Securities Industry Commentator by Bill Singer Esq

November 20, 2020

Gaithersburg Brothers Facing Federal Charge for Their Roles in a $5 Million Romance Scheme / Allegedly Stole and Laundered over $5 Million from About 200 Victims Around the World (DOJ Release)
The Department of Justice today filed a civil lawsuit against the National Association of REALTORS ("NAR") and the Antitrust Division simultaneously filed a proposed settlement that requires NAR to:
  • repeal and modify its rules to provide greater transparency to home buyers about the commissions of brokers representing home buyers (buyer brokers), 
  • cease misrepresenting that buyer broker services are free, eliminate rules that prohibit filtering multiple listing services (MLS) listings based on the level of buyer broker commissions, 
  • and change its rules and policy which limit access to lockboxes to only NAR-affiliated real estate brokers. 
As alleged in part in the DOJ Release:

According to the complaint, NAR's anticompetitive rules, policies, and practices include: (i) prohibiting MLSs that are affiliated with NAR from disclosing to prospective buyers the commission that the buyer broker will earn; (ii) allowing buyer brokers to misrepresent to buyers that a buyer broker's services are free; (iii) enabling buyer brokers to filter MLS listings based on the level of buyer broker commissions offered; and (iv) limiting access to the lockboxes that provide licensed brokers with access to homes for sale to brokers who work for a NAR-affiliated MLS. These NAR rules, policies, practices have been widely adopted by NAR-affiliated MLSs resulting in decreased competition among real estate brokers.

NAR is a trade association of more than 1.4 million-member REALTORS® who are engaged in residential real estate brokerages across the United States. NAR has over 1,400 local associations (called "Member Boards") organized as MLSs through which REALTORS® share information about homes for sale in their communities. Among other activities, NAR establishes and enforces rules, policies, and practices that are adopted by the Member Boards and their affiliated MLSs.

In an Indictment filed in the United States District Court for the Northern District of Illinois, Eugene Nowak was charged with three counts of wire fraud, one count of mail fraud, and one count of money laundering. As alleged in part in the DOJ Release:

[N]owak served as president of Global Funding Partners, a Nevada-based company that purported to be an investment firm engaged in complex business dealings with large multinational banking and financial institutions.  From 2013 to 2016, Nowak, while then residing in Naples, Fla., falsely represented to investors that their funds would be used to provide "bridge funding," or temporary funding, for Global Funding Partners to close a $33 million financial transaction involving Scotiabank, the indictment states.  Nowak falsely promised that investors, including the Chicago resident, would receive high-yield returns in a short amount of time, and that they could cancel their investment at any time for a full refund with interest, the indictment states.

In reality, Nowak and Global Funding Partners were not parties to a transaction with Scotiabank.  Nowak instead allegedly diverted investor funds to cover his personal expenses, including payments to a car dealership and pawn shop in Naples, Fla.  As a result of the scheme, Nowak caused investors, including the Chicago resident, to suffer hundreds of thousands of dollars in losses, the indictment states.

Former Chief Executive Officer And Chief Operating Officer Of Publicly Traded Biopharmaceutical Company Found Guilty Of Accounting Fraud (DOJ Release)
After a four-week trial in the United States District Court for the Southern District of New York:
  • former Chief Executive Officer of  biopharmaceutical company MiMedx Group, Inc. ("MiMedx"), Parker H. "Pete" Petit, was convicted on one count of securities fraud; and 
  • former Chief Operating Officer William Taylor was convicted one count of conspiracy to commit securities fraud, make false filings with the SEC, and mislead the conduct of audits..  
As alleged in part in the DOJ Release:

MiMedx was headquartered in Marietta, Georgia, and its securities traded under the symbol "MDXG" on the NASDAQ.  MiMedx sold regenerative biologic products, such as skin grafts and amniotic fluid, both directly to end users, such as public and private hospitals, and to various stocking distributors, which, in turn, resold the product to end users. 

