Securities Industry Commentator by Bill Singer Esq

November 23, 2020

Commissioner Stops Local Firm from Fraudulently Marketing Forex Investments, Making False Claims of Registration and Legitimacy (TSSB Release)

SEC Obtains Final Judgment in Offering Fraud (SEC Release)

FINRA Sanctions Firm and Former CCO/AMLCO/President Over AML Program Deficiencies
How uncanny that OCIE published a Statement about complex financial products on the same day when SEC Chair Clayton announced his resignation. Fascinating timing, no? Then there's the breathless admonition in the very opening lines of the OCIE Statement announcing its "critically important" directive. Not really. Sort of like how every major regulatory settlement is the biggest, largest, most fantabulous in the history of the world, until next week, when, go figure, another settlement is trumpeted as bigger, larger, and more fantabulous.
Former NL Techology, LLC President/Chief Executive Officer Jonny Ngo pled guilty to wire fraud in the United States District Court for the Southern District of California, and he was sentenced to 75 months in prison and ordered to pay $20,292,490.60 in restitution. As alleged in part in the DOJ Release: 

[N]go induced his victims to invest funds in various short-term investment contracts by making false representations, including that: (a) Investor money would be used to fund wholesale purchase orders of smartphone screens and other electronic goods; (b) NL Technology was a regular supplier of smartphone screens to a number of buyers, including two buyers who each ordered approximately $2 million of product from NL Technology; (c) All wholesale orders funded by investor money was pre-purchased by NL Technology clients; and (d) The quality of the products and safety of investor funds used to purchase the products were guaranteed by a third-party escrow company. 

In his plea agreement, Ngo admitted he created counterfeit invoices falsely indicating that NL Technology had substantial purchase orders from alleged wholesale companies. Ngo also provided false financial statements purportedly certified by an accountant showing NL Technology earned income from its wholesale business totaling $12.5 million in 2015 and $15.4 million in 2016.  Moreover, Ngo admitted he fabricated bank statements or screenshots from bank statements held in the name of NL Technology with individual line items altered to appear as legitimate wholesale business transactions.  Lastly, Ngo created false checks from wholesale companies allegedly doing business with NL Technology.   

According to court documents, Ngo told investors that they could roll over their investments into future investment contracts with NL Technology, when in fact no such future investments were possible.  Also, Ngo lulled investors about the continued viability of NL Technology through materially false representations, including that NL Technology had an outstanding purchase order from a smartphone repair company for approximately $300,000, when in fact, no such order existed. 

Instead of investing the funds in the business, Ngo admitted that he converted investor funds to his own personal use and benefit by spending the money on a home, luxury cars and gambling.  As a result of his investment fraud, Ngo caused more than $20 million in losses to investors in his Ponzi scheme.
In a Superseding Indictment filed in the United States District Court for the Eastern District of Pennsylvania, Jeffrey D. Martin was charged with conspiracy and multiple counts of securities fraud and wire fraud. As alleged in part in the DOJ Release:

[F]rom about April 2012 until December 2019, Martin and others allegedly manipulated the stock of Mainstream Entertainment, Inc., now known as Volt Solar Systems, Inc., Resort Savers, Inc., Axiom Corp., Virtual Medical International, Inc., and Union Bridge Holdings, Ltd. The alleged manipulation involved fraudulent press releases, fraudulent securities disclosures filed with the U.S. Securities and Exchange Commission, and other fraudulent communications, as well as manipulative stock trading. The defendant and others were thus allegedly able to fraudulently inflate the price of the stock, and then sell their own shares at inflated prices and reap illicit proceeds-a classic "pump and dump" scheme. Through this conspiracy, Martin and his co-conspirators allegedly defrauded investors to enrich themselves; Martin himself received more than $989,000 in illicit proceeds from the sale of over-inflated stock of just one of the companies.
A Texas State Securities Board  issued an Emergency Cease and Desist Order to stop KP Financials, LLC from fraudulently soliciting investments in managed forex accounts. As alleged in part in the TSSB Release:

The order names KP Financials, LLC, from Austin, Texas.  The firm was incorporated in June 2020, but it is allegedly telling potential clients it has been incorporated for years.  According to the order, KP Financials is touting the growth of its operations, claiming it now employs more than 40 account specialists and 20 traders - and is growing day-by-day. 

