The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

August 26, 2021


Federal Court Says Signed, Sealed, Delivered, Oooh Baby, It's Arbitration (BrokeAndBroker.com Blog)


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

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


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

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

VOTE for FINRA Small Firm Governor Paige W. Pierce
On September 1, 2021, FINRA will conduct its annual meeting to elect individuals to fill one small firm seat, one mid-size firm seat and one large firm seat on the FINRA Board of Governors (FINRA Board or Board). 

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. 

IF YOU HAVE NOT MAILED IN YOUR BALLOT FOR PAIGE PIERCE BY TODAY, PLEASE GO ONLINE TO VOTE OR TELEPHONE YOUR VOTE. FOR THOSE WORKING REMOTE, YOU CAN TELEPHONE FINRA'S OFFICE OF THE CORPORATE SECRETARY at (202) 728-8949 AND OBTAIN YOUR VOTING CODE, THEN USE THAT CODE TO CAST YOUR ONLINE/CALL-IN VOTE. 

http://www.brokeandbroker.com/6026/fisher-pnc-arbitration/
Motion practice is about as bland as it gets with civil litigation. As we come upon today's courtroom drama  in the United States District Court for the Southern District of Florida, the Defendants have filed a Motion to Compel Arbitration in response to a Complaint. From here, it's a matter of who signed what, what was or was not delivered or attached, and whether a federal magistrate or a federal judge got whatever it is right. 

https://www.justice.gov/opa/pr/multiple-defendants-grandparent-scam-network-indicted-racketeering-conspiracy
In an Indictment filed in the United States District Court for the Southern District of California https://www.justice.gov/usao-sdca/press-release/file/1427946/download, Timothy Ingram a/k/a Bleezy, Anajah Gifford, Joaquin Lopez, Jack Owuor, Tracy Glinton, Lyda Harris, Tracy Adrine Knowles, and Adonis Alexis Butler Wong were charged with conspiracy to conduct or participate in an enterprise through a pattern of racketeering activity under the Racketeer Influenced and Corrupt Organizations ("RICO") Act. As alleged in part in the DOJ Release:

[T]he defendants were members and associates of a network of individuals who, through extortion and fraud, induced elderly Americans across the United States to pay thousands to tens of thousands of dollars each to purportedly help their grandchild or other close family relatives. According to statements made by prosecutors in court, the defendants swindled more than $2 million from 70-plus elderly victims across the nation, with at least 10 in San Diego County. The perpetrators contacted elderly Americans by telephone and impersonated a grandchild, other close relative, or friend of the victim. They falsely convinced the victims that their relatives were in legal trouble and needed money to pay for bail, medical expenses for car accident victims, or to prevent additional charges from being filed. The defendants and their co-conspirators received money from victims via various means, including in-person pickup, mail, and wire transfer, and laundered the proceeds, including through cryptocurrency.

https://www.sec.gov/litigation/litreleases/2021/lr25183.htm
In a Complaint filed in the United States District Court for the Central District of California, thttps://www.sec.gov/litigation/complaints/2021/comp25183.pdf, the SEC charges Carl Jensen 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; and further charges Stephen W. Gold with aiding and abetting Jensen's violations. Kerry Margolis and Michael Hock are named as Relief Defendants. As alleged in part in the SEC Release:

[S]ince at least 2015, Jensen has raised investor funds through promissory notes by claiming remarkable, rapid-fire returns, between ten to hundreds of times the investors' principal, payable in anywhere from a week to thirty days. Jensen allegedly claims to own or have percentage interests in a portfolio of lucrative investments including Chinese and Mexican bearer bonds, as to which he boasts a special expertise in selling for a profit. Rather than receive investor money in his own name, Jensen allegedly directs investors to send their funds to accounts in the name of Stephen W. Gold, Kerry Margolis, and Michael Hock. The SEC alleges that after investments were made, Jensen and Gold lulled investors by providing a litany of excuses for not paying them, including a "banking protocol, a "logistical screw," an "emergency" that arose for the supposed buyer, a "super typhoon," bank "red tape," a "bank holiday," and "riots and civil unrest." The SEC further alleges that for years Jensen's investors have received few to no returns, and the majority of the money raised from investors has been spent on Jensen, Gold, Margolis and Hock's personal expenses such as clothing, rent, online retail, and credit card payments, or simply withdrawn in cash.

