding and abetting TS's fraudulent, prearranged trading scheme.
Representing himself pro se, Doherty admitted in his Answer to executing trades on behalf of TS but claimed that:

because he was unsure of the legality of the trades, he first discussed them with his desk manager and individuals in BGC's compliance department. According to Doherty, they told him the trades were acceptable as long as there was market risk, and they suggested there would be market risk if BGC held the bonds for four hours. . . . 

After a three-day Office of Hearing Officers Hearing, the FINRA Hearing Panel found as noted in the "Syllabus":

Respondent, a registered representative at an interdealer broker, intentionally engaged in a fraudulent, prearranged trading scheme to enable his customer, the trader of a proprietary account at another member firm, to evade that firm's aged inventory policy. For this misconduct, Respondent is suspended from associating with any member firm in any capacity for two years and ordered to pay restitution of $56,093 plus interest.

In determining the imposition of sanctions, the Hearing Panel noted in part the following aggravating factors [Ed: Footnotes omitted]:

First, Doherty attempted to conceal his misconduct from his firm and to shift responsibility for his actions to BGC's compliance department. Although Doherty admitted that he executed the transactions at issue at preset prices, he has not accepted responsibility for willingly executing prearranged trades designed solely to evade Scotia's Aged Inventory Policy. Throughout this proceeding, Doherty deflected responsibility by suggesting that BGC's compliance department had approved of the prearranged trading scheme. Doherty argued that he never tried to hide his misconduct. We disagree. Doherty disclosed only select portions of his plan to Eckert and Sulfaro, used a code word to disguise his trading, split return-leg tickets, and sold short to conceal his misconduct.We find Doherty's efforts to shift responsibility for his actions and conceal his misconduct from the firm aggravating.

We also find it aggravating that Doherty acted intentionally or, at a minimum, recklessly. The sole purpose of Doherty's prearranged trading scheme was to avoid Scotia's Aged Inventory Policy, and he knew that Scotia would incur commission costs for these sham transactions. He agreed to conceal the trades by using a secret code word, sometimes splitting the ticket on the return trip, and reversing the order of purchases and sales. At every step, Doherty exhibited intent and knowledge. We find the intentional nature of his misconduct aggravating. 

We also find it aggravating that Doherty engaged in a pattern of misconduct that spanned two months and involved 19 series of prearranged transactions (approximately 50 individual trades).  Furthermore, Doherty stopped the prearranged trading scheme only when Scotia fired TS for prearranged trading. Also aggravating is the harm that Doherty's misconduct caused Scotia. Because Doherty executed transactions that had no real business purpose for Scotia, the firm incurred commission costs of $56,093 for no reason. 

Conversely, Doherty benefitted from his misconduct. This too is aggravating.Doherty testified that he generally earned approximately one-third of the commissions he generated for BGC (adjusting for the costs and expenses deducted from his 55 percent payout). Crediting Doherty with his one-third estimate, he stood to earn approximately $18,700 in two short months, solely from the commissions Scotia paid BGC. Additionally, he engendered goodwill with a difficult customer who, as Doherty's second-largest account, Doherty had an interest in maintaining. Overall, we find that Doherty benefitted from his misconduct and that this fact is aggravating.

Pages 24 - 25 of the FINRA OHO Decision

2020 FINRA NAC Decision

FINRA's Department of Enforcement appealed to the National Adjudicatory Counsel ("NAC"), the OHO's imposition of a two-year suspension and $56,093 in restitution. Enforcement argued that OHO should have imposed a Bar upon Doherty, who represented himself pro se before the NAC. In affirming the OHO's findings, the NAC found that the suspension was an inadequate sanction and imposed a Bar upon Doherty. In part, the NAC offers this rationale for its increased sanction of a Bar [Ed: footnotes omitted]:

Unlike the Hearing Panel, we find that any mitigation credit that Doherty should receive for his termination should be minimal and is heavily outweighed by numerous aggravating factors. Doherty has not demonstrated, and the record does not show, that BGC's termination of him has materially reduced the likelihood that he will engage in future misconduct. As a result, our concern that Doherty "poses a continuing danger to investors and other securities industry participants" has not been assuaged. Indeed, the facts of this case more closely resemble those cases when a respondent has not received material mitigation credit for a prior termination. After BGC fired Doherty, he repeatedly and falsely asserted-in an on-the-record interview during FINRA's investigation, in a FINRA arbitration proceeding, and before the Hearing Panel -- that he disclosed fully the details of his prearranged trading scheme to BGC compliance personnel. He repeatedly testified concerning specific details of his purported conversations with Eckert and Sulfaro, details which they flatly denied at the hearing and that the Hearing Panel found were not credible. For example, Doherty falsely claimed that he told Eckert and Sulfaro that TS was the customer at issue; the purpose of his trades was to avoid Scotia's aged-inventory policy; he made it clear that no third party would be involved in the trades at issue; and that he often informed Eckert and Sulfaro that he had executed "another one of these trades" for TS. Doherty also testified that Sulfaro told him that he needed to hold the securities for a period of time, so that TS would be exposed to market risk, and that Doherty should book trades to BGC's London office.

