At first blush, this looked interesting. Another intra-industry dispute over what is typically called an EFL case – Employee Forgivable Loan -- but with a twist: The broker initiated the Financial Industry Regulatory Authority (FINRA) Arbitration proceedings as the Claimant and he sued his former firm for $1,500,000.00.  See . . . I told you that this looked interesting.  However, after reading the entire  Panel Decision, I’m no longer blushing.  Frankly, about the only reaction that I can summon up is: "What the hell was that all about?"

The short case summary provided by the FINRA Arbitration Panel simply says that Associated Person Gilbert Millstein filed a Statement of Claim against FINRA member firm Oppenheimer & Co., Inc. alleging Breach of Contract, Misrepresentation, and Promissory Estoppel. In the Matter of the Arbitration Between Gilbert Millstein (Claimant) vs. Oppenheimer & Co., Inc. (Respondent) (FINRA Arbitration 08-03749, March 5, 2010).  Millstein seeks about $1,500,000 in damages – a very tidy sum.  In addition to denying his charges, Oppenheimer counterclaimed for $464,066.11 in damages arising from Millstein’s alleged failure to pay amounts due under the terms of two promissory notes, which Millstein also denied.

Bill, Bill, Bill – you plead with me -- more details, more details.  You shake your head in bewildered confusion.  You ask, What is this case about? I reply that all I know about the arbitration is what I wrote above.  That’s it?, you ask. That’s it, I reply. But, but, but – you stutter, sounding like an old tugboat – these folks are asking for some relatively hefty seven- and six-figure damages.  Surely, FINRA provides more detail, you insist. 

My name is Bill, don’t call me Shirley, and, “no” FINRA arbitration decisions are typically sparse. 

If you don’t believe me, consider what passes for the rationale as to why the Panel made its award:

After considering the pleadings, the testimony and evidence presented at the hearing, the Panel has decided in full and final resolution of the issues submitted for determination as follows:

1. Respondent is liable for and shall pay to Claimant compensatory damages in the amount of $575,000.00.

2. Claimant is liable for and shall pay to Respondent compensatory damages in the amount of $464,066.00.

3. Any and all relief not specifically addressed herein is denied.

The High-Priced, Big-Shot, Industry Lawyer's Detailed Case Analysis

So, lemme see here.  Claimant Millstein wanted $1,500,000 for something. He got about one-third of that.  Okay, not sure what he was owed or why or what Oppenheimer did or didn’t do but, hey, if someone awards you $575,000, like, what???  you’re not going to pocket it. 

Of course, there’s the set-off issue involving Oppenheimer’s demand for big bucks for two unpaid promissory notes. Why didn’t Millstein pay them? Dunno.  However, the facts were apparently sufficient for the Arbitration Panel because Oppenheimer got every penny that demanded. 

All in all, a net of about $110,000 for Millsetin ain’t a bad day’s work except if there are reasons that Millstein should have gotten far more dollars or far less.  Sadly, we’ll never know.

The High-Priced, Big-Shot, Industry Lawyer's Sarcastic Yet Stunning Conclusion

What is ultimately so wrong about FINRA's version of the short-and-sweet?  Maybe the best way that I can explain it is to compare it to a restaurant menu that offers only the following:

Appetizer: $8

Soup: $6

Main Course Meat: $24

Main Course Fish: $28

Main Course Poultry: $20

Side Dish: $8

Dessert: $8

Hot Beverage: $2

(No Substitutions)

The waiter comes to take your order. You ask him, "What is the Appetizer?"

He points to the menu and says, "Eight dollars."

"Yes, I see the price," you say, "but what is today's appetizer?"

"Eight dollars," the waiter repeats.

"Okay, let me try this another way, what is the soup?"

"Six dollars."

"Yes, but what is the soup made of?"

"Tonight we are offering a hot liquid -- and it's six dollars."

With some increasing frustration, you ask about the main course meat dish, "And what is the meat, and how is it prepared?"

"It's meat that we cook in the kitchen, serve it to you on a plate at the table, and it's attractively priced at $24," comes the waiter's expected reply.

