Securities Industry Commentator by Bill Singer Esq

September 22, 2020


Members of Stock Fraud Ring Indicted for Securities Fraud, Two Defendants Arrested (DOJ Release)

Queens Man Charged in Insider Trading Scheme (DOJ Release)In the Matter of the Claim for an Award in connection with Redacted (SEC Order Determining Whistleblower Award Claim)

http://www.brokeandbroker.com/5448/FINRA-Discovery-Larson/
As with so many things in life and regulation, this one is all about nuance. We have a largely unsympathetic respondent, who does not seem to have had a firm grip upon his compliance obligations. Accordingly, FINRA filed charges and its staff seems to have done a commendable job making the counts stick. On top of that, we have persuasive decisions from FINRA's Office of Hearing Officers and its National Adjudicatory Council. As with all great beauties, however, there is a flaw. The flaw in this regulatory matter is FINRA's violation of its Discovery rules. A pro se respondent was asked to respond to Enforcement's misconduct at a time when the challenge would have proven immense for a veteran industry lawyer. In the end, someone has drawn a mustache on the Mona Lisa.

Members of Stock Fraud Ring Indicted for Securities Fraud, Two Defendants Arrested (DOJ Release)
https://www.justice.gov/usao-sdca/pr/members-stock-fraud-ring-indicted-securities-fraud-two-defendants-arrested
In an Indictment filed in the United States District Court for the Southern District of California,  Ongkaruck Sripetch a/k/a "King Richards" and "Shelby Saint-Claire;" Michael Wexler; securities attorney Ashmit Patel; and Andrew McAlpine were charged with Conspiracy to Commit Securities Fraud, Securities Fraud, and Manipulative Securities Trading. Allegedly, the Defendants were unaware that one of their partners was cooperating with the Government's investigation and was collecting evidence against his co-conspirators. As alleged in part in the DOJ Release:

[T]he stock fraud ring charged here carried out pump-and-dump schemes on the stock of two companies: Ottawa, Canada-based VMS Rehab Systems, which claimed to sell "quality of life orthopedic seat cushions for the home healthcare sector," and Argus Worldwide, a company headquartered in Cheyenne, Wyoming, which purportedly focused on "digital/internet products and services, smart consumer electronic products and health industries." 

https://www.justice.gov/usao-edny/pr/queens-man-charged-insider-trading-scheme
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SEC Charges Index Manager and Friend With Insider Trading (SEC Release)
https://www.sec.gov/news/press-release/2020-217

In a Complaint filed in the United States District Court for the Eastern District of New York ("EDNY") https://www.justice.gov/usao-edny/press-release/file/1318486/download, Yinghang Yang was charged securities fraud. As alleged in part in the DOJ Release:

[S]ince September 2018, Yang has been employed by a publicly traded company ("the Company") that specializes in financial information and analytics.  The Company publishes several market indices, including American stock market indices based on the market capitalizations of groups of companies with shares listed on the New York Stock Exchange (NYSE) or the NASDAQ Stock Market (NASDAQ).  Yang's job at the Company includes managing American stock market indices with more than $60 billion in asset value tracking. 

Between April 2019 and October 2019, Yang and a co-conspirator allegedly executed securities transactions in the co-conspirator's brokerage account based, in whole or in part, on nonpublic information obtained by Yang through his employment at the Company, about issuers that were to be added or subtracted from market indexes published by the Company.  For example, on October 2, 2019, beginning at 2:47 p.m., the co-conspirator's brokerage account entered orders to buy call options of Cleveland Cliffs (CLF), a publicly traded mining company.  The same day, at 5:15 p.m., the Company announced the addition of CLF to one of its indices effective prior to the open of trading on October 8, 2019.  The co-conspirator's brokerage account subsequently sold the CLF call options on October 3, 2019, realizing a gain of approximately $155,029.  This sequence was followed in 13 additional transactions in the co-conspirator's brokerage account during the charged conspiracy.

In total, the securities transactions engaged in by the co-conspirator's brokerage account during the relevant time period generated more than $900,000 in profits, some of which were transferred to three different bank accounts held by Yang.  Funds from those accounts were then used by Yang for personal expenses, including credit card payments, repayment of student loans and trading activity in Yang's own brokerage account.

