Securities Industry Commentator by Bill Singer Esq

VOTE for FINRA Small Firm Governor Paige W. Pierce

RIP Charlie Watts: You Can Lose The Backbeat (BrokeAndBroker.com Blog)

SEC Charges Netflix Insider Trading Ring (SEC Release)

Co-Founder And Former CEO Of Palo Alto-Based Start-Up Technology Company Headspin Charged With Securities Fraud And Wire Fraud / Defendant Raised More than $100 Million In Investments And Is Charged With Overstating Revenue To Investors (DOJ Release)

SEC Charges Former CEO of Technology Company With $80 Million Fraud (SEC Release)

SEC Obtains Emergency Relief, Charges Investment Adviser and Its Principal with Operating $110 Million Ponzi Scheme (SEC Release)

New York Life Insurance Broker Sentenced to 27 Months in Prison for Securities Fraud Scheme (DOJ Release)

SEC Charges Healthcare Services Company and CFO for Failing to Accurately Report Loss Contingencies as part of Continuing EPS Initiative (SEC Release)

Federal Court Orders Georgia Man and Two Companies to Pay Over $15.6 Million for Forex Fraud and Registration Violations (CFTC Release)

The Journey to the Cloud: Implications for the Securities Industry (FINRA Unscripted)

DBS Throws Director Under the FINRA Regulatory Bus (BrokeAndBroker.com Blog)

FINRA Arbitrator Pens Perfect Rationale in UBS Expungement Award (BrokeAndBroker.com Blog)

Bill Singer's Comment: In 1998, I was one of a slate of four petition candidates to run in the first contested Board election against the NASD's hand-picked slate of nominees. In what was then an incredible upset, two of the contested candidates won seats on the NASD Board. In the ensuing years, as a founder of the NASD and the FINRA Dissident Movements, I have continued my efforts to reform our industry and to support candidates in various FINRA elections. 

I have known sitting Small Firm Governor Paige W. Pierce for several years, and I wholeheartedly endorse her Board candidacy and urge eligible voters to cast a proxy in her favor. Paige has earned a second term by her continued advocacy for regulatory reform and fairness. 

[A]fter Sung Mo Jun left Netflix in 2017, he obtained confidential Netflix subscriber growth information from another Netflix insider, Ayden Lee. Sung Mo Jun allegedly traded himself and tipped Joon Jun and Chon in advance of Netflix earnings announcements from 2017 to 2019. The SEC alleges that Sung Mo Jun's former Netflix colleague Jae Hyeon Bae, another Netflix engineer, tipped Joon Jun based on Netflix's subscriber growth information in advance of Netflix's July 2019 earnings announcement. Sung Mo Jun, Joon Jun, and Chon allegedly used encrypted messaging applications to discuss their trading in an attempt to evade detection. According to the complaint, Sung Mo Jun, Joon Jun, and Chon made approximately $3 million in total profits from the illegal scheme. The SEC Market Abuse Unit's Analysis and Detection Center uncovered the trading ring by using data analysis tools to identify the traders' improbably successful trading over time.

is a co-founder of the Palo Alto-based technology company Headspin and acted as its CEO from its inception in 2015 until approximately May 2020.  Headspin provides a remote service that allows customers to access mobile devices around the world and remotely test their applications across different communications networks and in different locations.  Headspin earns revenue by selling subscriptions to its services, according to the complaint.      

The complaint alleges that from its 2015 inception until about March 2020, Headspin raised millions of dollars from investors during four major rounds of financing.  At its inception, Headspin raised approximately $11 million through the sale of Series A preferred shares.  Later, in April 2017 to May 2018, Headspin raised approximately $24.7 million selling promissory notes convertible into future Series B preferred stock.  During September to October 2018, Headspin raised approximately $20 million dollars in the sale of Series B preferred shares.  The fourth round of fundraising occurred from November 2019 to early 2020, and Headspin raised approximately $60 million in selling Series C preferred shares. 

During the Series C fund raising round - starting no later than November 1, 2019, through at least January 30, 2020 - the federal complaint charges that Lachwani engaged in a scheme of securities fraud and wire fraud.  The complaint alleges that in materials and presentations to potential investors, Lachwani reported false revenue and overstated key financial metrics of the company.  According to the complaint, Lachwani maintained control over operations, sales, and record-keeping, including invoicing, and he was the final decision maker on what revenue was booked and included in the company's financial records.  Multiple examples are alleged in the complaint of Lachwani instructing employees to include revenue from potential customers that inquired but did not engage Headspin, from past customers who no longer did business with Headspin, and from existing customers whose business was far less than the reported revenue.  Among other information, Lachwani provided investors false information that overstated Headspin's annual recurring revenue (ARR) - a key metric for evaluating the success of companies that provide "software as a service" - by approximately $51 to $55 million.  

The company's unaudited financial statements were reviewed by an auditing firm in May 2020.  According to the complaint, the review concluded that Headspin's cumulative revenues from inception through the first half of 2020 totaled only approximately $26.3 million, instead of the $95.3 million originally reported by the company. The review also calculated the cumulative net loss from Headspin's inception through the first half of 2020, totaling approximately $15.9 million, instead of the $3.7 million net income originally reported by the company. 

