Securities Industry Commentator by Bill Singer Esq

July 29, 2020

British Citizen Sentenced To Four Years In Prison For His Role In Fraudulent Investment Scheme Related To Co-Working Business (SEC Release)
I'm a NY Mets and NY Jets fan -- which, to be fair, means that I'm a NY Mets and NY Jets sufferer more than a fan. Be that as it may, there are times that a so-called "Game of the Week" is on television and my wife wonders why I don't watch it. Usually, it's because my Mets or Jets aren't in that televised contest and, hey, sure, I love watching a game for the love of sport but, eh, it's tough to get all that worked up over a match between two teams when neither is yours. As to the purported ongoing battle between Robin Hood retail investors and the Wizards of Wall Street's institutional crowd, I approach the ongoing tug of war with about the same enthusiasm as a game in which my Mets or Jets are not playing: Meh. As perfectly set out by Bloomberg's Authers, we are introduced to the two investing/trading teams and told about their inside game, their outside game, their trick plays, and all sorts of edgy stuff about their roads to glory. Much of which I am forced to sit through for fours hours on Super Bowl Sunday only to watch a game that's 21 - 0 with 30 seconds left in the first quarter. I'm convinced that those Robin Hood daytraders, who are all the rage and besting the Big Boys, will awaken to a disaster at some point. Retail has a tendency of getting in too late, getting out too early, and falling victim to "confirmation bias." Yeah, I know, it's different this time. It's always different this time. Until it ain't. I'm convinced that the likes of BlackRock will be the likes of BlackRock long after the likes of Robin Hood are no longer the likes of Robin Hood. Then again, E*Trade with its annoying asterisk has stayed the course -- well, sort of, if you consider that Morgan Stanley paid $13bn for the firm in February 2020. In any event, read Authers' article. He's not giving up the tying run with two outs and two strikes in the ninth and he's not running into a lineman's butt and fumbling the ball. 

King dollar's decline ripples across the globe (Bloomberg by Saqib Iqbal Ahmed and Ira Iosebashvili)
Where other media outlets seem to opt for the lurid and "click bait," Bloomberg has stayed the course with professional and thoughtful content. In yet a recent iteration, we have an superb primer on the impact of a falling USD and how the ripples work their way through various markets. 

Securities Trader Admits Market Manipulation Scheme that Netted More Than $17 Million in Illicit Profits (DOJ Release)
In a Superseding Indictment filed in the United States District Court for the District of New Jersey, Joseph Taub was charged with two counts of conspiracy to commit securities fraud, two counts of securities fraud, and one count of conspiracy to defraud the United States. In response, Taub pled guilty to one count of securities fraud and one count of conspiracy to defraud the United States. In its civil forfeiture case, DOJ entered into a settlement with Taub and his family members whereby they agreed to forfeit all assets subject to the pending forfeiture complaint in which they have a potential interest; and, further, Taub is required to cooperate with and assist the DOJ in the orderly transfer, management and disposition of the relevant assets. Finally, unindicted co-conspirator Sean Greenwald pled guilty to his role in the scheme on and awaits sentencing.As alleged in part in the DOJ Relese:

From 2014 to 2016, Taub and others conspired to manipulate the securities prices of numerous public companies by coordinating trading in dozens of brokerage accounts he secretly controlled. Taub used "straw accounts" that were held in the names of others to conduct much of his trading. Taub funded many of these straw accounts and used the straw account holders to conceal the scheme from regulators and law enforcement.

To manipulate securities prices, Taub engaged repeatedly in a series of contemporaneous transactions designed to artificially influence the market price of the securities of various publicly traded companies, and induce other market participants to trade in those securities based on the false impression that there was real market interest in the securities, using Run Based Manipulation and Order Based Manipulation.

Run Based Manipulation is a type of securities manipulation in which a manipulator takes either a long or a short position in a security, enters orders or trades in a manner designed to inflate or deflate the price of the security while attracting others to trade the security and finally reverse their position at the inflated or deflated price. A common feature of Run Based Manipulation is that the manipulator profits directly from the manipulated market by exploiting investors who bought at inflated prices or sold at depressed prices. Order Based Manipulation is a type of securities manipulation involving orders, sometimes but not always accompanied by trades, that are intended to give other market participants a false signal about the security's demand or supply.

Taub also admitted defrauding the United States by hiding from the brokerage firms and the IRS the identities of those who actually controlled the straw accounts and who reaped the majority of the profits from the scheme. As a result, the profits from the straw accounts were taxed at the lower tax rates applicable to the straw account holders instead of the higher tax rates applicable to Taub, which allowed Taub to avoid $394,424 in taxes.