One of the most critical financial metrics disclosed in MiMedx's public filings with the Securities and Exchange Commission ("SEC"), and touted in MiMedx's accompanying press releases, was MiMedx's quarterly and annual sales revenue.  Under Generally Accepted Accounting Principles (GAAP) and SEC guidance, a company like MiMedx that engages in the sale of products through a distributor may recognize revenue upon transfer of the product to a distributor if certain requirements are satisfied, including that delivery has occurred or services have been rendered, the seller's price to the buyer is fixed or determinable, and collectability of payment is reasonably assured.  PETIT and TAYLOR repeatedly demonstrated and touted their understanding of these rules governing revenue recognition.  They also publicly identified revenue as the principal metric reflecting MiMedx's growth, and touted MiMedx's consistent record of quarter-over-quarter revenue growth and meeting or exceeding revenue guidance in 17 consecutive quarters, from 2011 through year-end 2015.  By 2015, however, it became increasingly difficult for MiMedx to reach its revenue guidance due to decreased demand from certain distributors and the increasingly aggressive revenue targets that MiMedx had publicly announced. 

Confronted with the difficulties faced by MiMedx in meeting its quarterly and annual revenue guidance by legitimate means, PETIT and TAYLOR engaged in a fraudulent scheme to falsely recognize revenue upon the shipment of MiMedx product to four stocking distributors, CPM, SLR, Stability Biologics ("Stability"), and First Medical, in the second through fourth quarters of 2015.  PETIT and TAYLOR caused MiMedx to report fraudulently inflated revenue figures to the investing public in order to ensure that the reported figures fell within MiMedx's publicly announced revenue guidance, and to fraudulently convey to the investing public that MiMedx was accomplishing consistent growth quarter after quarter, as PETIT and TAYLOR had falsely touted to the investing public.  The fraudulent scheme involved the following central features:

  • As to CPM, in the second quarter of 2015, PETIT and TAYLOR caused MiMedx fraudulently to recognize $1.4 million in revenue by (1) making a $200,000 sham "consulting" payment to CPM's owner to bribe CPM to buy MiMedx product and (2) secretly agreeing to send CPM approximately $1.1 million of product it did not want and did not intend to sell, while promising that CPM could return the product to MiMedx and swap it for different product in a subsequent quarter.  PETIT and TAYLOR entered into the sham "consulting" agreement to conceal that the payment was a bribe to purchase product, and CPM's owner performed no consulting work for the payment.  Neither PETIT nor TAYLOR disclosed to MiMedx's outside auditors the "consulting" payment or product swap.  

  • As to SLR, in the third quarter of 2015, PETIT and TAYLOR caused MiMedx fraudulently to recognize $4.6 million in revenue by booking the revenue despite understanding that SLR would not make a timely payment for the product, and certainly would not do so within contractual terms.  To hide from MiMedx's auditors that the collectability of payment from SLR was questionable, during the fourth quarter 2015, PETIT arranged for his adult children to use a shell company to loan money to SLR (money that came from a trust fund established by PETIT for their benefit), with the understanding that the loan proceeds would be used in substantial part to pay down SLR's debt to MiMedx.  PETIT did not disclose the loan to MiMedx's outside auditors and made false and misleading statements to the auditors about SLR's ability to pay MiMedx.

  • As to Stability, in the third and fourth quarters of 2015, PETIT and TAYLOR caused MiMedx improperly to recognize $2.6 million of revenue, where they (1) failed to agree with Stability on the essential terms of the deal, including when payment was due; (2) reached a secret understanding that Stability could swap or return unwanted product in subsequent quarters; and (3) understood that Stability could not pay for the product in a timely fashion.  In fact, PETIT granted the right of return to Stability in a back-dated letter he hid from MiMedx's internal accountants and outside auditors.