The Hearing Panel thoroughly determined that Doherty's version of events was not credible. After BGC terminated Doherty, he created and repeated a false narrative in an effort to avoid liability for his fraudulent misconduct. Doherty's actions subsequent to his termination belie any claim that the likelihood of future misconduct has materially diminished. And, as set forth below, Doherty concealed the fraudulent trading scheme, showed no true remorse for his misconduct, and failed to accept any responsibility for his misconduct. These facts distinguish this case from previous instances when we have found a termination mitigating.We therefore find that Doherty should receive minimal mitigation credit for BGC's termination of him for his fraudulent, prearranged trading scheme with TS.

. . .

Moreover, there are numerous aggravating factors here. Doherty concealed his fraudulent scheme from BGC He did so by using a code word with TS to indicate when to execute a prearranged trade, splitting tickets on 11 of the 19 transactions (six of which Doherty himself suggested), and, occasionally, reversing the order of transactions. All of these actions made it more difficult for BGC to detect Doherty's fraudulent misconduct. Further, prior to engaging in his fraudulent misconduct, Doherty disclosed to Eckert and his firm's compliance department minimal details of the prearranged trading scheme with TS. Had Doherty been forthright with Eckert and BGC's compliance department, Doherty would not have been permitted to engage in the prearranged trades at issue. 

Further aggravating Doherty's fraudulent misconduct, he has repeatedly attempted to shift the blame for his misconduct to BGC and has not taken responsibility for his actions. He acted intentionally to assist his customer's avoidance of Scotia's aged-inventory policy, engaged in a pattern of misconduct (19 transactions consisting of 51 separate trades over a period of several months), and harmed Scotia by executing trades with no economic or legitimate purpose. Doherty also benefited from his misconduct by earning commissions on the prearranged trades and by accommodating his admittedly difficult customer, who generated a large portion of Doherty's revenues. In sum, aggravating factors predominate here and warrant barring Doherty for his fraudulent scheme. 

at Pages 12 - 13 of the NAC Decision

Bill Singer's Comment: Regardless of whether you agree or disagree with FINRA's regulatory agenda, or with the merits of a given case, there is no question that the Decisions coming out of both OHO and NAC have shown marked improvement in terms of content and context in the last few years -- and Doherty is another such example. Frankly, even a cranky pain-in-the-ass such as me has a hard time criticizing this prosecution, the Panels' conclusions, and the sanctions. Job well done all around!

In the Matter of Dennis A. Mehringer, Jr., Respondent (FINRA OHO Decision 2014041868001 / April 30, 2018)
In the Matter of Dennis A. Mehringer,Jr.., Respondent (FINRA NAC OHO Decision 2015047005801)

As set forth in the Syllabus to the Office of Hearing Officers Hearing Decision:

Respondent recommended unsuitable mutual fund Class A shares to a customer and exercised discretion in the customer's accounts without written authorization. He breached his fiduciary duties to a charitable trust and gave his employer firm false information about his use of the charity's funds. He also settled a customer's complaint without notifying his firm and later falsely told the firm he had not received or settled any customer complaints. Respondent is barred from associating with any FINRA member firm in any capacity, fined $50,000, and ordered to disgorge $108,131.21, plus interest. Respondent is ordered to pay costs. 

After an appeal to the National Adjudicatory Counsel, the NAC Decision modified some findings and largely affirmed the OHO's sanctions. As summed up in the NAC Decision's "Conclusion" [Ed: footnotes omitted]:

We affirm the Hearing Panel's findings that Mehringer: (1) engaged in unsuitable short-term trading of mutual funds in ES's accounts, in violation of FINRA Rules 2111 and 2010 and NASD Rule 2310 (cause one); (2) exercised discretion in ES's accounts without written authorization and Firm approval, in violation of NASD Rule 2510 and FINRA Rule 2010 (cause two); (3) made misrepresentations to Western International Securities about the Mehringer Education Trust, its purpose, and its use of funds, in violation of FINRA Rule 2010 (cause four); (4) settled MN's complaint without notifying Western International Securities, in violation of FINRA Rule 2010 (cause five); and (5) falsely stated on Western International Securities's annual compliance questionnaire that he had not settled any customer complaint without notifying the Firm, in violation of FINRA Rule 2010 (cause six). We dismiss the cause of action related to Mehringer's breach of his fiduciary obligations to the Mehringer Education Trust (cause three).

For causes one and two, we bar Mehringer in all capacities and order him to pay
disgorgement of $108,131.21, plus prejudgment interest. For causes four, five, and six, we bar Mehringer in all capacities. We affirm the Hearing Panel's order that Mehringer pay hearing costs of $6,568.43, and we impose appeal costs of $1,650.47.

Bill Singer's Comment: Consistent with my comment in Doherty above, regardless of whether you agree or disagree with FINRA's regulatory agenda, or with the merits of a given case, it's difficult to criticize any aspect of Mehringer, from the prosecution, the Panels' conclusions, and the sanctions. Another job well done all around!