Hungry and tired of the banter, you order the $8 Appetizer, the $24 Main Course Meat, and the $8 Side Dish. 

When your order arrives at your table, you poke around the plates and can't quite figure out what the hell is on them.  When you eat your meal, you can't quite figure out what you're eating.  Upon clearing the table, your ever-helpful waiter cheerfully chimes in, "Would you like our $8 Dessert and $2 Hot Beverage?"

This is no way to run a restaurant and no way to run mandatory arbitration.

On Wall Street there is supposed to be a winner for every loser -- you know, two sides to every coin and a mirror image for every trade.  However, seems that a couple of would-be alchemists thought that they found a way to circumvent the physics of trading.  In the end, no cigar.

Get Your Scorecard

In a Complaint filed in federal court on March 9, 2010, the Securities and Exchange Commission (SEC) alleges that in October 2003, a Spanish Bank (“Bank”) opened an account with Jose O. Vianna, Jr. ("Vianna"), then a broker with the Maxim Group, LLC, (“Maxim”). The purpose of this account was to effect proprietary trading for the Bank, and Vianna was designated the registered representative for the Customer A account.

In its promotional literature, Maxim describes itself as full-service investment banking firm headquartered in New York. Maxim provides a full array of financial services including investment banking; private wealth management; and global institutional equity, fixed-income and derivatives sales and trading as well as equity research. Maxim currently manages in excess of $5 billion in client assets. The investment banking group focuses on middle market and emerging growth companies within the shipping, energy, health care, technology, retail, and business and financial services sectors. The firm's institutional coverage North and South America, Europe and Asia.

Employee, a citizen and resident of Spain, was a portfolio manager employed by the Bank at its office in Madrid, Spain.  Employee was responsible for trading securities in the Bank’s proprietary trading accounts, including the one maintained at Maxim.

At the end of April 2007, Employee referred Creswell Equities, Inc.("Creswell"), a British Virgin Islands corporation with an office in Geneva, to Maxim;  and on June 20, 2007, Creswell opened an account there.  Vianna was the registered person assigned to that account.Creswell gave Employee the discretion to direct trading in its Maxim account and paid Employee a fee for doing so. Although Vianna knew that Employee was directing trading in the Creswell account, Vianna did not inform Maxim of this fact.

Let the Good Times Roll (but reallocate the bad)

Starting in July 2007 and continuing until March 2008, acting in concert with Employee, Vianna carried out a fraudulent scheme to divert trading profits from the Bank to Creswell. 

On at least 57 occasions during that period, Vianna entered simultaneous orders in the Bank and Creswell accounts to trade the same number of shares of the same stock. In each instance, Vianna entered an order to buy the stock for the account of one customer and entered an order to sell the stock for the account of the other customer. The corresponding orders were for blocks of stock, ranging from 20,000 to 310,000 shares.  In each instance, Maxim executed the corresponding orders at the same price.

In 28 of the 57 instances in which Vianna entered corresponding orders for the Bank and Creswell accounts, the market moved so that the Bank's trade was profitable and Creswell's trade was unprofitable. Initially, that would be good news for the Bank; however, in each such profitable instance, Vianna improperly misused his access to Maxim's order management system to change the identity of the customer on each order so that the profitable trade was reallocated to Creswell’s account and the unprofitable trade was reallocated to the Bank's account, thus causing Maxim's records to inaccurately reflect the account for which various orders were entered and transactions effected.

The Down And Dirty

NVLS 

• On July 17, 2007 at 10:19 a.m., Vianna entered a market order for the Creswell account to sell 60,000 shares of Novellus Systems Inc. (''NVLS'') and entered a market order to buy 60,000 .shares of NVLS for the Bank account.
• At 10:20 a.m., these market orders were executed by Maxim at $32.36 per share.
• Following the execution of these orders, the price of NVLS rose, generating unrealized trading profits for the Bank and unrealized trading losses for Creswell.
• At 1:37 p.m., Vianna entered a new order to sell 60,000 shares of NVLS for Creswell's account. This order was executed at 1:42 p.m. at $32.94 per share.
• At 1:52 p.m.,Vianna accessed Maxim's order management system and switched the customer accounts on the original 10:19 a.m. orders, so that Creswell became the buyer of 60,000 shares of NVLS at $32.36 per share and the Bank was transformed into the seller.
• Following the switch, Creswell was a buyer of 60,000 NVLS at $32.36 per share and a seller of those shares at $32.94 per share, realizing trading profits of almost $32,000. On the other hand, the Bank became a seller of NVLS at a price lower than the then current market price. 