  • As to First Medical, in the fourth quarter of 2015, TAYLOR caused MiMedx improperly to recognize $2.2 million in revenue by making an undisclosed promise to First Medical that it could return any product that it could not sell and that MiMedx would not leave First Medical with any losses.  To carry out the scheme, TAYLOR sent two emails four seconds apart to First Medical.  The first was a "cover story" that purported to require payment within a fixed period, as required by MiMedx's accountants.  TAYLOR forwarded the first email to MiMedx's accounting department.  The second email, sent only four seconds after the first, memorialized the true terms of the deal, which involved an agreement to defer payment and take back product if it could not be sold.  TAYLOR hid the second email from MiMedx's internal accountants and outside auditors.  TAYLOR also arranged for a false audit "confirmation," which falsely represented that First Medical was required to pay within a fixed period and omitted the true terms of the deal, to be provided to MiMedx's outside auditors.
PETIT's and TAYLOR's fraudulent manipulation of MiMedx's revenue caused MiMedx to report materially inflated revenue in the second, third, and fourth quarters of 2015, and for the full year 2015.  In its 2015 10-K, MiMedx reported annual revenue that was fraudulently inflated by approximately $8.2 million.  Absent this fraudulent inflation of revenue, MiMedx would have missed both (1) its quarterly revenue guidance in the third and fourth quarters of 2015 and annual revenue guidance for 2015 and (2) analyst revenue consensus for the second through fourth quarters of 2015 and the full year 2015.
Joseph S. Anile, II, 56, pled guilty in the United States District Court for the Middle District of Florida Sarasota) to conspiracy to commit wire fraud and mail fraud, money laundering, and filing a false income tax return; and he was sentenced to 10 years in prison, the court entered a $3,283,467 judgment against him, and he was ordered to forfeit his interest in multiple pieces of real property, including a luxury residence in Sarasota, high-end vehicles, currency, gold coins, and silver bars, which are traceable to proceeds of the fraud. As alleged in part in the DOJ Release:

[F]rom November 2011 through April 18, 2019, Anile conspired with others to commit wire fraud and mail fraud. Through false and fraudulent representations and material omissions, the conspirators persuaded at least 700 victims to invest more than $72 million in a foreign exchange market ("FOREX") fraud known as Oasis International Group. Anile, a licensed attorney, created offshore entities, secured broker-dealer licenses, drafted promissory notes and disclosures, monitored incoming wire transactions, directed outgoing wire transactions and interacted with victim-investors to help carry out the scheme. The conspirators also developed and administered a "back office" operation-a secure website that falsely and fraudulently depicted account balances and earnings-to convince victim-investors that their principal balances were safe and that their investments were performing.

In fact, the conspirators used only a portion of the victim-investors' funds for FOREX trading, which resulted in catastrophic losses that were concealed. They used the balance of the victim-investors' funds to make payments toward expenses associated with perpetuating the scheme, and to purchase million-dollar residential properties, high-end vehicles, gold, silver and other liquid assets, to fund a lavish lifestyle for the conspirators, their family members and friends, and for their personal enrichment. Anile used fraud proceeds to purchase other assets, including a Ferrari California T convertible. Anile did not report the victim-investors' funds he received on his federal income tax returns.
Veteran Wall Street lawyer Aegis Frumento considers veteran Wall Street prosecutor Rudy Giuliani's legal strategy on behalf of the Trump re-election effort. For starters, Aegis conjures up Rudy's prickly cameo in the latest Borat movie, and that wacky press conference at the Four Seasons Total Landscaping parking lot, which is between a porn shop and a crematorium. And yet, there's a serious issue afoot here. Aegis concludes that the Trump lawsuits are failing because there were no facts to back them up. As Aegis notes, lawyers aren't supposed to bring cases that have no merit. Lawyers who promote frivolous lawsuits risk both court sanctions and professional ethics violations. And bad press, too.
The SEC awarded over $900,000 to a whistleblower, who identified securities law violations occurring overseas. 
As alleged in the Order Determining Whistleblower Award Claim ('34 Act Rel. No. 90460, Whistleblower Award Proc. File No. 2021-8 / November 19, 2020), the SEC noted that:

(i) Claimant provided significant and timely information that resulted in the significant expansion of the staff's investigation and resulting Commission charges; (ii) Claimant assisted in the staff's investigation by submitting additional information that helped expedite the investigation; and (iii) there are important law enforcement interests here in that Claimant identified alleged violations that were occurring overseas, some of which would have been difficult to detect in the absence of Claimant's information.
In a criminal Complaint filed in the United States District Court for the District of Maryland, David Annor, age 27, and Lesley Annor, age 22, were charged with money laundering. As alleged in part in the DOJ Release:

[T]he Annors are part of a romance scheme in which their co-conspirators find their victims online, typically through social media or dating websites, and communicate with the victims using e-mail, cell phones and online applications.  The complaint alleges that since April 2017, the brothers and another co-conspirator have received and laundered over $5 million from approximately 200 romance fraud victims throughout the United States and overseas.  The age range of the known victims is from 38 to 83 years old.

