Securities Industry Commentator by Bill Singer Esq

November 15, 2018

GUEST BLOG: Pragmatic Federalism In a Blockchained World by Aegis Frumento Esq ( Blog)
The Securities and Exchange Commission is trying to regulate cryptocoins and coin exchanges nationally with position papers and enforcement actions, which is rather clumsy. This comes just as blockchain fever seems to have broken, being hyped less and less on earnings calls as people realize how little they understand it. Blockchain-enabled instruments and transactions are a truly new thing, and the statutes governing the SEC were never intended for them. It will be a long time before Congress passes blockchain-specific legislation, and Congress will never be able to act fast enough. Technology always evolves faster than applicable laws can be passed, and blockchain is morphing faster than most. For all those reasons, the SEC's efforts will remain imperfect and always late. But the States -- particularly New York and California -- are better positioned to enact regulations tailored to the realities of these new financial tools. Being where much of tech and finance is located, those States can act faster and more precisely than Congress or the SEC.
Pursuant to the filing of an Indictment in the United States District Court for the District of Massachusetts, former State Street Corporation executive vice president and president of its U.S. broker-dealer unit, Ross McLellan, was convicted by a federal jury of one count of conspiring to commit securities fraud and wire fraud, two counts of securities fraud and two counts of wire fraud; and he was was sentenced to 18 months in prison and two years of supervised release after being  Former State Street managing director Richard Boomgaardt pled guilty to one count of conspiracy to commit securities fraud and wire fraud, and was sentenced to one year of probation. Former senior managing director and the head of the Portfolio Solutions Group for Europe, the Middle East and Africa, Edward Pennings, pled guilty to one count of conspiracy to commit securities fraud and wire fraud, and was sentenced to six months in prison. As set forth in part in the DOJ Release:

Between February 2010 and September 2011, Pennings, McLellan, and Boomgaardt conspired to add secret commissions to fixed income and equity trades performed for six clients of the bank's "transition management" business, which helps institutional clients move their investments between and among asset managers or liquidate large investment portfolios. The commissions were charged on top of fees that the clients had agreed to pay to the bank, and despite written instructions to the bank's traders that generally reflected that the clients were not to be charged trading commissions. Pennings, McLellan, and Boomgaardt took steps to hide the commissions from the clients and others within the bank, including by directing that the commissions not be broken out in post-trade reports. 

In June 2011, when one of the affected clients inquired about whether it had, in fact, been charged commissions in breach of its agreement with the bank, Pennings initially denied that any commissions had been charged. Later, at McLellan's direction, Pennings acknowledged only that "inadvertent commissions" had been applied to securities traded in the United States, but did not disclose that they had, in fact, been intentionally charged in both the United States and in Europe. Pennings and McLellan sought to mislead the bank's compliance staff into believing that the commissions had been charged in error and that the amount of the overcharges was limited to the commissions applied on U.S. securities.

Rare Dismissal by FINRA Arbitration Panel of Customer Complaint Prior to Conclusion of Case in Chief
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2018, public customer Claimants Fuchs asserted breaches of fiduciary duty and contract; fraud; negligence; negligent supervision; suitability; misrepresentation; and omission to state a material fact in connection with their investment in Woodbridge Notes. Claimants sought about $150,000 in compensatory damages plus punitive damages, rescission, interest, and costs. In the Matter of the FINRA Arbitration Between John and Jane Fuchs, Claimants, vs. G.F. Investment Services, LLC, Madison Avenue Securities, LLC, Andrew M. Costa, and Christopher Grant Conness, Respondents (FINRA Arbitration 18-01756, November 13, 2018).
Respondents GFIS, Costa and Conness did not file an executed Submission Agreements; however, in September 2018, the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida, issued a preliminary injunction enjoining Claimants from pursuing their claims in arbitration against Respondents GFIS, Costa and Conness. Accordingly, the FINRA Arbitration Panel made no determinations with respect to any of the claims asserted against said Respondents.  

Respondent Madison moved to dismiss based upon its assertion that it was not associated with the accounts, securities or conduct at issue in this matter.Pointedly, the firm asserted that Claimants were never its clients and no business was transacted with them. Further, the firm asserted that no executed arbitration agreement existed with Claimants. The FINRA Arbitration Decision states that:

[C]laimants asserted they transacted business with Global Wealth Management ("GWM"), bought and maintained investments with GWM, received advice and guidance on their Woodbridge securities investment from GWM, and believed that the personnel at GWM were managing them. Claimants allege that since GWM is the alter ego of Respondents Costa and Conness, who are registered representatives of Respondent Madison, Claimants were customers of Madison. In its Reply, Respondent Madison stated that it and GWM are not now, and never have been affiliated entities, and that GWM is an independent financial services firm, which was founded by its managing directors, Respondents Costa and Conness, while they were still affiliated with Respondent GFIS.