Kevin Vu Pham is the founder and manager of KP Financials, and the company now maintains an office in the Domain, in North Austin.  Gerald Johnson, an account specialist, and Daniel Ajwani, a co-founder and account executive, are also named in the order. 

The parties are allegedly marketing investments in managed forex accounts.  They claim KP Financials has been using investor funds to trade in the accounts, and it has been earning 3% per month for investors. The investments in the managed forex accounts are supposedly safe and secure, and according to testimonials on the firm's website, the investments provide "minimal risk and maximum reward." 

The offering is a fraud, according to the order.  KP Financials is accused of concealing important information and misleading investors with deceptive statements. 

For example, the order accuses KP Financials of falsely touting registration to add legitimacy to the forex trading investments.  It is allegedly advertising itself as "Registering with the Texas SEC and Series 34 [sic]."  According to the order, the statement is simply false.  KP Financials is not registered with the State Securities Board and the named parties have not sat for the Series 34 - an examination and license required for persons engaging in off-exchange forex transaction with retail customers.  

Also, the parties require investors to execute a management agreement.  The management agreement allegedly authorizes KP Financials to trade forex.  However, the management agreement also authorizes KP Financials to render services as an investment adviser by using principal to buy, sell or trade securities. Notably, KP Financials is not registered or notice-filed as an investment adviser, and Pham, Ajwani and Johnson are not registered or notice-filed as investment adviser representatives. 

The firm is also accused of leveraging changes from COVID-19 in its sales pitch.  It allegedly claims it has been able to "take advantage of that chaos," referring to disruptions in the securities markets due to COVID-19.  According to the order, KP Financials further claims to be working with clients using their 401K accounts to fund forex trading - and paying significant taxes as a consequence of withdrawing early - because they are attracted to the purported lucrative profits associated with the managed forex accounts.

As the firm develops its platform, Respondent KP Financials allegedly plans to add "partnerships" with other businesses that will benefit investors.  It is also telling investors that it will soon provide investors with access to the firm's private plane, according to the order.   

North Dakota Man Is Arrested On Multiple Federal Charges For Alleged Investment Scheme / The Defendant Resided in Haywood County and Targeted Victims at, or Near, Retirement Age (DOJ Release)  
SEC Halts Alleged Ongoing Offering Fraud (SEC Release)
CFTC Charges Investment Firm and VP with Commodity Pool Fraud (CFTC Release)  
North Dakota Man Is Sentenced To Prison For Investment Scheme / The Defendant Resided in Haywood County and Targeted Victims at, or Near, Retirement Age (DOJ Release)
SEC Obtains Final Judgment in Offering Fraud (SEC Release)

In an Indictment filed in the United States District Court for the Western District of North Carolina ("WDNC"), Mark Nicholas Pyatt was charged with securities fraud, wire fraud, investment adviser fraud, and money laundering. As alleged in part in the DOJ Release:

[B]eginning as early as October 2017, and continuing through at least February 2019, Pyatt, often using the alias Daniel G. Randolph, solicited friends and acquaintances to invest their money in a "communal account," or "fund," held by his company, Winston Reed Investments, LLC (WRI).  As alleged in the indictment, Pyatt represented to his victim-investors that he had made significant amounts of money through his own investing and day trading activities, and that he wanted to invest the victims' money using a similar strategy so that they could experience the same wealth that he enjoyed. 

The indictment alleges that, in order to induce the victims to part with their money, Pyatt made a number of false and fraudulent representations.  Pyatt told the investors that he would make trades with the investors' money on a daily basis, that he would be trading futures and forex, and that he would specialize in energy-related stocks. Pyatt also falsely promised large returns on investments, assuring victims that the "low average expected return on investments" would be 15% per month, with a goal of a return of 100% in three to four months.  Pyatt represented to his victims that he would receive a fee for WRI's services of just 10% of all gains, and that he would not charge his investors any fees if he did not make a profit.

