Securities Industry Commentator by Bill Singer Esq

October 14, 2020 today's featured FINRA regulatory settlement, we come across yet another in a seemingly endless line of so-called Outside Business Activities ("OBAs") cases. In fairness to FINRA, the OBA protocol is fairly straightforward: A registered rep who wants to engage in OBA is required to notify his employer. At that point, it's up to the employer to evaluate the proposed OBA and decide whether to allow it, deny it, or modify it. That much of the rule is about as simple as it gets. The larger question is what gives an employer or an industry's self-regulator the right to proscribe what outside activities an employee may engage in.
Richard Barrett Dale Walker pled guilty in the United States District Court for the Middle District of Florida to wire fraud and bank fraud; and he was sentenced to five years and five months in prison and ordered to pay $790,600 in restitution and an $839,305.30 forfeiture order. As alleged in part in the DOJ Release:

[W]alker was the part-time office manager of a locally owned business where he worked 10 hours a week and was responsible for paying bills and managing the finances of the business. He was paid $500 per week. Walker also had two companies of his own: RBD Distributors LLC and Shotgun Shooting Supply LLC. 

Walker's scheme consisted of two parts. First, from January 2014 to July 3, 2018, Walker used the business's bank account, without authorization, to write $751,824.29 in checks to himself and his two companies. In total, there were more than 500 checks, ranging from $145.89 to $16,981.03, each of which included the forged signature of the owner of the business. 

The second part of the scheme occurred from March 19 to July 3, 2018.  During that time period, Walker used the business's personal and corporate credit cards to charge $301,328.65 in fraudulent/unauthorized credit card transactions that were paid to Walker's company, RBD Distributors. Walker sometimes paid for those credit card transactions by writing a check or initiating a transfer from the business's bank account. 

Walker engaged in a series of actions to hide and cover up his fraudulent scheme including changing the address for the business's credit card statements from the actual location of the business to the address of a relative of Walker (so that the owner of the business would no longer receive credit card statements); adding himself as "Treasurer" of the business by sending an annual report to the Florida Secretary of State that falsely represented that he had that position with the company; adding his email and phone number to an account for the business's corporate card; and adding an email address to another of the business's corporate cards.

After deducting the amounts returned by Walker during his scheme and the reversal of some of the unauthorized credit card charges, the total amount of restitution in the case is $790,600.
In an Indictment filed in the United States District Court for the Eastern District of Pennsylvania, Alexander S. Rowland was charged with 30 counts of wire fraud, seven counts of mail fraud, two counts of money laundering, one count of bank fraud, one count of securities fraud, and one count of investment adviser fraud. As alleged in part in the DOJ Release:

[R]owland, a former warehouse operator, started an investment company in July 2016 that he incorporated in New Jersey, called Roaring Investments, Inc., and which he operated out of his apartment. The defendant held himself out to potential investors as a licensed investment adviser who would invest their money in stocks and cryptocurrency, and promised them a minimum rate of return of 25%, with potential returns of 50% or higher. Through these and other misrepresentations, Rowland was able to dupe his victims into investing almost $3 million in Roaring Investments. Eventually, the defendant was able to move his company from his apartment in New Jersey into office space in Philadelphia.

According to the Indictment, despite telling investors that he was a licensed investment adviser, in reality Rowland did not hold any licenses to sell securities or offer investment advice. Further, the defendant invested only approximately $518,000 of the almost $3 million he obtained from his clients, and those investments lost more than $100,000. The remaining client funds (almost $2.5 million) were used by Rowland in a variety of ways that were never disclosed to his clients, including spending more than $1 million on himself by: taking large cash withdrawals; paying his own personal bills; buying luxury vehicles; paying for vacations and jewelry; paying for gym memberships; and buying more than $47,000 worth of firearms.

The Indictment also alleges that Rowland was able to deceive his clients into believing that their investments were safe and profitable through a variety of fraudulent means, including: (a) operating a "Ponzi" scheme by using new client funds to make payments to earlier clients who had invested with Roaring Investments, thereby tricking those earlier clients into believing that their investments were making money; (b) creating a website, "," through which clients could check their account balances and on which defendant Rowland posted false account balances for his clients; and (c) emailing false account statements to clients that listed their fictitious account balances and showed non-existent profits.

