Securities Industry Commentator by Bill Singer Esq

October 19, 2020

Former Stockbroker Sentenced In Scheme To Defraud Elderly Victims Through The Sale Of Worthless Stock (DOJ Release)

Orlando Man Pleads Guilty To Multi-Million Dollar Investment Fraud Conspiracy (DOJ Release)

SEC Obtains Judgment Against Colorado Ponzi Scheme Operator (SEC Release)

FINRA Fines and Suspends AMLCO Over Allegedly Failed AML Program Implementation 
In the Matter of Thomas Michael Rensvold, Respondent (FINRA AWC)

SEC Updates Auditor Independence Rules (SEC Release)

Promoting an Effective Auditor Independence Framework, by Chairman Jay Clayton

Who Watches the Watchers?* Joint Statement on Auditor Independence Amendments, by Commissioners Allison Herren Lee and Caroline A. Crenshaw

Statement on Order Approving a Wireless Fee Schedule Setting Forth Available Wireless Bandwidth Connections and Wireless Market Data Connections, by Commissioner Hester M. Peirce
Stockbroker and investment advisor Leon C. Vaccarelli got into the ring with the United States Government and thought he could go the distance against a 21-count Indictment. In the end, Vaccarelli found himself on his back, looking up at the ceiling, and being counted out. Perhaps hearing the bell for the 13th Round of a 12 Round fight, Vaccarelli continued to fight back via a Motion for Acquittal. Sometimes you just gotta know when to stay down.
Vladimir Ziskind pled guilty in the United States District Court for the Southern District of New York to one count of securities fraud and one count of securities fraud conspiracy; and he was sentenced to 28 months in prison plus three years of supervised release, and he was ordered to pay a $732,018 forfeiture. Previously, Keith Orlean was sentenced to a prison term of 32 months, and  Kevin Weinzoff, who previously pled guilty, awaits sentencing. As alleged in part in the DOJ Release:

For several years, ZISKIND and his co-defendants operated a fraudulent scheme in which a salesman named "Mike Palmer" would call elderly persons on the phone and offer them what he claimed was a time-sensitive opportunity to buy stock in certain companies.  In fact, there was no "Mike Palmer," and the salesman was actually ZISKIND or co-defendant Kevin Weinzoff, who were taking turns using the fake alias.  The purported time-sensitive investment opportunity was also fabricated by the defendants, as the companies in which they solicited investments were actually companies under their control.  In one intercepted phone call conversation, ZISKIND described to co-defendant Keith Orlean, the chief executive officer of the company, his strategy for a successful investor sales pitch as: "You ram it down their fucking throat."  In another intercepted call between ZISKIND and Orlean, upon learning that a particular victim investor died, ZISKIND remarked: "I knew I should have pulled the last $10,000 out of him."  

The most recent version of the defendants' phony sales pitch included false representations about an impending initial public offering, or "IPO," for their company, Digital Donations Technologies, Inc.  For example, in April 2018, ZISKIND assured a victim investor that "our company is doing great," that the company had an offer for an IPO valued at approximately $300 million, and that Orlean was considering a private sale of the company for more than $1.5 billion.  In truth, however, the defendants knew that the company had little or no actual commercial value and that no such IPO or sale was taking place.  

The FBI estimates that since April 2014, the defendants have convinced more than approximately 50 elderly persons to purchase stock in companies controlled by one or more of  the defendants based on false representations.  During the scheme, the defendants solicited more than $2 million in stock purchases from victims.
Edison Denizard pled guilty in the United States District Court for the Middle District of Florida to conspiracy to commit wire fraud. As alleged in part in the DOJ Release:

[B]etween March 2016 and June 2017, Denizard raised millions of dollars from dozens of victims who believed that they were investing in specific music concerts through legitimate businesses owned by Denizard and a co-conspirator, Andres Fernandez. Fernandez and Denizard lured investors by guaranteeing them large returns and promising that all of the funds that they provided would be invested in events by top artists, including Drake, Garth Brooks, Pitbull, The Weeknd, and Maná. In fact, neither Denizard nor Fernandez was involved in most of the events.