Pursuant to FINRA Rule 12504(a)(6)(B) ((6) ("The panel cannot act upon a motion to dismiss a party or claim under paragraph (a) of this rule, unless the panel determines that: . . .(B) the moving party was not associated with the account(s), security(ies), or conduct at issue . . ."), the FINRA Arbitration Panel dismissed with prejudice Claimants' claims as against Respondent Madison. The arbitrators offered the following rationale:

"The Panel is cognizant of FINRA's policy that, prior to the conclusion of a party's case in chief, a Motion to Dismiss is discouraged. However, after car -consideration of the Statement of Claim and the arguments presented at the prehearing conference call and in the review of all documents, the Panel found no basis for imposing liability on Respondent Madison for losses sustained by Claimants. The moving party had no connection to the purchase of the subject securities, or to any fraud or misrepresentation related thereto. There is no basis for imposition of liability for failure to supervise, as there was no duty of Respondent Madison to supervise anyone connected with the subject securities. There is no contract between Respondent Madison and Claimants. While the Panel are loathe to deny Claimants an opportunity to present their case on the merits, in this instance there is no evidence which could support an award against Respondent Madison."
In a Complaint filed in the United States District Court for the District of Massachusetts, the SEC 
charged ormer investment adviser and broker representative Richard G. Cody with defrauding at least three of his retired clients over a twelve-year period by concealing substantial losses in their retirement accounts. READ the SEC Complaint  The SEC obtained a preliminary injunction and an asset freeze against Cody and his company, Boston Investment Partners LLC, from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC's litigation against Cody, which seeks disgorgement of allegedly ill-gotten gains, plus interest and penalties, as well as permanent injunctive relief, is ongoing. 
In an Indictment arising from the same underlying conduct, it was alleged that Cody lied to the SEC during a March 2017 sworn deposition.  Cody pled guilty to the charges and the court accepted his plea, and he is awaiting sentencing. 

Yeah, I know, the holiday season is upon us and some of you are hoping for year-end promotions, salary increases, and bonuses. Some of you will get 'em. Some of you won't. This article is dedicated to those of you who will find coal in your holiday business stockings and start to plan all sorts of devious ways to get back at your employer.
After a five-day jury trial, Nikishna Polequaptewa was found guilty in the United States District Court for the Central District of California of one count of unauthorized impairment of a protected computer and causing over $50,000 in loss. As much as I would love to spin this yarn, let me step back and quote from the DOJ Release:

Beginning in April 2014, Polequaptewa worked at Blue Stone Strategy Group, which provided consulting services to Native American tribal governments throughout the United States. In addition to his consulting responsibilities, Polequaptewa led information technology and marketing at Blue Stone. 

In November 2014, Polequaptewa was relieved of IT and marketing duties after he began falling behind on work. Following this change in responsibilities, Polequaptewa was assigned to a consulting project in Florida for the Seminole Tribe. While on that project, Polequaptewa deleted Blue Stone's website and marketing materials that the company had developed over eight years.

Polequaptewa resigned in Florida and continued to delete Blue Stone files, including client information, Blue Stone work product, and the company's backup files held by a third-party. Polequaptewa's final deletion was done by sending a "wipe" command to a Blue Stone desktop computer in Irvine.
The Texas State Securities Board announced that Phillip Michael Carter (principal of Texas Cash Cow Investments Inc. and North Forty Development LLC) was indicted on Texas state fraud charges in connection with raising $17.5 million from nearly 100 Texas investors (many elderly) for real estate development projects in North Texas. Additionally, Shelley Noel Carter (Phillip Carter's wife) was charged with money laundering and misapplying investor funds; and Richard Gregory Tilford was indicted on charges stemming from sales of fraudulent real estate investments, primarily in the form of promissory notes, of which Tilford raised $6 million from investors. Phillip Carter allegedly failed to disclose to investors that he and one of his sales agents, Bobby Eugene Guess, was served with a target letter from the U.S. Attorney's Office for the Eastern District of Texas involving allegations of mail fraud, money laundering, and securities fraud. Tilford concealed from investors that he was a convicted felon READ the Indictments