Finally, the Indictment alleges that the defendant received and ignored an August 2018 cease and desist letter from the Pennsylvania Department of Banking and Securities that instructed Roaring Investments to stop selling unregistered securities and for Rowland to stop serving as an unlicensed investment adviser. Instead, Rowland continued to solicit new investments from clients. All told, due to Rowland's alleged fraudulent conduct, Roaring Investments' clients lost more than $2,139,000.
In 2011, Christopher D. Hales was convicted of bank fraud, which was related to a mortgage fraud case; and Hales was sentenced to 90 months in prison and ordered to pay $12,719,236. In 2016, after violating the terms of his supervised release, Hales was sentenced to an additional 30 months in prison. Following his release from federal prison on February 8, 2018, Hales resided at a halfway house and until sometime around August 8, 2018. On August 6, 2018, an individual referenced in the DOJ Release as "CC1" (an unnamed co-conspirator) formed Sindakit Software LLC, for which CC1 was listed as the sole officer and was also listed on the LLC's bank account as the entity's manager and only authorized signor. CC1 and Hales engaged in an investment fraud for which Hales was charged in September 2020 and to which he ultimately pled guilty in October 2020 in the United States District Court for the District of Utah to wire fraud conspiracy and money laundering conspiracy. The Plea Agreement stipulates to a 10-year prison sentence. As alleged in part in the DOJ Release:

The Information alleges Hales and CC1 conspired to defraud investors and potential investors by inducing them to purchase investments in a sports betting software. Hales purported to own a sports betting software that "beat the house" to convince investors to give him money to place sports bets.  In furtherance of the conspiracy, the indictment alleges Hales made a variety of false statements of material facts to investors and potential investors, including representing that 100 percent of investor funds would be used to place sports bets when, in fact, Hales diverted nearly all investor funds received to his and CC1's personal use, and to make payments to other investors.

Hales also told them he was Chris Christian, when in fact, he was Christopher Hales, a convicted felon on supervised release. Investors were also told Hales would match all investor funds, when in reality he would take out a line of credit with the sports betting website and use the line of credit to hedge bets. Hales also told investors that the sports betting was producing a rate of return for investors of around 10 percent a week - an amount made up by Hales to entice investors to provide funds. He also represented that there were potential buyers willing to purchase the software he developed for tens of millions of dollars, when there were actually no buyers, according to the Felony Information.

In furtherance of the conspiracy, Hales failed to disclose to investors that they did not actually own an algorithm or a sports betting software and that they were laundering investor funds through transfers in and out of the Sindakit Software account.  Sports betting account statements provided to investors were false and were inflated based on Hales' line of credit and his ability to manipulate the statements.  They also did not disclose that part of the investors' money was used to pay commissions to those introducing investors to Sindakit or that they were using investment money from newer investors to pay promised winnings to earlier investors in what is commonly recognized as a Ponzi scheme.
The United States District Court for the District of Hawaii entered a Default Judgment finding that Peter Szatmari fraudulently solicited U.S. residents to open binary options trading accounts; and the Court required Szatmari to pay about $6.25 million in restitution to defrauded customers, $1.9 million in disgorgement, and a civil monetary penalty of $5.7 million. Additionally, Szatmari is permanently enjoined from engaging in conduct that violates the Commodity Exchange Act, registering with the CFTC, and trading in any CFTC-regulated markets. See the:
As alleged in part in the CFTC Release:

The order resolves a CFTC enforcement case filed on October 7, 2019, which charged that Szatmari and a business partner created and disseminated fraudulent solicitations that led approximately 25,000 customers to open and fund trading accounts that generated $3.8 million in fees for Szatmari and his partner, while customers lost most or all of their funds. [See CFTC Press Release No. 8047-19]

Case Background

According to the CFTC complaint and findings, Szatmari specialized in "affiliate marketing," a form of performance-based marketing that promotes third-party products or services, such as binary options trading, and is typically conducted via solicitations that the affiliate marketer emails to recipients and/or posts on the internet. As charged and found, Szatmari and his partner fraudulently solicited customers into opening and funding binary option accounts on websites operated by unregistered, off-exchange brokers while pitching free access to automated trading software that purported to generate significant profits with little to no risk of loss. Their marketing campaigns featured actors pretending to be actual owners or users of the trading software, and depicted fictitious trading results as real. The court further found that Szatmari knew that the solicitations were false and misleading, that the software did not work as claimed, and that customers were unlikely to make a profit. 