The SEC issued an Order finding that VALIC Financial Advisors ("VFA") willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-3 and 206(4)-7 thereunder.  Without admitting or denying the SEC's findings, VFA consented to a cease-and-desist order, a Censure, and a civil penalty of $20 million; also the comapny agreed to set advisory fees for all Florida K-12 teachers who currently participate in its advisory product in Florida's 403(b) and 457(b) retirement programs, or who currently or may within the next five years own certain other VALIC Financial Advisors products, at its most favorable rates in the Florida K-12 market.

Additionally, the SEC'issued an Order finding that VALIC Financial Advisors ("VFA") mutual fund fee disclosure practices violated Sections 206(2) and 206(4) of the Investment Advisers Act and Rule 206(4)-7 thereunder.  Without admitting or denying the SEC's findings, VFA has consented to a cease-and-desist order, a Censure, disgorgement and prejudgment interest of over $15.4 million, and a civil penalty of $4.5 million.  The over $19.9 million in monetary relief will be placed into a fund for distribution to investors affected by this conduct. 

As alleged in part in the SEC Release:

VFA is a financial services vendor in nearly every school district in Florida.  According to the SEC's order, VFA's parent company, The Variable Annuity Life Insurance Company (VALIC), for 13 years made payments to an entity owned by the Florida teachers' unions in exchange for that entity's exclusive endorsement of VFA as its preferred financial services partner and the entity's agreement to not promote or endorse VFA's competitors.  VALIC also provided the entity owned by the teachers' unions three full-time employees to serve as "member benefit coordinators."  These coordinators - who deceptively presented themselves as employees of the entity owned by the teachers unions - promoted VALIC and VFA to Florida K-12 teachers, including at benefits fairs and financial planning seminars, and referred teachers to VFA for investment recommendations.  The order finds that the member benefit coordinators increased VFA's access to K-12 teachers in Florida, and that VFA did not disclose that the for-profit entity was paid to make VFA its preferred financial services provider.

. . .

According to the SEC's order, VFA's wrap agreements with its clients provided that the advisory fee the client paid to VFA included the costs to execute securities transactions.  The order finds that VFA either directly invested or instructed its primary sub-adviser to select new mutual fund investments for clients that were part of VFA's clearing broker's no-transaction fee program (NTF Program), and thus would not incur a transaction fee VFA would be responsible for paying.  The NTF Program mutual funds were generally more expensive than other mutual funds available to VFA clients, including instances when a less expensive mutual fund share class for the same fund was available outside the NTF Program. 

The order finds that VFA's participation in the NTF Program generated three key financial benefits to VFA, and that VFA not only failed to provide disclosures regarding these conflicts, but also provided false and misleading disclosures concerning the conflicts.  The order sets forth that VFA received both 12b-1 fees and revenue sharing from the clearing broker for client investment in mutual funds within the NTF Program.  In addition, according to the order, for clients with wrap agreements in which VFA was responsible for client execution costs, VFA financially benefited by not having to pay any transaction fees for mutual funds in the NTF Program.  Despite being eligible to do so, VFA did not self report its receipt of undisclosed 12b-1 fees as part of the Division of Enforcement's Share Class Selection Disclosure Initiative announced in February 2018.

British Citizen Sentenced To Four Years In Prison For His Role In Fraudulent Investment Scheme Related To Co-Working Business (SEC Release)
Savraj Gata-Aura pled guilty in the United States District Court for the Southern District of New York to conspiracy to commit wire fraud; and he was sentenced to four years in prison plus three years of supervised release, and he was ordered to pay $2,988,225 in forfeiture. Previously, 
Renwick Haddow pled guilty to one count each of wire fraud and wire fraud conspiracy relating to the Bar Works scheme involving Gata-Aura, and one count each of wire fraud and wire fraud conspiracy relating to a separate investment scheme involving Bitcoins.  Following a jury trial, James Moore was convicted of one count of wire fraud and one count of wire fraud conspiracy. As alleged in part in the DOJ Release:

From approximately September 2015 to June 2017, GATA-AURA partnered with Renwick Haddow, who is also a British citizen, in soliciting investments into Bar Works through material misrepresentations concerning, among other things, the identity of Bar Works' management and the financial condition of that company.  Previously, Haddow had been disqualified as a director of any U.K. company for eight years, and sued by the Financial Conduct Authority, a British regulator, for operating investment schemes through misrepresentations that lost investors substantially all of their money.  These sanctions and lawsuit were publicized extensively online.