https://www.sec.gov/litigation/litreleases/2021/lr25180.htm
As alleged in a Complaint filed in the United States District Court for the Western District of Washington
https://www.sec.gov/litigation/complaints/2021/comp25180.pdf, the SEC alleged that Sung Mo "Jay" Jun, Joon Mo Jun, Junwoo Chon, Ayden Lee, and Jae Hyon Bae violated federal antifraud laws. Sung Mo Jun, Joon Jun, Chon, and Lee consented to the entry of judgments that would permanently enjoin each from violating the charge provisions and to the imposition of civil penalties; and, further, Sung Mo Jun agreed to an officer/director Bar; and Bae consented to a permanent injunction from violation Section 10(b) of the Exchange Act and Rule 10b-5 and to the imposition of a $72,875 civil penalty. An Information was filed against Sung Mo Jun, Joon Jun, Chon, and Lee in a parallel criminal action. As alleged in part in the SEC Release:

[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.


https://www.justice.gov/usao-ndca/press-release/file/1427881/download, Headpin Inc.'s Chief Executive Officer Manish Lachwani was charged with one count each of wire fraud and securities fraud. As alleged in part in the DOJ Release, Lachwani:

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.

In a Complaint filed in the United States District Court for the Northern District of California
https://www.sec.gov/litigation/complaints/2021/comp-pr2021-164.pdf, the SEC alleged that Lachwani violated federal antifraud laws. As alleged in part in the SEC Release:

[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.

https://www.sec.gov/litigation/complaints/2021/comp-pr2021-163.pdf
In a Complaint filed in the United States District Court for the Northern District of Georgia
https://www.sec.gov/litigation/complaints/2021/comp-pr2021-163.pdf, the SEC alleged that John J. Woods, Livingston Group Asset Management Company, d/b/a Southport Capital, and Horizon Private Equity, III LLC violated the antifraud provisions of the the federal securities laws. The Court granted a temporary restraining order and asset freeze against Defendants Woods and Horizon, and further ordered expedited discovery per Defendant Southport. As alleged in part in the SEC Release:

[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. 

https://www.cftc.gov/PressRoom/PressReleases/8417-21
https://www.cftc.gov/media/6266/enfmayerfinaldefaultjudgment072721/download The Order finds the Defendants liable for forex solicitation fraud, Commodity Trading Advisor ("CTA") fraud, and registration violations. The Order requires SSLS and Mayer to pay $3,712,035.93 in restitution jointly and severally and SSL to pay $198,143.03 in restitution. The order further imposes $9,798,107.79 in civil monetary penalties on SSLS; $9,798,107.79 on SSL; and $1,338,000 on Mayer. Additionally, under the order, defendants are permanently enjoined from engaging in conduct that violates the Commodity Exchange Act (CEA), registering with the CFTC, and trading in any CFTC-regulated markets. As alleged in part in the CFTC Release:

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]

https://www.sec.gov/news/press-release/2021-165

The Securities and Exchange Commission today announced the appointment of Barbara Roper as Senior Advisor to the Chair. Ms. Roper's focus will be on issues relating to retail investor protection, including matters relating to policy, broker-dealer oversight, investment adviser oversight, and examinations. She is currently the Director of Investor Protection for the Consumer Federation of America (CFA).

"Barb is a champion for investors and will provide invaluable counsel on behalf of the American public," Chair Gary Gensler said. "I've had the pleasure of working closely with her on the Sarbanes-Oxley Act and the critical market reforms of the Dodd-Frank Act, and I'm thrilled to collaborate with her again at the SEC."