Specifically, the affidavit alleges that David registered a business entity in the State of Maryland called Ravid Enterprise LLC, a shell company through which the conspirators laundered the proceeds of the fraud scheme.  According to the articles of organization, Ravid Enterprise is "a car sale business where buyers come in to get cars which are from the auction." David is listed as the resident agent for the company and his Gaithersburg residence-which is an apartment-is the registered address of the company.  Bank records show that between at least May 2017 and September 2020, David and Lesley Annor opened or maintained bank accounts at 10 different financial institutions, including accounts opened in the name of Ravid Enterprise, for the purpose of receiving payments from victims of the romance scheme.

As detailed in the criminal complaint, the Annors' co-conspirators made contact with the victims and after convincing the victims that they were in a romantic relationship, requested money from the victims for various purposes, often assuring the victims that they would be repaid.  The co-conspirators provided the victims with details on where to send the payments, which were accounts controlled by the Annors or another co-conspirator, or their mailing address, where victims would mail cashier's checks.  The eight victims described in the criminal complaint each allegedly lost between $17,500 and $201,000.

The criminal complaint alleges that after receiving the victim payments, the Annors sent a portion of the money to other co-conspirators, often located in Ghana, and kept at least 10 percent of the victim payments for themselves.  The Annors also allegedly laundered the victim payments by sending each other wires, checks, and possibly cash.

In a FINRA Arbitration Statement of Claim filed in March 2019 and as amended, public customer Claimants  common law fraud; misrepresentation; unsuitability; unsuitable product; breach of fiduciary duty; breach of contract; negligence; and failure to supervise. The FINRA Arbitration Award asserts that the "causes of action relate to Claimants' investment in the Yield Enhancement Strategy ("YES") offering with Respondent. At the close of the hearing, Claimants sought:

total damages in the amount of $950,655.00, as follows: compensatory damages for losses in Claimants' accounts in the amount of $482,463.00; realized capital losses - sales to fund YES loss payoff in the amount of $17,082.00; disgorgement of YES fees and interest in the amount of $68,803.00; pre-judgment interest pursuant to Florida Statutes §55.03(1) in the amount of $38,579.00, from April 1, 2019, to October 1, 2020, at the rate of 5.37%; attorneys' fees on a 33 and 1/3 percent contingency basis in the amount of $202,309.00 pursuant to Florida Statutes §517.211(6); experts' fees in the amount of $106,026.00; other costs and expenses in the amount of $35,393.00; and an unspecified amount of punitive damages.

Respondents generally denied the allegations and asserted various affirmative defenses. The evidentiary hearing was conducted in 14 hearing sessions by videoconference in October 2020 during the COVID pandemic. The FINRA Arbitration Panel denied Claimants' claims. 
Bill Singer's Comment: An interesting aspect of this arbitration was what, if any, role the resort to videoconferencing played in the outcome of the case. Many Plaintiff/Claimant's lawyers do not want to have their client's "day in court" transformed from an in-the-flesh event to a teleconference. The thought pattern in eschewing the videoconference is that it prevents the arbitrators from observing live witnesses, which may dampen the emotional impact of having victimized customers tell their emotional stories. On the other hand, during these pandemic times, many customers are pressing their lawyers to do whatever it takes to schedule hearings because they want recompense sooner rather than later. There are equities both pro and con for consenting to a teleconferenced FINRA arbitration. Similarly, Defendant/Respondent's lawyers may prefer teleconferences as a way to mute the emotionally charged testimony of an elderly or particularly sympathetic customer, and, accordingly, as a way to lessen the perceived arrogance or unreliability of an industry witness. Again, there are advocates either way on both sides of the issue of teleconferencing. In the Brodys, it seems that the better gambit was for Respondent's counsel to consent to the videoconference, which resulted in a clear-cut victory for UBS. Adding insult to injury, Claimants were charged with $18,787.50 of the $21,825 in pre-hearing and hearing fees.