The complaint alleges that in the fall of 2018, during Headspin's Series B fundraising round, investors agreed to purchase shares at prices that valued the company at approximately $500 million dollars. By late 2019, during the Series C fundraising round, investors agreed to purchase shares at prices that valued the company at approximately $1.1 billion.  According the allegations in the complaint, after the company discovered the overstated revenue and recapitalized the company's investors, the valuation of the company dropped to approximately $300 million.

[F]rom at least 2018 through 2020, Lachwani engaged in a fraudulent scheme to propel HeadSpin's valuation to over $1 billion by falsely inflating the company's key financial metrics and doctoring its internal sales records. According to the complaint, Lachwani, who allegedly controlled all important aspects of HeadSpin's financials and sales operations, significantly inflated the value of numerous customer deals and fraudulently treated potential deal amounts that he had discussed with customers as if they were guaranteed future payments. The complaint alleges that Lachwani concealed this inflation by creating fake invoices and altering real invoices to make it appear as though customers had been billed higher amounts. As further alleged, Lachwani enriched himself by selling $2.5 million of his HeadSpin shares in a fundraising round during which he made misrepresentations to an existing HeadSpin investor. According to the complaint, Lachwani's fraud unraveled after the company's Board of Directors conducted an internal investigation that revealed significant issues with HeadSpin's reporting of customer deals, and revised HeadSpin's valuation down from $1.1 billion to $300 million.

[T]he defendants have raised more than $110 million from over 400 investors in 20 states by offering and selling membership units in Horizon.  Woods, Southport, and other Southport investment adviser representatives allegedly told investors - including many elderly retirees - that their Horizon investments were safe, would be used for different investment activities, would pay a fixed rate of return, and that investors could get their principal back without penalty after a short waiting period. According to the complaint, however, these statements were false and misleading: Horizon did not earn any significant profits from legitimate investments, and a very large percentage of purported "returns" to earlier investors were simply paid out of new investor money. The complaint also alleges that Woods repeatedly lied to the SEC during regulatory examinations of Southport. 

Ramos, who worked at New York Life selling life insurance, sought out inexperienced investors seeking low-risk investments. The victims met Ramos after purchasing life insurance through him, or through New York Life marketing events, or through mutual acquaintances. Ramos led his victims to believe, through misrepresentations and omissions, that two entities that he controlled, Invexperts LLC and Wealth Seeds Capital LLC, were associated with New York Life when they were not. The victims believed that the money they entrusted to Ramos would be placed in investments through New York Life, and accordingly multiple victims referenced New York Life on the memo line of their investment checks. One victim, for example, attended a New York Life seminar, then subsequently met with Ramos at his office in Edison, and ultimately invested in Invexperts believing it was associated with New York Life.

Ramos falsely told victims that their investments in Invexperts and Wealth Seeds were no-risk with fixed annual returns. Instead of investing their money as he promised he would, Ramos used the funds for purposes not disclosed to the victims, including, among other things, to pay for personal expenses for Ramos and others, to develop a restaurant called "Frisky Bull Barbeque" in Elizabeth, New Jersey, and to repay other investors. 

Ramos obtained over $1 million in investor money through the fraudulent scheme.   

[I]n 2014 and 2015, HCSG, a provider of housekeeping, dining, and other services to healthcare facilities, failed to timely accrue for and disclose material loss contingencies related to the settlement of private litigation against the company, as required by U.S. Generally Accepted Accounting Principles. By failing to properly record the loss contingencies in the appropriate quarters, which would have had the effect of reducing the company's income, HCSG reported EPS that met to the penny or came close to meeting research analyst consensus EPS estimates and reported multiple quarters of EPS growth, including then-record-high EPS. According to the order, HCSG's former CFO John C. Shea failed to direct the recording or disclosure of the loss contingencies on a timely basis. The order also finds that HCSG's Controller, Derya D. Warner, made other accounting entries that were not supported by adequate documentation as required by company policies.

In the order, U.S. District Judge Robert P. Boulee found that from at least July 2018 to March 2019, the defendants fraudulently solicited customers to open discretionary trading accounts, and offered to trade those accounts, through a fully automated retail foreign currency (forex) trading software system that Mayer created. The order further finds that the defendants solicited customers through online videos, social media, and in-person marketing events. As found in the order, the solicitations contained material misrepresentations and omissions regarding Mayer's qualifications and trading experience. Additionally, as found in the order, the defendants misrepresented the forex trading system's performance history and expected trading profits. Further, as found in the order, the defendants failed to disclose that Mayer never opened a live trading account using the forex trading system. The order further found that Mayer failed to register as an associated person of a CTA; and that SSL and SSLS unlawfully permitted Mayer to become or remain associated with them.

Related CFTC Enforcement Action

In a previous, related case, the CFTC found that SSL and SSLS acted as unregistered CTAs, and that two former officers acted as unregistered associated persons of both SSL and SSLS. [See CFTC Press Release No. 8071-19]

The Office of Financial Innovation is a conduit and a facilitator of information related to significant innovation in the financial services industry, working to provide expertise and support to groups within FINRA, as well as FINRA member firms. 

As cloud computing transforms how broker-dealers operate, FINRA's Office of Financial Innovation surveyed nearly 40 broker-dealer firms, cloud service providers, industry analysts and technology consultants to better understand the implications of cloud computing on the securities industry. 

On this episode, FINRA's Haime Workie and Michael Oh join the podcast to discuss the group's latest report on cloud computing and to provide an update on other areas of focus. 

• Securities Industry Commentator
• Bill Singer