In a Complaint filed in EDNY https://www.sec.gov/litigation/complaints/2020/comp-pr2020-217.pdf, the SEC alleged that Yinghang "James" Yang (a senior index manager at an index provider) and his friend Yuanbiao Chen (a manager of a sushi restaurant) violated the antifraud provisions of the federal securities laws. As alleged in part in the SEC Release:

[B]etween June and October of 2019, Yang and Chen repeatedly purchased call or put options of publicly traded companies hours before public announcements that those companies would be added to or removed from a popular stock market index that Yang helped his employer manage. When the options increased in value after the announcements, Yang and Chen allegedly liquidated their options positions for a substantial profit. As alleged in the complaint, the defendants conducted all of the illegal trading in Chen's brokerage account, which allowed Yang to conceal his trading from his employer. The complaint alleges, for example, that a number of purchase orders were entered in Chen's brokerage account immediately following logins from IP addresses assigned to Yang's home address.

https://www.sec.gov/news/press-release/2020-216
Without admitting or denying the allegations in an SEC Complaint filed in the United States District Court for the District of Colorado
https://www.sec.gov/litigation/complaints/2020/comp-pr2020-216.pdf, Martin J. Dosal, Jr. consented to the entry of a final judgment permanently enjoining him from violating the antifraud and broker-dealer registration provisions of the federal securities laws; and he agreed to return $51,633 of allegedly ill-gotten gains plus prejudgment interest of $3,503, and to pay a $51,633 civil penalty. As alleged in part in the SEC Release:

[O]ver a two-year period, Milton J. Dosal, Jr. raised nearly $100,000 from approximately 41 investors under the guise that he would day-trade stocks on their behalf. According to the complaint, Dosal, a car enthusiast, met a number of investors through car club events, including an Air Force Academy cadet who Dosal then used to gain access to other cadets Dosal convinced to invest. The complaint alleges that Dosal falsely held himself out as a securities professional and misled investors about his trading activity and their investment returns. The complaint further alleges that Dosal's empty promises included telling investors that they could, with little risk, expect weekly returns of up to ten percent. Dosal also allegedly used fake stockbroker agreements and false account balances for some investors. The complaint alleges that Dosal used investor funds for personal expenses and diverted new investor funds to pay back prior investors, in a Ponzi-scheme fashion.

David Wagner pled guilty in the United States District Court for the Southern District of New York to two counts of securities fraud and one count of wire fraud; and he agreed to forfeit $549,000 and pay $7,850,000 in restitution. The case against Defendant Marc Lawrence is pending. As alleged in part in the DOJ Release:

From at least in or about December 2013 through at least in or about 2017, WAGNER, the chief executive officer of Downing, and Lawrence, the president of several Downing entities, solicited investments in Downing, a purported venture capital firm that would invest in healthcare start-ups referred to as "portfolio companies" and provide sales, operations, and management expertise to the portfolio companies in order to bring their products to market and generate returns for Downing investors, who also worked for Downing (the "employee-investors").  WAGNER and Lawrence, and others acting at their direction, solicited more than approximately $8 million in investments in Downing from employee-investors located across the United States, including in the Southern District of New York, as a requirement of employment with Downing. 

After making the required investment of between $150,000 and $250,000 in Downing and starting their employment at Downing, employee-investors soon learned, among other things, that contrary to representations made by WAGNER and Lawrence, and others acting at their direction, Downing did not have access to millions of dollars in funding, often could not make payroll, had virtually no products to sell, and employee investments were the overwhelming source of funding.  Employee-investors also learned that WAGNER and Lawrence had misrepresented the companies in Downing's portfolio, their product readiness, and ability to generate revenue.  While the particular formulation of these misrepresentations shifted over time, WAGNER and Lawrence systematically sought and obtained employee-investor money through materially false and misleading statements.

Beginning in or about May 2016, after several employee-investors had brought lawsuits against WAGNER, Lawrence, and several Downing entities alleging claims based on, among other things, fraud, WAGNER and Lawrence continued the scheme by recruiting employee-investors into a new company called Cliniflow Technologies, LLC ("Cliniflow"), through materially false and misleading statements about Cliniflow's cash reserves, portfolio companies, and exposure to litigation.  In fact, Cliniflow purportedly held majority ownership in the same primary portfolio company as other Downing entities and was simply a new name used by WAGNER and Lawrence to solicit investments from new employee-investors that was not tainted by the lawsuits filed against Downing entities.  A majority of the over $1.5 million raised by WAGNER and Lawrence through Cliniflow was transferred to other Downing entities and used to pay for, among other things, WAGNER's personal expenses and the repayment of prior investors.

Finally, in or about January 2017, WAGNER obtained a $400,000 loan and $100,000 grant from the Connecticut Department of Economic and Community Development ("CTDECD") for Cliniflow on the basis of materially false statements made by WAGNER to the CTDECD.  WAGNER transferred a majority of the funds obtained from the State of Connecticut, which were required to be used for Cliniflow's purported relocation from New York to Connecticut, to other Downing entities and also used a portion of the funds to purchase a luxury car for his daughter.