"I'm excited to join the SEC and Chair Gensler's leadership team," Ms. Roper said. "I've dedicated my career to ensuring that our capital markets work for the average investor. With investor protection at the core of the SEC's mission, I'm looking forward to bringing that same focus on the needs of individual investors to my work for the SEC."

Ms. Roper has worked at the CFA for 35 years and has been a leading consumer spokesperson on investor protection issues, particularly the standards that apply to investment professionals investors rely on for advice and recommendations. She has conducted studies of the financial planning industry, state oversight of investment advisers, and state and federal financial planning regulation. She has also conducted studies on the need for audit reform in the wake of the Enron scandal, the need for mutual fund reform in the wake of trading and sales abuse scandals, the information preferences of mutual fund shareholders, the potential of the Internet to improve disclosure, and securities law weaknesses as a cause of the financial crisis. She has served on numerous advisory committees at the SEC, Financial Industry Regulatory Authority, and other entities. She is a graduate of Princeton University with a degree in art history.

https://www.finra.org/sites/default/files/fda_documents/2017056432606
%20Donald%20J.%20Fowler%20CRD%204989632%20AWC%20va.pdf
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, Donald J. Fowler submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC's "Background" asserts that:

Fowler first registered with FINRA as a General Securities Representative (GS) through a member firm in September 2005. From January 2007 through November 2014, Fowler was registered as a GS through another member firm. During this time, he became registered with FINRA as a General Securities Principal (GP) in May 2008 and as an Operations Professional (OS) in November 2011. From November 2014 to August 2019, Fowler was registered through Worden Capital Management LLC (CRD No. 148366) (WCM) as a GS, GP, and OS. On August 1, 2019, WCM filed a Uniform Termination Notice for Securities Industry Registration (Form U5) disclosing that Fowler was permitted to resign and adding the explanation that "RR was found liable for 10b-5 violations due to activity conducted while employed at another broker/dealer." 

Although Fowler is not currently registered or associated with any member firm, he remains subject to FINRA's jurisdiction. On December 23, 2020, WCM filed an amendment to Fowler's Form U5 that disclosed a new customer complaint which alleged, among other things, churning and unsuitable trading. Pursuant to Article V, Section 4(a) of FINRA's By-Laws, the Form U5 amendment filed December 23, 2020, operates to recommence the running of the two-year jurisdiction period.

On June 20, 2019, a jury found Fowler, between January 2007 and November 2014, violated (i) Section 17(a) of the Securities Act of 1933, and (ii) Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder for recommending to 13 customers a high-cost, in-and-out trading strategy without a reasonable basis and making unauthorized trades. On February 25, 2020, the court entered a final judgment against Fowler and, among other things, permanently enjoined him from further violations of the securities laws. . . . 

The "Overview" portion of the AWC alleges that [Ed: footnotes omitted]:

Between December 2014 and December 2018, while registered through WCM, Fowler churned and excessively traded four customers' accounts. 2 Fowler's trading in his customers' accounts resulted in the customers being charged high commissions and fees and incurring significant realized losses. As a result of his churning and excessive trading, Fowler violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and violated FINRA Rules 2020, 2111, and 2010.

In accordance with the terms of the AWC, FINRA imposed upon Fowler a Bar from associating with any FINRA member in all capacities. Compliments to FINRA on a comprehensive and compelling AWC. 

https://www.finra.org/sites/default/files/fda_documents/2019063019901
%20Joffre%20Salazar%20CRD%202185914%20AWC%20va.pdf
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, Joffre Salazar submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Joffre Salazar was first registered in 1991 and by April 2016, he was registered with LPL Financial LLC, and, thereafter, he was registered from April 2019 until October 1, 2019 with another firm. In part, the AWC alleges that:

In or around December 2017, at Salazar's recommendation, Customer A agreed to purchase a five-year fixed annuity and signed certain documents to effect that purchase. In or around January 2018, the annuity issuer rejected the application and requested that Salazar resubmit the documents. Instead of having Customer A sign new documents, Salazar forged Customer A's signature six times on multiple documents for the purchase of a seven-year fixed annuity, even though Customer A had not authorized the purchase of a seven-year annuity. Salazar then submitted the forged documents for processing, and the application was approved. Customer A subsequently complained to LPL about the unauthorized purchase.2 