According to the allegations in the indictment, contrary to the promises he made to his victim-investors, Pyatt simply stole the vast majority of the investors' money.  The indictment alleges that Pyatt misappropriated over $100,000 to pay for personal expenses, including jewelry, groceries, cigars, and a Chevrolet Corvette.  Pyatt also withdrew tens of thousands of dollars in cash, and made several Ponzi-style payments to his investors, falsely implying that the returned funds were trading profits. 

As alleged in the indictment, Pyatt perpetuated the fraud by making misrepresentations to victim-investors about the fund's performance.  For example, for months, Pyatt regularly provided his investors with false updates that purported to describe his trading activity and the considerable positive returns he was earning on their investments.  Then, in February 2019, after reporting substantial monthly gains to his investors for more than a year, Pyatt allegedly notified his investors by email that a "complete and catastrophic" loss had occurred, and that their money was gone.  Pyatt allegedly claimed that he was investigating the loss with the assistance of a forensics firm, and he told his investors that the loss was due to a technical oversight or failure by the brokerage firm holding the investment account.  According to the indictment, all of these representations were false; in reality, the money was gone because Pyatt spent it.  

The indictment further alleges that, during at least a substantial portion of the scheme, Pyatt resided in Haywood County and targeted local victims.  In total, the indictment alleges that Pyatt stole at least $218,000 from his victim investors, many of whom were at, or near, retirement age.

In a Complaint filed in the WDNC, the SEC charged Winston Reed Investments LLC and its principal Mark N. Pyatt with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Also, the Complaint seeks disgorgement from Relief Defendant Daniel G. Randolph. As alleged in part in the SEC Release:

[B]eginning in April 2017, Winston Reed Investments LLC and Mark N. Pyatt raised hundreds of thousands of dollars from retail investors by representing they would use a sophisticated trading strategy to trade in futures contracts, foreign exchange, and stocks. Instead, Pyatt allegedly used the vast majority of investor money for personal items, including vehicles, jewelry, groceries, and cigars. Winston Reed and Pyatt also allegedly used a portion of new investor money to make payments to other investors. The complaint further alleges that in an attempt to cover up his fraud, Pyatt provided investors with updates purporting to show substantial monthly returns based on his trading, and later claimed that all investor money had been lost as a result of a broker-dealer not following his trading instructions.

In a Complaint filed in the WDNC
021020/download, the CFTC
 charged Winston Reed Investments LLC and  Mark N. Pyatt a/k/a Daniel Randolph, with misappropriation of customer funds and fraudulent solicitation in connection with a commodity pool. As alleged in part in the CFTC Release:

[F]rom April 2017 through February 2019, WRI and Pyatt fraudulently solicited and received approximately $200,000 from at least 19 pool participants in connection with pooled trades in commodity futures contracts and retail foreign exchange transactions, among other things.

As further alleged, WRI and Pyatt misappropriated most of pool participants' funds for business expenses, personal use, and to make Ponzi-like payments to other pool participants.  In addition, despite incurring overall net trading losses, WRI and Pyatt sent reports to investors falsely claiming large profits of between approximately 19 and 86% per month.

On October 27, 2020, after pleading guilty to one count of wire fraud, Mark Nicholas Pyatt, 44, was sentenced to 37 months in prison plus three years of supervised release, and he was ordered to pay about $274,506 in restitution. 

On November 20, 2020, WDNC entered final consent judgments against Mark N. Pyatt and Winston Reed Investments LLC permanently enjoining them from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Further,  Pyatt and Winston Reed agreed to pay, jointly and severally, disgorgement of $255,850, subject to offset by amounts paid as restitution in a parallel criminal case against Pyatt. Previously, Relief Defendant Daniel G. Randolph was dismissed.