SEC Settles with Two Additional Defendants in Boiler Room Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/2020/lr24906.htm
In a Complaint filed in 2017 in the United States District Court for the Eastern District of New York
https://www.sec.gov/litigation/complaints/2017/comp23878.pdf, the SEC alleged that Emin Cohen, Dennis Verderosa, and others, had engaged in a fraudulent scheme using threatening and deceitful sales tactics to pressure retail investors to purchase penny stocks; and that the defendants used information they learned about the victims' purchase orders to facilitate the placement of opposing sell orders to dump shares owned by participants in the fraudulent scheme. In a parallel criminal action, Cohen and Verderosa pled guilty, and the were, respectively, sentenced to 24 and 72 months in prison plu three years of supervised release. EDNY entered final Consent Judgments against Cohen https://www.sec.gov/litigation/litreleases/2020/24906-judgment-cohen.pdf and Verdorosa https://www.sec.gov/litigation/litreleases/2020/24906-judgment-verderosa.pdf, who, as set forth in the SEC Release, are enjoined from:

violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the broker-dealer registration provision of Section 15(a) of the Exchange Act. The final judgments order Cohen and Verderosa to disgorge $136,373 and $383,344 respectively, plus prejudgment interest, all of which is deemed satisfied by the forfeiture and restitution ordered in the parallel criminal action. The judgments also impose penny stock bars. These judgments follow the June 11, 2020 announcement of final judgments obtained by consent against three other defendants in the case. In a separate settled administrative proceeding, Cohen was barred from the securities industry.

https://www.sec.gov/rules/other/2020/34-89929.pdf
The SEC's Claims Review Staff  ("CRS") issued a Preliminary Determination recommending that Claimant receive a $2.4 mullion whistleblower award, and the SEC adopted the recommendation and ordered the Award paid. The SEC Order notes in part that:

[I]n reaching that determination, we positively assessed the following facts: (i) Claimant timely submitted information that prompted Enforcement staff to open an investigation into a Redacted Redacted (ii) Claimant's information helped the Commission detect Redacted Redacted (iii) Claimant's information helped staff identify key witnesses and parties and draft targeted subpoenas, which saved the staff time and resources in conducting the investigation; and (iv) Claimant's assistance throughout the investigation contributed to all of the charges of the Covered Action.

In the Matter of Roger Allan Duval, Respondent (FINRA AWC 2019062789901)
https://www.finra.org/sites/default/files/fda_documents/2019062789901
%20%20Roger%20Allan%20Duval%20CRD%202503718%20AWC%20jlg.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, Roger Allan Duval submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Roger Allan Duval entered the industry in 1994 and by March 2017, he was associated with MML Investors Services, LLC. The AWC alleges that Roger Allan Duval " does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization" In accordance with the terms of the AWC, FINRA found that Roger Allan Duval had violated  FINRA Rules 2150(a) and 2010; and the self regulator imposed upon him a Bar from associating with any FINRA member firm in any capacity. As alleged in part in the AWC: 

Beginning in 2013, Duval convinced three elderly customers to establish and maintain brokerage accounts at a FINRA member firm, away from his employer member firms. From June 2017 through April 2019, he used the customers' login credentials to access these accounts and wrote himself checks totaling approximately $130,000 without their knowledge or authorization. Duval deposited these checks into his personal checking account and then transferred some of these funds into his personal brokerage account. By converting customer funds for his own personal use, Duval violated FINRA Rules 2150(a) and 2010. 

As set forth in the Syllabus to the NAC's Decision:

Eric S. Smith appeals an Extended Hearing Panel ("Hearing Panel") decision. The Hearing Panel found that Smith fraudulently made material misrepresentations and omissions of fact in offering documents, in willful violation of the federal securities laws and FINRA rules. The Hearing Panel barred Smith from associating with any FINRA member in any capacity for this misconduct and ordered that he pay, jointly and severally with his firm, $130,000 in restitution to four investors. 

The Hearing Panel also found that Smith actively engaged in the conduct of his firm's securities business in the capacities of a general securities principal and representative without being registered, in violation of NASD and FINRA rules. In light of the bar for Smith's fraud, the Hearing Panel assessed, but did not impose, additional sanctions for Smith's registration violations. 

After a thorough review of the record, we affirm the Hearing Panel's liability findings and the bar and restitution ordered for Smith's fraud. We, however, modify the Hearing Panel's assessed sanctions for Smith's registration violations. For acting as an unregistered principal, we increase the fine from $50,000 to $75,000 and the suspension in all capacities from one year to two years. For acting as an unregistered general securities representative, we affirm the Hearing Panel's recommended $50,000 fine and one-year concurrent suspension in all capacities. Like the Hearing Panel, we decline to impose the sanctions for the registration violations in light of the bar imposed for Smith's fraud.