Securities Industry Commentator by Bill Singer Esq

October 22, 2020

Vero Beach Man Pleads Guilty To Over $40 Million In Fraud (DOJ Release)

SEC Obtains Final Judgment Against Kik Interactive For Unregistered Offering (SEC Release)
Every so often, some Wall Street pundit pens a commentary and the logic is spot on. That's the case with Ron Insana's take on Larry Kudlow's insistence that we're in a so-called V-shaped recovery. Rather than explain what Insana explains quite well in his own words, I will refer you to his CNBC post.
Another stunning development in the the high-profile defamation case of former FINRA National Adjudicatory Council member Christopher Brummer. The New York State Supreme Court/Appellate Division reversed several orders issued by the trial court in a set-back for Defendant Benjamin Wey et al. In one of the nastiest lawsuits in recent years, the fireworks continue.
As set forth in the Syllabus to the DCT Ruling:

Before the Court is Plaintiff-Respondents Barry Horowitz and Lincoln Financial Securities Corporation's Motion for a Temporary Restraining Order, [Dkt. 32]. Plaintiff-Respondents filed this action seeking a declaratory judgment and injunctive relief to enjoin Defendant-Claimants Barbara Foster, Cheryl Bonomo, and Miriam McCray from continuing with an arbitration proceeding they initiated with the Financial Industry Regulatory Authority ("FINRA") against Plaintiff-Respondents. [Dkt. 1 (Compl.)]. The Plaintiff-Respondents raise a question of arbitrability arguing that the Defendant-Claimants do not have a legal right to compel arbitration because there is no written arbitration agreement between the parties and the Defendant-Claimants were not securities customers of Plaintiff-Respondents within the meaning of FINRA rules. See [Id. ¶¶ 1, 4, 13, 26-32]. Plaintiff-Respondents' Motion for a Temporary Restraining Order seeks to enjoin the Defendant-Claimants from proceeding with the arbitration until the Court has ruled on the Plaintiff-Respondents' Motion for a Preliminary Injunction, [Dkt. 18].For the foregoing reasons, Plaintiff-Respondents' Motion for a Temporary Restraining Order is GRANTED.

The matter before DCT involved whether there was an arbitrable dispute between the parties in light of the fact that there was no contract extant containing an arbitration clause. Despite the absence of such an arbitration clause, Defendants invoked FINRA's arbitration rules as Claimants in that forum. Plaintiff Lincoln Financial Securities Corp ("LFSC") is a FINRA member firm and Plaintiff Horowitz is an associated person of that firm. Notwithstanding the absence of a contract containing an arbitration clause, FINRA Rule 12200 provides that arbitration under the organization's arbitration code is available when required by a written agreement or requested by the customer; or the dispute is between a customer and a FINRA member firm or its associated person and the dispute is "in connection with the business activities of the member or the associated person." Oddly, the only definition of a customer is that it is an individual/entity that "shall not include a broker or dealer." Yeah, that's a help! In ruling in LFSC and Horowitz's favor, DCT notes in pertinent part that:

In this case, the Court concludes that the Plaintiff-Respondents raise "serious questions" that go to the merit of whether Defendant-Claimants were there "customers" within the meaning of FINRA Rule 12200 and the hardships tip decidedly in their favor. Like VCG Special Opportunities Master Fund, arbitrability rests on a binary issue. If the Defendant-Claimants did not purchase a "good or service" from Mr. Horowitz they would not be his customers within the meaning of the rule. Mr. Horowitz swears that he did not receive compensation from Mr. Renison related to the sale of securities products. But whether the financial products were securities or forms of insurance is a legal conclusion. None of the allegations in the Statement of Claim nor the generalized statements in Mr. Horowitz's 2019 letter elucidate whether any of the Claimant's were securities customers of Mr. Horowitz. Defendant-Respondents do not allege any independent basis to demonstrate that they are customers of LFSC. 

The Court's preliminary review of the pleadings and filing leaves salient questions unanswered. The Court does not know when each of the Defendant-Claimants engaged Mr. Horowitz for the provision of investment advice, if any, nor the duration of their professional relationships. The parties do not explain what products they purchased from Mr. Renison for which Mr. Horowitz received any commissions, or what investment advice they received from Mr. Horowitz. The Defendant-Claimants state vaguely that they sold their initial annuities purchased from Mr. Renison and invested in ARO Equities between 2015 and 2018, but they do not explain the amount of time that elapsed between Mr. Horowitz's sales (indirectly) of any securities product and/or the provision of investment advice, and their investment with ARO Equities. These issues must be addressed by the parties during the forthcoming hearing on whether a preliminary injunction should enter. 

As discussed above, the Plaintiff-Respondents will suffer irreparable harm per se if they are required to proceed with arbitrating the dispute and the Court later determines that arbitrability is lacking. The Court recognizes that, unlike the institutional investors in VCG Special Opportunities Master Fund, the Defendant-Claimants are elderly individual investors. However, a stay maintains the status quo, if the Court later determines that Defendant-Claimants' allegations are arbitrable, the proceedings may recommence. The case does not involve complicated international financial transactions, but rather discrete information that is already known or could be reasonably ascertained by the parties. 

Before seeking judicial intervention, the Plaintiff-Respondents sought the Defendant-Claimants' consent to stay the proceeding. When the Defendant-Claimants declined to consent to the stay, they sought a stay from FINRA itself, which was summarily denied. Plaintiff-Respondents' diligence further militates in favor of staying the arbitration proceeding.

at Pages 12 - 14 of the DCT Ruling

Vero Beach Man Pleads Guilty To Over $40 Million In Fraud (DOJ Release)
David John Ridling pled guilty in the United States District Court for the Middle District of Florida to 10 counts of wire fraud, 4 counts of bank fraud, 8 counts of money laundering, and 2 counts of aggravated identity theft. As alleged in part in the DOJ Release:

[R]idling is a farmer. Over the course of three years, Ridling attempted to defraud five financial institutions, one financial services provider, and one local Orlando business out of over $50 million. Ridling's scheme involved the use of false brokerage account statements, fabricated tax returns, and false financial statements, to obtain loans and lines of credit. 

As part of his scheme, Ridling falsely claimed that three individuals were his account representatives at a financial brokerage company and set up fake email accounts for two of those individuals without their consent or knowledge. Assuming the identities of those two individuals, Ridling then sent emails from the fake email accounts in an effort to convince lenders that he had millions of dollars in his two brokerage accounts. In fact, Ridling only had one brokerage account, which never had more than $2,000 in it. During the last year of Ridling's scheme, he was able to obtain three loans totaling over $25 million, based in part on his claim that his brokerage accounts had millions of dollars. During that timeframe, Ridling's brokerage account had less than $2.00.

In total, Ridling was successful in receiving over $40 million in proceeds from his scheme. He used some of the proceeds that he obtained from his victims to pay amounts that he owed to other victims, prolonging his scheme. 

SEC Obtains Final Judgment Against Kik Interactive For Unregistered Offering (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC alleged that Kik Interactive Inc. sold unregistered digital assets.  SDNY granted the SEC's motion for summary judgment finding that Kik's sales of "Kin" tokens were sales of unregistered investment contracts, which did not qualify for any exemption from registration requirements; and that the various private and public token sales were a single integrated offering. In a Final Judgment, SDNY permanently enjoins Kik from violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act; and, further, or the next three years, Kik is required to provide notice to the SEC before engaging in enumerated future issuances, offers, sales, and transfers of digital assets. Finally,  Kik will ay a $5 million penalty