Denizard used most of the funds that he had received from investors to pay fraudulent "investment returns" to earlier investors and for his own personal use, including to purchase a new lakefront residence and luxury hotel stays. The total amount of victims' losses attributable to Denizard are $7,479,453.

Fernandez previously pleaded guilty to 12 counts of wire fraud and was sentenced earlier this year to 10 years in federal prison.

SEC Obtains Judgment Against Colorado Ponzi Scheme Operator (SEC Release)
The United States District Court for the District of Colorado entered a final consent judgment against Daniel B. Rudden and a group of his companies operating under the predicate name "Financial Visions. In a parallel criminal action, in June 2019, Rudden was sentenced to serve 121 months in federal prison plus three years of supervised release, and ordered to pay about $20 million in restitution. The Judgement permanently enjoins Rudden and the Financial Visions companies from violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act, and Rule 10b-5 thereunder; and orders disgorgement of $6,511,721, to be offset by the order of restitution imposed in the related criminal case, and provides that Rudden's frozen assets can be used to help satisfy that criminal restitution order. As alleged in part in the SEC Release:

[R]udden and a group of companies operating under the name Financial Visions defrauded more than 100 investors after promising them annual returns of 12% or more. Since at least 2010 or 2011, Rudden allegedly used new investor funds to pay interest and redemptions to existing investors and concealed the Financial Visions companies' true financial performance and condition. The complaint also alleged that Rudden continued to represent the business as successful to existing and prospective investors when he knew that he was running a Ponzi scheme. The SEC obtained an emergency freeze of Rudden's remaining assets shortly after filing its complaint.

FINRA Fines and Suspends AMLCO Over Allegedly Failed AML Program Implementation
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, Thomas Michael Rensvold submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Thomas Michael Rensvold was first registered in 1987, and by 2015 he was registered with Planner Securities LLC, where he remained until April 2018. The AWC asserts that Rensvold "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 Rensvold had violated FINRA Rules 3310(a) and 2010; and the self regulator imposed upon him a $10,000 fine and a one-month suspension in a Principal-only capacity. The AWC alleges in part that:

During the relevant period, under the firm's AML program, Rensvold, as the firm's AMLCO, had "full responsibility for the firm's AML program," and was responsible for monitoring the firm's compliance with AML obligations, overseeing AML-related communication and training for employees, and filing SARs. Although the firm's business model changed dramatically during the relevant period, Rensvold did not take reasonable steps to establish and implement an AML program tailored to the firm's new business lines. The firm's AML procedures provided that the firm "will monitor account activity for unusual size, pattern or type of transactions, taking into account risk factors and red flags that are appropriate to [the] business." 

Although the procedures listed types of securities transactions that could be considered red flags, including "wash or cross trades" and transactions involving "penny stock companies," there were no procedures as to how Planner would review for red flags related to its low-priced securities business. Further, Rensvold failed to reasonably train the firm's employees regarding how to conduct reviews for suspicious transactions. 

Planner did not use any exception reports or automated tools to monitor customer account activity for suspicious transactions, including transactions in accounts of customers located in high-risk jurisdictions or who traded in low-priced securities. The firm's review for potentially suspicious transactions was limited to a manual review of transactions. This manual review was unreasonable given the growth and complexity of Planner's new international business lines. The firm's failure to implement an AML program reasonably tailored to its new business lines resulted in potentially suspicious transactions going undetected. 

For example, during the period August 1, 2016 through October 27, 2017, at least one customer potentially engaged in wash sale transactions and two customers may have engaged in other market manipulation (as demonstrated by the customers' market dominance in certain low-priced securities and active trading around press releases). Rensvold failed to detect these red flags. In the instances when Planner's clearing firm contacted Rensvold about suspicious trades, he still did not review the trading or account information. Instead, Rensvold instructed the operations manager to contact the customer for an explanation and then forward the response to the clearing firm without conducting any additional due diligence.  