The SEC adopted amendments that will purportedly modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K. As noted, in part, in the SEC Final Rule; Rel. No. 33-10890; 34-90459; IC-34100; File No. S7-01-20 

[S]pecifically, we are eliminating the requirement for Selected Financial Data, streamlining the requirement to disclose Supplementary Financial Information, and amending Management's Discussion & Analysis of Financial Condition and Results of Operations ("MD&A"). These amendments are intended to eliminate duplicative disclosures and modernize and enhance MD&A disclosures for the benefit of investors, while simplifying compliance efforts for registrants. 

As summarized, in part, in the SEC Release:

The changes to Items 301, 302, and 303 of Regulation S-K sharpen the focus on material information by:
  • Eliminating Item 301 (Selected Financial Data); and
  • Modernizing, simplifying and streamlining Item 302(a) (Supplementary Financial Information) and Item 303 (MD&A).  Specifically, these amendments:
  • Revise Item 302(a) to replace the current requirement for quarterly tabular disclosure with a principles-based requirement for material retrospective changes;
  • Add a new Item 303(a), Objective, to state the principal objectives of MD&A;
  • Amend current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources;
  • Amend current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations;
  • Add a new Item 303(b)(3), Critical accounting estimates, to clarify and codify Commission guidance on critical accounting estimates;
  • Replace current Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of MD&A;
  • Eliminate current Item 303(a)(5), Tabular disclosure of contractual obligations, in light of the amended disclosure requirements for liquidity and capital resources and certain overlap with information required in the financial statements; and
  • Amend current Item 303(b), Interim periods (amended Item 303(c)) to modernize, clarify and streamline the item and allow for flexibility in the comparison of interim periods to help registrants provide a more tailored and meaningful analysis relevant to their business cycles.
In addition, the Commission adopted certain parallel amendments to the financial disclosure requirements applicable to foreign private issuers, including to Forms 20-F and 40-F, as well as other conforming amendments to the Commission's rules and forms, as appropriate.
In their Dissent from the amendments, Commissioners Lee and Crenshaw note in part that [Ed: footnotes omitted]:

[W]e certainly agree that how a company manages climate risk and human capital is material information subject to disclosure under a principles-based approach, and that the securities laws require companies to include that information, amongst other material information, in their discussions of MD&A, descriptions of business, legal proceedings, risk factor disclosures, and perhaps elsewhere too. However, many companies simply do not make these disclosures, the majority of U.S. based large companies have failed to acknowledge the financial risks of climate change in their filings.  Moreover, research and analysis have shown that a principles-based approach, coupled with voluntary disclosure, results in non-standardized, inconsistent, and incomparable disclosures. A major purpose of requiring companies to disclose specific information about climate risk and human capital management is to allow market participants to accurately price and compare the risks and opportunities associated with these risks. But when disclosure metrics are not uniform and standardized the task of pricing and comparing these risks and opportunities is, at best, unduly burdensome. And without specific requirements, much of the information is simply not there to be worked into the analysis.

While we are disappointed that the modernization of Regulation S-K did not address these vital issues, there is a silver lining. We have an opportunity going forward to address climate, human capital, and other ESG risks, in a comprehensive fashion with new rulemaking specific to these topics. In addition, the Commission should have an internal task force and ESG Advisory Committee that is dedicated to building upon the recommendations of leading organizations, such as the Task Force on Climate-Related Financial Disclosures, and defining a clear plan to address sustainable investing.There's no time to waste in setting to ourselves to this task, and we look forward to rolling up our sleeves to establish requirements for standard, comparable, and reliable climate, human capital, and other ESG disclosures.
FINRA filed with the SEC a proposal to provide member firms the option to complete remotely their calendar year 2020/2021 inspection obligations under FINRA Rule 3110(c) (Internal Inspections), without an on-site visit to the office or location. The temporary rule change is necessitated by the compelling health and safety concerns and the operational challenges member firms are facing due to the sustained COVID-19 pandemic.