Securities Industry Commentator by Bill Singer Esq

The Expungement Was Not Not Warranted But Still Denied (BrokeAndBroker.com Blog)

The Schwab v. Spadoni Complaint / Schwab says "software enhancement" caused inadvertent transfer of $1.2 million / Beneficiary of Goof Not Returning Calls (duh)

Court Authorizes Service of John Doe Summons Seeking Identities of U.S. Taxpayers Who Have Used Cryptocurrency (DOJ Release)

Central Indiana Man Faces Federal Fraud Charges / Investors lost over $1,500,000, Securities and Exchange Commission involved (DOJ Release)

Claimed real estate investor charged with securities fraud (DOJ Release)

SEC Charges Atlanta Resident with Offering Fraud and Misappropriating Funds (SEC Release)

Firm Agrees to a Refund and Fine for Unreasonable Supervisory System (TSSB Release)

FINRA Fines and Suspends Rep Over Willful Untimely Disclosure of Felony Charges and Plea 
In the Matter of Jason V. McHenry, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep Over Trading in Deceased Client's Account

In the Matter of Ignacio Erhart Del Campo, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep For Four PSTs 
In the Matter of Candice E. Montie, Respondent (FINRA AWC)

1. Spadoni is a former Schwab client who refuses to return more than $1.2 million that was inadvertently transferred to her Fidelity Brokerage Services account by Schwab. 

2. Due to an issue created by a software enhancement, Schwab mistakenly transferred these funds to Spadoni on February 23, 2021. 

3. Immediately after learning of the transfer, Schwab has contacted Fidelity and Spadoni repeatedly to request return of the funds. 

4. Fidelity has reported it is unable to return the funds because they are not available. 

5. Spadoni has refused to take Schwab's calls, and instead, she has taken steps to prevent Schwab from recovering the funds. 

6. Accordingly, Schwab is seeking a writ of sequestration to prevent Spadoni from rendering the arbitration a hollow formality by dissipation of the funds in question before a panel of arbitrators can be assembled to rule on Schwab's claims.

[I]n the court's order, U.S. Judge Richard G. Stearns found that there is a reasonable basis for believing that cryptocurrency users may have failed to comply with federal tax laws.

The court's order grants the IRS permission to serve what is known as a "John Doe" summons on Circle. The United States' petition does not allege that Circle has engaged in any wrongdoing in connection with its digital currency exchange business. Rather, according to the court's order, the summons seeks information related to the IRS's "investigation of an ascertainable group or class of persons" that the IRS has reasonable basis to believe "may have failed to comply with any provision of any internal revenue laws[.]" According to the copy of the summons filed with the petition, the IRS is requesting that Circle produce records identifying the U.S. taxpayers described above, along with other documents relating to their cryptocurrency transactions.

[B]etween May 2008 and August 2016, Blankenbaker created three business entities, Stargrower Commercial Bridge Loan Fund 1 LLC and Stargrower Asset Management, LLC (hereinafter the Stargrower Entities) and EDU Holding Trust (the Trust). . . .

. . .

Blankenbaker persuaded more than 100 individuals to invest more than ten million dollars in the Stargrower Entities. He represented to investors that the funds they invested would be used to finance the use of shipping containers of food in the "international trade of fast moving consumer products similar to what you would find in a grocery store." The investment funds received by Blankenbaker were deposited into Stargrower Entities bank accounts which he solely controlled and was the sole signatory.

Contrary to Blankenbaker promises to investors, he did not invest their money as he had described. On over 300 separate occasions between September 2016 and May 2019, Blankenbaker diverted the investment money he received to primarily make interest payments and return of principal payments to other Stargrower Entities investors, and to fund personal expenses and unrelated business ventures of his. Thirty-four investors lost over $1,400,000 in this scheme.

Blankenbaker other business entity known as EDU Holding Trust (the Trust), was designed to utilize investor funds to purchase life insurance policies on the secondary market at a price less than the face maturity amount of the policies. Investors in the Trust received a document created by Blankenbaker, entitled "life settlement purchase agreement" that they were beneficiaries of the Trust and that they would receive compensation from the profits generated when the life insurance policy matured, that is, when the insured died. In another document provided to investors, he said that a financial institution, the Bank of Utah, would serve as an escrow agent to receive the proceeds upon the maturity of the life insurance policies and then distribute the funds to the investors appropriately.

In August 2016, one of the policies purchased by the Trust died, and a proceeds check in an amount in excess of 2.5 million dollars was issued to the Trust by the life insurance company on which the policy was drawn. The check was not deposited into the Bank of Utah escrow account, but was rather deposited by Blankenbaker into an account he opened at PNC Bank in the name of EDU Holding Esc Acct. Although some of the funds from this deposit were appropriately transferred to investors in the Trust, others were transferred to another account he controlled at PNC Bank in the name of one of the Stargrower Entities. These funds were used, in part, for business and personal expenses of Blankenbaker unrelated to the purposes of the Trust. This scheme resulted in a loss of $110,200 to an investor in the Trust.

In 2017, Randolph began preparing to merge Gallagher Management Group into Randolph Acquisitions and sold Randolph Acquisitions shares to multiple investors.  Gallagher Management also engaged an accounting firm to audit its 2016 financial statements.  In connection with this audit, Randolph allegedly provided false information regarding Gallagher Management Group's assets which were then reflected on the balance sheet of the 2016 financial statements:

• Randolph falsely claimed that Gallagher Management Group owned two buildings valued at a claimed $10 million combined.  In reality, neither Gallagher Management Group, nor Randolph ever owned these properties.
  
  
• Randolph falsely valued a different property at $10.5 million with no associated liability.  In reality, Gallagher Management Group purchased the property in or about September 2016 for $1.1 million with a $1.1 million mortgage loan secured by the property.  It was sold in August 2017 for $1.2 million.
  