In order to conceal his role at Bar Works because of the negative publicity on the internet related to past investment schemes and government sanctions in the United Kingdom, Haddow adopted the alias "Jonathan Black."  Notwithstanding Haddow's control over Bar Works, GATA-AURA and others knowingly distributed the Bar Works offering materials listing Black as the chief executive officer of Bar Works and claiming that Black had an extensive background in finance and past success with start-up companies.  As GATA-AURA well knew, "Jonathan Black," was an entirely fictitious person, created to mask Haddow's control of Bar Works. 

Among other things, GATA-AURA helped devise and distribute pitch materials that contained the misrepresentation, coordinated a substantial sales force to recruit investors knowing that the materials contained the falsehood, advised Haddow as to how to continue to conceal the truth concerning the identity of "Jonathan Black," and affirmatively represented to sub-agents for investors that he was communicating with CEO "Jonathan Black."  GATA-AURA and his agent network were directly responsible for raising approximately $40 million from investors in Bar Works.  GATA-AURA received in excess of $2.9 million in commissions out of victim funds for his participation in the scheme.

In the Matter of Mark Feathers (SEC Order Denying Motion for Stay, Admin. Proc. Rul. Rel. No. 6780, Admin. Proc. File No. 3-15755)
In what has proven to be one of those cases in which a Respondent seems to be dragged kicking and screaming into a hearing, and, frankly, the kicking and screaming appear to have achieved some measure of delay, we pick up with the SEC's ongoing epic with Mark Feathers. In this latest installment of "not now," we come across these comments from SEC Administrative Law Judge James E. Grimes [Ed: footnotes omitted]:

Respondent Mark Feathers again moves for a stay of this proceeding. In his motion, he asserts that he has been "beset by" a "chronic and debilitating" medical condition "since shortly after the onset of these proceedings." Feathers says his circumstance is exacerbated by an additional irreversible . . . condition" Based on these assertions, he asks that I stay this proceeding "[u]ntil [he] . . . is no longer suffering from [his] chronic and debilitating" medical condition. 

Feathers's motion is denied. Without questioning the debilitating nature of Feathers's condition, he is asking for open-ended stay, which is prohibited. Moreover, the number of filings he has submitted over the last three months suggests that his condition does not impede his ability to participate in this proceeding. 

In the Matter of Barton W. Stuck (SEC Order Granting an Extension of Time, Invest. Adv. Act Rel. No. 5553, Admin. Proc. File No. 3-19685)
In response to a January 31, 2020, SEC Order Instituting Proceedings ("OIP"), Respondent Stuck was supposed to file an Answer on July 27. 2020 -- said date was the third extended date granted by the SEC. If nothing but consistent, Stuck now seeks a fourth extension to September 27. 2020. Of course, in fairness to Stuck and nowhere referenced in the SEC's Order has been this thing called the COVID pandemic. In fairness to the SEC, Stuck's reason for extensions seems less to do with the pandemic and more to do with his ongoing criminal case [Ed: footnotes omitted]:

[R]espondent asserts that the sentencing hearing in the criminal case underlying this administrative proceeding has been rescheduled to September 16, 2020. He now requests that the Commission grant him a similar extension of time and suggests that doing so will allow him to retain counsel.

The Division of Enforcement opposes this fourth extension request. It notes that Stuck has already been granted lengthy extensions. The Division also states that a postponement of Stuck's sentencing in the criminal case does not warrant delaying this administrative proceeding. 

Although we agree that the timing of Respondent's criminal sentencing does not alter his obligation to timely answer the OIP in this case, we nevertheless grant Respondent additional time to answer the OIP on the basis that he suggests doing so will allow him to retain counsel. But, as this is Respondent's fourth request for an extension of time, any future requests for an extension will be disfavored, notwithstanding the Commission's March 18 order. Therefore, it is ORDERED that the time for filing an answer to the OIP is extended to September 28, 2020. . . .
In an Indictment filed in the United States District Court for the District of Massachusetts, former lawyer Barry Wayne Plunkett Jr. and his wife Nancy Plunkett were charged with five counts of bank fraud and one count of aggravated identity theft; and, Barry Wayne Plunkett Jr. was also charged with one count of tax evasion. As alleged in part in the DOJ Releas:

[U]ntil he was disbarred in October 2017, Barry Wayne Plunkett Jr. owned and operated the Plunkett Law Firm where his wife, Nancy Plunkett, was his office assistant and paralegal.