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, Southern Trust Securities, Inc. ("STS") and Susan Molina Escobio submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon STS a Censure and $55,000 fine; and upon Escobio a six month suspension from association with any FINRA member firm in any capacity (no fine was imposed in consideration of her financial status). The Respondents submitted a "Statement of Corrective Action." The AWC asserts that:
  • STS has been a FINRA member firm since 2000 with about 20 registered representatives and two branches; and
  • Susan Molina Escobio entered the industry in 1978 and from May 2000 through September 2020, she was STS's Chief Compliance Officer and Anti-Money Laundering Compliance Officer, and the firm's President from 2014 through September 2020
As alleged in the AWC's "Overview":

From July 23, 2015, through June 4, 2018, the Respondents failed to develop and implement an anti-money laundering (AML) program that was reasonably designed to achieve and monitor the firm's compliance with the Bank Secrecy Act and the implementing regulations thereunder. In particular, the Respondents did not establish and implement policies and procedures tailored to the firm's business, which could be reasonably expected to detect and cause the reporting of suspicious activity arising from wire transfers to customer accounts. Additionally, from July 23, 2015, through June 4, 2018, the Respondents failed to provide reasonable ongoing AML training to its associated persons. Also, from March 2016 to June 2018, the Respondents failed to conduct periodic reviews of account activity and enhanced due diligence with respect to a foreign financial institution (FFI) account, as required by the United States Department of the Treasury (Treasury) Regulation, 31 CFR §1010.610. As a result of the foregoing, Respondents violated FINRA Rules 3310(a), (b), and (e), and 2010.

From July 2017 to June 2018, the Respondents failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to prevent a terminated representative from continuing to access STS email, which contained customer records. During this period, Escobio was responsible for reviewing all emails sent from or received by a terminated, statutorily disqualified individual's firm email address on a daily basis. Escobio failed to perform such reviews. Respondents also failed to recognize and investigate red flags indicating the terminated individual may have continued to access his firm email address containing customer records. As a result of the foregoing, STS violated Rule 30 of Regulation S-P and FINRA Rule 2010. Escobio caused STS to violate Rule 30 of Regulation S-P, and by virtue of the foregoing, Escobio violated FINRA Rule 2010. Further, Respondents' email supervision failures violated FINRA Rules 3110 and 2010.

From July 2015 to July 2017, on two occasions, Escobio, in the course of STS purchasing Rule 144A restricted securities, negligently misrepresented to corporate bond dealers, through written, signed certifications, that STS was a qualified institutional buyer (Q1B), or was a dealer acting in a riskless-principal capacity on behalf of a Q1B. These certifications were inaccurate since STS was not a Q1B, and it purchased such restricted securities from the dealers on behalf of a non-Q1B customer. As a result, Escobio violated F1NRA Rule 2010.

Claimant Webster moved for a ZOOM hearing citing the COVID pandemic. Respondent Wells Fargo opposed the motion. The FINRA Arbitrator granted the Motion and on November 10 - 11, 2020, a hearing was conducted via ZOOM. The Arbitrator recommended that Claimant's Termination Explanation be revised to indicate "Not for cause termination." In an unusual move, the Arbitrator found:

Respondent is liable for and shall pay to Claimant the sum of $30,000.00 in attorneys' fees pursuant to Akintobi v. Phoneix Fire Restoration Co., 513 S.E.2d 507 (1999).

Bill Singer's Comment: Compliments to Robert Herskovits, Esq. of Herskovits PLLC on a superb outcome for his client! An award of attorneys' fees in FINRA Expungements is virtually unheard of. 

In pertinent part, Akintobi
html holds that:

Here, nothing on the face of the arbitration award including the award of attorney fees appears to be the result of corruption, fraud, or misconduct. Greene, 266 Ga. at 596, 468 S.E.2d 350. Nor does the award evince any partiality or overstepping by the arbitrator. Gilbert v. Montlick, 232 Ga.App. 91, 93(2),499 S.E.2d 731 (1998). In fact, although no contract provided for attorney fees, the record demonstrates that both sides vigorously pursued such fees before the arbitrator. Not only did Akintobi fail to object to the evidence of Phoenix's attorney fees at arbitration, Akintobi submitted its own evidence of attorney fees. In so doing, Phoenix and Akintobi implicitly agreed to arbitrate that issue. See Hope & Assoc. v. Marvin M. Black Co., 205 Ga.App. 561, 562(1), 422 S.E.2d 918 (1992). Inasmuch as Akintobi failed to sustain its burden of showing that the arbitrator's decision was "completely irrational" or constituted a "manifest disregard of the law," it must be upheld. Amerispec Franchise v. Cross, 215 Ga.App. 669, 671(1), 452 S.E.2d 188 (1994); OCGA § 9-9-13(b).