  
• Randolph falsely valued yet another property at $4.5 million that was acquired in January 2016 for $425,000 by an entity controlled by Randolph and was transferred to Gallagher Management Group in March 2017.  In April 2018, the property was sold at auction for $687,500 after Gallagher Management Group defaulted on a $500,000 loan.
  
  
• Randolph provided a false bank statement showing a balance of over $2.5 million.  The actual balance in this account was $58,198.78.  

The audited financials included other misrepresentations such as falsely stating that Gallagher Management Group "has consistently maintained over $50 million dollars in assets, under management, annually."

Gallagher Management Group also engaged a consultant to prepare a business valuation for the merger which relied upon Gallagher Management Group's 2016 audited financial statements, alleged additional false property valuation information provided by Randolph, and false projections provided by Randolph.  The report valued Gallagher Management Group at $31.3 million on an enterprise value basis and $33.8 million on an equity value basis.

 

In connection with the proposed merger between Randolph Acquisitions and Gallagher Management Group, Randolph Acquisitions made multiple filings with the Securities and Exchange Commission that attached the alleged false 2016 audited financial statements of Gallagher Management Group.  Randolph directed investors to these filings.  In addition to these documents, Randolph allegedly falsely claimed that Randolph Acquisitions owned EF Block when it did not. He allegedly falsely claimed that Randolph Acquisitions was close to securing a variety of large public and private contracts in the U.S. Virgin Islands, including hurricane remediation contracts and an agreement to manage the U.S. Virgin Islands public retirement fund, when in fact they never obtained any of those contracts. 

 

These alleged misrepresentations materially increased Randolph Acquisitions' apparent value and future prospects, when in reality, it was little more than a shell company with limited assets.  Randolph allegedly induced 14 victims who relied upon the misrepresentations to invest over $1.5 million in Randolph Acquisitions.

[S]ince late 2015, Randolph raised more than $1.6 million from at least 14 investors whom Randolph persuaded to fund purported real estate and business projects. According to the complaint, Randolph fraudulently promoted these projects, including by using false financial statements based on fictitious assets and by making false claims about impending projects. The complaint alleges that most of the projects and business opportunities touted by Randolph did not exist, and that Randolph grossly inflated the value of the projects that did exist. The complaint further alleges that Randolph misappropriated a substantial amount of investor proceeds, including making over $400,000 in unauthorized cash withdrawals and using tens of thousands of dollars for personal expenses. According to the complaint, Randolph also routinely used investments in one business to fund the activities of other Randolph-controlled businesses in which investors had no interest.

In addition to paying back customers for the losses they incurred, Independent Financial Group agreed to pay an administrative fine of $75,000 for its failure to have a reasonable supervisory system in place to monitor the activities of the Representative. Specifically, the firm failed to have a specific training requirement regarding leveraged ETFs, failed to have a supervisory system in place to monitor and flag for extended holding periods related to leveraged ETFs and failed to prevent the Representative from purchasing more than 2x leveraged ETFs in client accounts at a time when the Representative was not approved to purchase them.

Securities Commissioner Iles previously entered a consent order on December 1, 2020 wherein Commissioner Iles denied the registration of the former representative responsible for the high-risk trading strategy in leveraged ETFs.

Respondent understands that this settlement includes a finding that he willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this omission makes him subject to a statutory disqualification with respect to association with a member.

On September 18, 2018, while associated with PFSI, McHenry was charged with three felonies. Although McHenry was required to update his response to Question 14A within thirty days, or by October 18, 2018, he did not amend his Form U4 to disclose the felony charges until November 13, 2020, more than two years late. On September 15, 2020, McHenry pleaded guilty to a felony charge, which rendered him statutorily disqualified from associating with a member firm. Although McHenry was required to update his response to Question 14A within ten days, or by September 25, 2020, he did not amend his Form U4 to disclose the guilty plea until November 13, 2020, almost two months late. The felony charges and guilty plea were material facts that a reasonable employer or customer would want to know about a representative. 

In addition, on December 1, 2018 and June 12, 2019, while completing PFSI's annual compliance questionnaires, McHenry falsely stated that he had not been charged with any felony.

From November 1, 2013 to June 4, 2017, while associated with Northeast Securities, Erhart Del Campo exercised discretion in a customer's account without written authorization in violation of NASD Rule 2510(b) and FINRA Rule 2010. After the customer's June 4, 2017 death and unaware that the customer died, Erhart Del Campo continued to trade in the account. From June 9, 2017 to May 29, 2019, while associated with Northeast and Insigneo, he placed 77 unauthorized transactions in the account in violation of FINRA Rule 2010.

Between April and June 2018, Montie participated in sales of L Bonds issued by GWG Holdings, Inc. ("GWG") to four investors. These individuals invested a total of $150,000 in the L Bonds and purchased them through another broker-dealer with which Monti was not registered or associated. Montie participated in these sales through the other brokerdealer by assisting the investors with completing the paperwork required to purchase the L Bonds, including a GWG subscription agreement and a new account application. Montie also participated in these sales by obtaining the customers' signatures on these and other documents, copies of their drivers' licenses, and a check from each customer to fund the L Bond purchase. Montie also participated in the sales of the L Bonds by scanning and transmitting the required paperwork to the other broker-dealer and/or GWG directly to complete the customers' purchases. 

Montie did not receive any commissions or other payments for her role in the four transactions. 

Montie did not provide written notice to Moloney Securities prior to participating in the sales of the L Bonds through the other broker-dealer, nor did she obtain approval from Moloney Securities prior to participating in those transactions.

• Securities Industry Commentator
• Bill Singer