The indictment alleges that the defendants engaged in several bank fraud schemes. In one scheme, from September 2012 to July 2016, the defendants defrauded six mortgage lenders and 14 homeowners for whom the Plunkett Law Firm handled the closings for new mortgage loans to refinance residential properties. The defendants informed the mortgage lenders that pre-existing mortgages were paid off from the new loan proceeds when, in fact, the Plunketts intentionally failed to pay off the prior liens and instead converted more than $900,000 in payoff funds for their own purposes. 

In other bank fraud schemes - between April 2015 and March 2018 - it is alleged that the Plunketts fraudulently used various names, entities and false documents to obtain three successive mortgage loans on their home in Hyannis Port in amounts of $412,000, $470,000 and $1.2 million. The defendants pledged as collateral a property in Hyannis Port that was held in a family trust for which Barry Wayne Plunkett Jr. was one of three beneficiaries. Both defendants participated in providing false documents to the lenders, including false title reports and other records to falsely represent that the property was free and clear of existing mortgage liens and forged documents in the names of other people. The defendants also allegedly made misrepresentations to a lender that Nancy Plunkett was a single woman living in Wellesley who was purchasing the property in her maiden name as a business investment when, in fact, the defendants had been married since 2014 and the property was their residence.

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, Hilltop Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Hilltop Securities, Inc.  has been a FINRA member firm since 1972 with about 492 registered individuals and 69 branches.  The AWC alleges that Hilltop Securities, Inc. "has no relevant disciplinary history." In accordance with the terms of the AWC, FINRA imposed upon the firm a Censure and a $100,000 fine. the firm agreed to undertake, in part, to have a Principal certify to FINRA within 90 days that it has established compliant Bank Secrecy Act/AML systems and procedures. As alleged in "Overview" of the AWC [Ed: footnotes omitted]:

Between February 1, 2015 and April 30, 2016 (the "AML Relevant Period"), Hilltop failed to establish and implement an AML compliance program reasonably designed to detect and report suspicious trading activity in low-priced securities. During the AML Relevant Period, customers introduced to Hilltop traded at least 2.07 billion shares of low-priced securities, valued at approximately $221 million. These 2.07 billion shares were not subject to a reasonable review to detect and investigate red flags of suspicious activity for purposes of determining whether to file a suspicious activity report ("SAR"). Specifically: 
  • The Firm failed to follow the Department of Treasury's standard for determining whether to file a SAR - requiring proof of actual fraud as opposed to suspicion that a transaction involved unlawful activity or lacked an apparent lawful purpose; 
  • Hilltop failed to implement its AML procedures requiring the collection and completion of Deposit Review Forms in connection with the deposit of lowpriced securities, resulting in missed red flags of potentially suspicious activity; and 
  • Hilltop's AML compliance program failed to reasonably detect and report suspicious trading activity, in part, because Hilltop failed to devote adequate resources to its AML program. Hilltop's two to three AML analysts were tasked with reviewing a report that did not provide for a reasonable AML review. Due to deficiencies in the report, the analysts did not use risk-based factors to choose transactions for review and, based on sample reviewed by the Staff, were only able to review approximately 20% of the transactions; these 20% were not the highest risk transactions at the Firm. 
As a result of this conduct, Hilltop violated FINRA Rules 3310(a) and 2010. 

Additionally, from July 2011 to March 2016 (the "MSRB Relevant Period"), Hilltop failed to submit Form G-32 information to the Electronic Municipal Market Access System ("EMMA") in connection with 122 primary offerings of municipal securities. The Firm also made four Form G-32 filings to EMMA that were between 1 and 3 days late. Such conduct violated MSRB Rule G-32. Furthermore, between January 2012 and September 2015, Hilltop failed to provide required MSRB Rule G-17 disclosure letters to issuers in connection with 119 of the 122 offerings plus one other offering, in violation of MSRB Rule G-17. Finally, from October 2014 to September 2015, in connection with 45 of the 122 offerings, the Firm failed to report on Form G-37 that it had conducted municipal securities business. As a result of this conduct, Hilltop violated MSRB Rule G-37.
Way back when, when I was a kid, I used to watch the television show "Dragnet." In those black-and-white days with cigarette commercials and cereal loaded up with lots of tasty sugar, we knew that the stories on "Dragnet" were honest-to-goodness real-life cases involving bad guys because, well, because the announcer's voice told us that the "story you are about to see is true; the names had been changed to protect the innocent." In FINRA's updated version of "Dragnet," the names seem to be changed to protect the guilty.