SEC Updates Auditor Independence Rules (SEC Release)

The Securities and Exchange Commission today announced that it adopted final amendments to certain auditor independence requirements in Rule 2-01 of Regulation S-X.  Informed by decades of staff experience applying the auditor independence framework, the final amendments modernize the rules and more effectively focus the analysis on relationships and services that may pose threats to an auditor's objectivity and impartiality.  

The final amendments reflect updates based on recurring fact patterns that the Commission staff has observed over years of consultations in which certain relationships and services triggered technical independence rule violations without necessarily impairing an auditor's objectivity and impartiality.  These relationships either triggered non-substantive rule breaches or required potentially time-consuming audit committee review of non-substantive matters, thereby diverting time, attention, and other resources of audit clients, auditors, and audit committees from other investor protection efforts. The final amendments result in auditor independence requirements that will be used to evaluate specific relationships and services, with a focus on protecting investors against threats to the objectivity and impartiality of auditors.. . .

READ: Final Amendments

Promoting an Effective Auditor Independence Framework, by Chairman Jay Clayton

Today's modest and tailored amendments reduce or eliminate those adverse effects on auditor choice without detracting from the independence obligations of auditors and issuers. This type of retrospective review and tailored action is important to the continued effectiveness and efficiency of our rules
[W]e understand that the introduction of the materiality standard into the rules, as well as the loosening of other standards, is based in part on the staff's experience in the consultation process.[14] That is, when auditors have violated independence rules in the past and come to the staff to make the case that their independence is not actually impaired despite a "technical" violation, auditors have relied in part on materiality assessments like those that will now be permitted by these amendments. We appreciate the staff's professional expertise and experience, and we believe that expertise is invaluable for assisting auditors in analyzing and making these judgments. By writing this broad standard into the rule, however, we place greater reliance on auditors to decide what is or is not "material." Thus, we rely on auditors to subjectively determine when their own independence is impaired, and we do so without providing specific guidance on materiality.[15] This despite the fact that people and organizations are so often inept at perceiving their own conflicts of interest and/or understanding if or how such conflicts may affect their own judgment.[16] What's more, the rule fails to provide visibility into how auditors apply this standard.

While it makes sense for us to assess how our rules are functioning from time to time and to recalibrate them as needed, we are concerned that the dial for auditor independence is turning in only one direction, and that is towards loosening standards and reducing transparency. We cannot support introducing greater opportunity for error and uncertainty into auditor independence standards while decreasing visibility into how auditors are actually making these judgments. We respectfully dissent. . . .

[I] write separately, however, because I am not fully convinced that the services provided by IDS constitute a "facility" of an exchange under Section 3(a)(2) of the Exchange Act and am concerned that the Commission's analysis in this order takes an overly broad view of what constitutes an "exchange" for purposes of Section 3(a)(1) of the Exchange Act. The order finds that the Wireless Connections are facilities, in part, because IDS is part of a group of persons who, together, maintain the market place that constitutes each exchange, including by providing "a system of communication for the purpose of effecting or reporting transactions on the Exchanges."[3] Under this approach, affiliation with an exchange by a provider of this type of communications service appears to be sufficient to create a presumption that those services are a "facility" of the exchange and, consequently, are subject to the full panoply of exchange regulation under the Exchange Act.

I am uncertain that this is what the statute requires. Section 3(a)(1) of the Exchange Act does refer to "a group of persons . . . which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities," but it is not clear to me that belonging to the same corporate group necessarily makes an affiliate of an exchange part of "a group of persons" in this sense.[4] Depending on corporate structure, it may be possible for an affiliated entity to provide, for example, wireless connectivity services in an arms-length relationship with the exchange, in which case it could be difficult to distinguish those services from similar services provided by unaffiliated providers (such as IDS's competitors in the wireless connectivity space). Similarly, if an affiliate is providing a non-exclusive system of communication in a competitive market, it is unclear how significant a factor affiliation should be in determining whether a provider is treated differently from its competitors. . . .