In or around July 2018, Salazar recommended that Customer B purchase a five-year fixed annuity with a 3.15% interest rate. Customer B agreed to do so and signed an application and related documents to effect that purchase. However, the interest rate on the five-year fixed annuity was actually 2.85%. Salazar then forged Customer B's initials on multiple documents for the purchase of a five-year fixed annuity at 2.85%, and subsequently submitted the documents to the issuer of the annuity, which approved the application. Customer B subsequently complained to LPL about the unauthorized purchase. 3 

Based on the foregoing conduct, Salazar violated FINRA Rule 2010. 

= = = = =

Footnote 2: Customer A ultimately agreed to continue her investment in the seven-year annuity, despite not having authorized its initial purchase. 

Footnote 3: LPL paid restitution to Customer B to compensate her for the difference in interest rates. 

In accordance with the terms of the AWC, FINRA imposed upon Joffre Salazar a $5,000 fine and a one-year-suspension from associating with any FINRA member in all capacities. 

https://www.finra.org/sites/default/files/fda_documents/2019064979901
%20Andes%20Capital%20Group%2C%20LLC%20CRD%20139212%20AWC%20va.pdf
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, Andes Capital Group, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Andes Capital Group, LLC has been a member since 2006 with 30 registered representatives at three branches. In part, the AWC alleges that:

In August 2018, a registered representative associated with Andes disclosed to the firm that he would be forming a special purpose vehicle for the purpose of making an investment. The representative inquired as to what form he should use to disclose the activity, which he characterized as a passive investment. The firm followed up with the representative to get more information about the investment, and learned that the special purpose vehicle would be used to pool investments for other individuals as well, whom the representative characterized as "friends and family." Andes did not request any documents concerning the investment, and approved the activity. Andes did not supervise the investment or activity, and did not update the representative's Form U4. 

Thereafter, the registered representative formed a limited liability company and became its general partner. The representative also served as manager for the LLC, and was entitled to receive a portion of any profits distributed to the company. The representative sold interests in the LLC to seven investors, including himself, in the amount of $1,495,438. 

Andes had written supervisory procedures in place for approving, recording, and supervising private securities transactions. The representative disclosed to Andes he was forming a special purpose vehicle to pool investment monies for himself and other individuals. Andes did not inquire further, and erroneously concluded that the activity did not constitute a private securities transaction. 

As a result of this erroneous conclusion, Andes did not supervise the private securities transactions or record the transactions on its books and records. As such, Andes failed to reasonably enforce its own written supervisory procedures. Therefore, Respondent violated FINRA Rules 3280(c), 3110, and 2010. 

In accordance with the terms of the AWC, FINRA imposed upon Andes a Censure and a $15,000 fine.

http://www.brokeandbroker.com/6024/deutsche-bank-awc-oba/
A recent FINRA AWC regulatory settlement looks like a case where an employer threw an employee under the bus, and the regulator gunned the engine and drove over him with relish and delight. There was a time when Wall Street's employers had their employees' backs. Some say that was a problem. Some look back upon those days with wistfulness. Be that as it may, there's no going back, but if this regulatory settlement is any indication, we're not necessarily moving forward but going off the rails. 

http://www.brokeandbroker.com/6014/finra-expungement-rationale/
BrokeAndBroker.com's publisher, Bill Singer, is no fan of FINRA's expungement process. When wearing his white hat as an investor's advocate, Bill sees FINRA's expungement process as little more than a profitable drive-in car wash that cleans dirty records and polishes undeserving reputations. When wearing his black hat as an industry advocate, Bill sees FINRA's expungement process as a cudgel with which broker-dealer employers pound their former employees via mandatory intra-industry arbitration replete with high fees and enervating delays. Notwithstanding Bill's reservations and concerns, a recent FINRA Arbitration Award presented a compelling case for expungement that was deftly handled by a very competent arbitrator. 

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