FRE

• On November 20, 2007 at 8:56 a.m.,Vianna entered a limit order for Creswell's account to buy 100,000 shares of Freddie Mac (''FRE'') at $30.80 per share, and then immediately entered a limit order for the Bank's account to sell the same number of shares of FRE at the same price. Maxim executed both orders at $30.80 per share, the limit price.

• Following execution of the orders, the price of FRE declined, generating unrealized losses for Creswell.
• At 9:19 a.m., Vianna entered an order in Creswell's account to buy another 100,000 shares of FRE at the market price. Maxim executed this order at $28.99 per share.
• The price of FRE continued to decline, and at 9:25 a.m. Vianna entered another order in Creswell's account to buy 100,000 shares of FRE, which was executed at $27.07 per share.
• Minutes later, Vianna accessed Maxim's order entry system and reallocated Creswell's purchases of 100,000 FRE at $30.80 and 100,000 FRE at $28.99 to the Bank’s account, and reallocated the Bank’s sale of 100,000 FRE at $30.80 to Creswell's account.
• The net result of these trades was that Creswell sold 100,000 shares of FRE at $30.80 and bought 100,000 shares of FRE at $27.07 for a profit of over $367,000. The Bank bought 200,000 shares of FRE at above the then current market price. 

AAPL

• On March 3,2008, at 9:33 a.m., Vianna entered a market order in Creswell's account to buy 30,000 shares of Apple Inc. ("AAPL") and a market order in the Bank's account to sell 30,000 shares of AAPL. Both orders were executed at $125.37 per share.
• The market price of AAPL declined, resulting in unrealized losses for Creswell.
• At 9:46 a.m., Creswell purchased 30,000 shares of AAPL in its account at another broker-dealer for $123.68 per share.
• Within minutes of Creswell's purchase at the other broker dealer, Vianna accessed Maxim's order management system and reallocated Creswell's purchase of 30,000 AAPL at $125.37 to the Bank and reallocated the Bank's sale of 30,000 AAPL at that price to CreswelL
• The net result of these trades was that Creswell bought 30,000 shares of AAPL at $123.68 and sold 30,000 shares at $125.37, for a profit of over $45,000. The Bank purchased 30,000 shares of AAPL at $125.37, above the then current market price.

All Is Cress(Well) that Ends Cress(Well)?

In 29 of the 57 instances in which Vianna entered corresponding orders for the Bank and Creswell accounts, the market moved so that Creswell's original trade was profitable and the Bank's original trade was unprofitable: In each such instance, Vianna allowed the orders to remain as they originally had been entered.  Ahhh, but it's those aforementioned 28 other instances in which Cresswell's losing trades were amazingly reallocated to the Bank that make all the difference, and result in the present legal mess.

It is the SEC's allegation that Vianna entered the corresponding orders in the Creswell and the Bank accounts with the intention of misusing his access to Maxim's order management system to switch the account allocations for the original orders when the market moved against Creswell and in favor of the Bank. Vianna's purpose was to transfer all trading risk from Creswell to the Bank, so that Creswell would profit no matter which way the market moved. Creswell's corresponding trades with the Bank generated net profits of over $3.3 million for Creswell. Vianna also received at least $125,000 in commissions.

The Hardcore, Legal Mumbo Jumbo

The SEC alleges that Vianna is liable for violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §77q(a), and Section 10(b)  of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b),and Rule 10b-5 thereunder, 17 C.F.R.§ 240.10b-5; and for aiding and abetting Maxim's violations of Section 17(a) of the Exchange Act, 15 U.S.C. § 78q(a), and Rule 11a-3 thereunder; 17 C.F.R. §240.17a-3.