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, Donates B. Vildzius submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Donates B. Vildzius was first registered in 1992 and from May 2015 through May 2019, he was registered with FINRA member firm Network 1 Financial Services Inc.  In accordance with the terms of the AWC, FINRA found that Vildzius had violated FINRA Rules 2111 and 2010; and the self regulator imposed upon him an $5,000 fine and a six-month suspension in all capacities. Under the heading "Relevant Disciplinary History,' the AWC alleges that:

On January 31, 2014, Vildzius entered into an AWC (2013017424801) in which he consented to a one-month suspension in all capacities and $2,500 fine for failing to timely disclose two outstanding judgments on his Uniform Application for Securities Industry Registration or Transfer (Form U4) in violation of Article V, Section 2(e) of the FINRA By-Laws, and FINRA Rules 1122 and 2010. 

On April 10, 2006, Vildzius entered into an AWC (E112003069901) in which he consented to a 30-day suspension in all capacities, a fine of $9,000 and restitution of $16,000 for exercising discretion in one customer account without prior written. authorization and engaging in unsuitable and/or excessive trading in that customer's account in violation of NASD Conduct Rules 2510(b), 2310, 2110 and 1M-2310-2.  

As to the underlying conduct at issue in the 2020 AWC, in part it is alleged that:

During the relevant period, Vildzius engaged in quantitatively unsuitable trading in the accounts of customers (IN and RR, Vildzius recommended the trading in the customers' accounts and they routinely followed his recommendations. As a result, Vildzius exercised de facto control over customer ON's and RR's accounts.

Vildzius's trading of the accounts, which utilized a. short-term, active trading strategy that included. frequent in-and-out trading, resulted in high turnover rates and cost-to-equity ratios as well as significant losses, as set forth below. 
  • GN's account was an Individual Retirement Account (IRA). GN's investment objective was "growth" and his risk tolerance "moderate." GN's account exhibited an annualized turnover rate of 6.42 and an annualized cost-to-equity ratio of 50.6%. GN's account incurred losses of $26,694 and paid $25,956 in commissions and fees. 
  • RR's account was an individual account. RR's investment objective was "growth" and his risk tolerance "'moderate." RR's account exhibited an annualized turnover rate of 4.58 and an annualized cost-to-equity ratio of 41.3%. RR's account incurred losses of $5,546 and paid $7,493 in commissions and fees. 
Vildzius's trading in GN's and RR's accounts was excessive and unsuitable given the customers' investment profiles. As a result of Vildzius's excessive trading, the two customers suffered collective losses of $32,240 and paid $33,449 in commissions and fees.1  
= = = = =
Footnote 1: Newtork 1 paid restitution of commissions and fees to customers GN and RR. 

FINRA Fines and Suspends Rep For Alleged Pension Stream PSTs
In the Matter of Lonna R. Dehn Ristvedt, Respondent (FINRA AWC 2020066026901)

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, Lonna R. Dehn Ristvedt submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Lonna R. Dehn Ristvedt was first registered in 2004, and from 2010 through November 2017, she was registered with National Planning Corporation; and, thereafter, with another unnamed member firm until November 2019.  The AWC asserts that Ristvedt "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Ristvedt had violated FINRA Rules 3040 and 2010; and the self regulator imposed upon her a $5,000 fine and a four-month suspension in any capacity. In part, the AWC alleges that:

In June 2015, Respondent solicited investors to purchase securities in Future Income Payments, LLC. FIP represented itself as a structured cash flow investment, claiming to purchase pensions at a discount from pensioners and then selling a portion of those pensions as a "pension stream" to investors. FIP generally promised investors a 7% to 8% rate of return on their investment. Respondent participated in the sale of $163,320 in FIP purchase agreements to two investors in four separate transactions. Respondent received at least $5,457.66 in commissions in connection with these transactions. 

At all times during the stated period, Respondent's employer member firm prohibited its registered representatives from participating in private securities transactions without prior written approval from the firm. Respondent did not provide notice to her firm prior to participating in the transactions involving FIP, nor did she obtain approval from the firm. Respondent also incorrectly attested on an Annual Compliance Questionnaire that she did not participate in private securities transactions. 

In April 2018, FIP ceased business, owing nearly $300 million in unpaid investor payments. In a March 12, 2019 indictment, the United States charged FIP and its owner, Scott A. Kohn, with conspiracy to engage in mail and wire fraud related to FIP's operations. 

Visit the PST Cases Archive