Securities Industry Commentator by Bill Singer Esq

SEC Charges Former Brokers with IIIegally Selling Securities (SEC Release)

SEC Obtains Summary Judgment Against Municipal Bond "Flippers" (SEC Release)

Federal Court Tells Interactive Brokers to Comply With FINRA Panel's $1M Ruling: Right or Wrong (FINOPS Report by Chris Kentouris)

Philadelphia Tax Preparer Sentenced to Five Years for Fraud (DOJ Release)

Owners Of South Bay Businesses Sentenced To Prison For Investment Fraud Conspiracy And Related Crimes / Jennifer Yang and Daniel Wu also ordered to pay over $5.9 million in restitution for their respective roles in immigration-related fraud scheme (DOJ Release)

Wells Fargo Customers Seek Damages from High Risk, Poor Performing Investments

In the Matter of the Arbitration Between George Wildrick, Claimant, v. Wells Fargo Clearing Services, LLC and Robert Ted Lyons, Respondents (FINRA Arbitration Award 18-03398)

Pro Se Public Customer Alleges FINRA Arbitrators' Misconduct in Schwab Case (BrokeAndBroker.com Blog)

[H]ede and Graetz sold approximately $9.6 million worth of Belize Fund notes to their customers at the brokerage firm where they were then employed, even though the firm had already declined to approve the Belize Fund's notes for offer and sale to its customers. As alleged, by selling a security that was not approved by the firm, Hede and Graetz engaged in a prohibited practice called "selling away." The complaint alleges that Hede and Graetz profited through the commissions from the sales, while the firm's customers suffered significant losses. The SEC charged Belize Fund and its owner, Brent Borland, in 2018, alleging that Borland misappropriated more than $5.98 million of funds obtained from investors in Belize Fund notes and used the stolen principal to fund his family's lavish lifestyle.

In granting the SEC's motion for summary judgment, the court ruled that the defendants operated as unregistered brokers by regularly engaging in securities transactions on behalf of RMR in exchange for transaction-based compensation, in violation of Section 15(a) of the Securities Exchange Act of 1934. The court also ruled that Jocelyn Murphy committed fraud by submitting false zip codes with her orders to secure the higher priority reserved for local retail investors, in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The court will determine remedies at a later time.

At the core of the battle between Interactive Brokers and its former customers is whether investors have their right to sue their brokerages for damages based on violating FINRA's rules. The regulation in question is FINRA's Rule 4210 which explicitly prohibits trades of high-risk securities in portfolio margin accounts. FINRA's arbitration panel which initially awarded damages apparently thought investors could sue for damages related to violations of FINRA rules, but the Virginia district court disagreed. The majority opinion of the Fourth Circuit Court of Appeals in favor of Interactive Brokers never addressed the issue, but made it clear that federal courts shouldn't dispute FINRA arbitration decisions. The fact that the Saroops and Sofis signed an agreement with Interactive Brokers that the firm would not be held liable for financial losses in the event of a market downturn didn't matter. Nor did the fact that as sophisticated investors, they agreed to high-risk trading strategies and must have acknowledged Interactive Brokers' auto-liquidation terms for portfolio margin accounts when they created their accounts. The Saroops and Sofis could have sued their investment adviser Vikas Brar for their losses, but his firm was reportedly out of cash and their only alternative was to sue Interactive Brokers, the firm with deep pockets.

[Q]uisiah was the owner and operator of First Premier Tax Service (also d/b/a Kosh & Associates), a Philadelphia-based tax preparation business on Woodland Avenue. From 2010 through 2017, the defendant prepared tax returns for clients that fraudulently inflated itemized deductions, claimed fictitious Schedule C businesses, and claimed false dependents for tax years 2009 through 2016. This resulted in inflated tax refunds for his clients to which the clients were not entitled. Quisiah also bought and sold the personal identifying information of children in order to falsely claim the children as dependents on tax returns.

[Y]ang, a lawyer and licensed member of Bar of the District of Columbia, held herself out as a legal specialist for persons interested in applying for EB-5 visa benefits.  Yang and Wu solicited six- and seven-figure investments from foreign individuals interested in lawful permanent residency in the United States, promising those individuals that their investments would be used to create jobs and qualify them for EB-5 visas.  Nevertheless, instead of using the investors' money to create jobs as promised, the evidence at trial showed that the defendants diverted the money for other purposes including personal expenditures such as the purchase of cars, stays in luxury hotels, college tuition for a family member, and the cash purchase of a $2.5 million house for Yang and her family.  When it came time to submit visa applications on behalf of the investor victims, Yang and Wu falsely represented that the money had been used properly and the jobs had been created.  In some cases, the false information about bogus job positions was created using the personal identifying information of third parties without those individuals' knowledge or consent.  Between 2007 and 2016, the defendants filed fraudulent EB-5 visa petitions for at least seven foreign investors who supplied Yang and Wu with approximately six million dollars intended for use as EB-5 investments.

[T]he causes of action relate to Claimant's allegations that Respondents invested his funds in high risk, poor performing positions in the energy sector, although Claimant had wanted his funds to be invested in a conservative manner.

• Securities Industry Commentator
• Bill Singer