The SECs seeks permanent injunctive relief from Vianna, as well as disgorgement of ill-gotten gains plus prejudgment interest, and civil money penalties. The SEC's complaint also charges Creswell as a relief defendant, and seeks disgorgement of Creswell's illicit profits, plus prejudgment interest. On March 9, 2010, the Court entered an order temporarily freezing Creswell's assets pending a hearing on the SEC's application to freeze Creswell's assets for the duration of the action.

Bill Singer's Comment: Why the SEC's Complaint does not name the "Employee" is a bit baffling, particularly given his alleged complicity in the fraud.  Which is not to say that there may not be a number of reasonable explanations -- but it is to suggest that absolutely none of those explanations are offered in the Complaint or the press release.  If the purpose of not naming the Employee is to protect the identity of the similarly unnamed bank, then fine.  You would think that the federal regulator would treat the public with a tad more maturity and offer that rationale.

Given that the Bank appears to have been victimized, there is some fairness in not further trashing its name.  However, most folks would recognizee the Bank's victimization and you have to wonder if outing the guilty Employee would serve a greater civic purpose than protecting an institution under these circumstances.

NOTE: The above statements are merely allegations as contained in the SEC's Complaint and the Defendants are presumed innocent until proven guilty.

Securities and Exchange Commission v. Jose O. Vianna, Jr. and Creswell Equities, Inc., (Case No. 10 Civ. 1842 (GBD) (S.D.N.Y.), SEC Litigation Release No. 21446/ March 10, 2010) http://sec.gov/litigation/complaints/2010/comp21446.pdf

A federal criminal Complaint unsealed on March 8, 2010, paints a frightening story.  On February 22, 2010, more than a dozen employees,executives, and one board member of a New York-based life insurance company (the "Company") received an email that read,  in part, "I HIGHLY suggest you visit this websiteand contact me afterwards." The message was signed  signed "Anthony Digati." ("Digati")

The email provided a website address that connected a viewer to a website created by Digati (the"Website"). The Website includes, among other things, the following text 

a. These things, unless you honor the below claim, WILL HAPPEN on March 8, 2010. 　

b. As you have denied my claim I can only respond in this way. You no longer have a choice in the matter, unless of course you want me to continue with this outlined plan. I have nothing to lose, you have everything to lose.

c. My demand is now for $198,303.88. This amount is NOT negotiable, you had your chance to make me an offer, now I call the shots.

d. I have 6 MILLION emails going out to couples with children age 25-40, this email campaign is ordered and paid for.  2 million go out on the 8th and every two days 2 million more for three weeks rotating the list. Of course it is spam, I hired a spam service, I could care less, The damge [sic] will be done.

e. I am a huge social networker, and I am highly experienced. 200,000 people will be directly contacted by me through social networks, slamming your integrity and directing them to this website within days.

 f. I think you get the idea, I am going to drag your company name and reputation, through the muddiest waters imaginable. This will cost you millions in lost revenues, trust and credibility not to mention the advertising you will be buying to counter mine. Sad thing is it’s almost free for me!

g. The process is in motion and will be released on March 8th, 2010. If you delay and the site goes live, The price will then be $3,000,000.00.

According to press reports, Digati had invested about $50,000 into a variable life insurance policy sold by New York Life.  Apparently, unhappy about not getting a nearly quadruple return on his investment, he opted for extortion.

United States Attorney for the Southern District of New York, Preet Bharara and Acting Assistant Director-in-Charge of the Federal Bureau of Investigation's New York Field Division ("FBI"), George Venizelos announced that 52-year-old Digati was arrested at his home in Chino, California on March 6, 2010, on charges of attempting to extort approximately $200,000 from the Company by threatening to make false public statements and transmit computer spam in an effort to damage the reputation of the company and cost it millions of dollars in revenue. Digati was charged with with one count of extortion through interstate communications (which carries a maximum sentence of two years in prison and a maximum fine of $250,000 or twice the gross pecuniary loss or gain derived from the offense).

Please note that the charge in the criminal Complaint is merely an accusation, and the defendant is presumed innocent unless and until proven guilty.