Securities Industry Commentator by Bill Singer Esq

November 27, 2018

SEC Division of Enforcement Seeks Protective Order for Voicemail Inadvertently Left by SEC Counsel. Respondent Argues That The Voicemail Shows The "consistent and criminal behavior of the SEC, its ALJ and its employees" As Generally Practiced Against Small Businesses and Their Owners. 

In the Matter of Anton & Chia, LLP; Gregory A. Wahl, CPA; Michael Deutchman, CPA; Gerogia Chung, CPA; and Tommy Shek, CPA (Order, SEC, Admin Proc. Rul. Rel. No. 6361; Admin,. Proc. File No. 3-18292)
The SEC's Order Instituting Proceedings alleged that Respondents violated the antifraud and reporting provisions of the federal securities laws and engaged in improper professional conduct related to audit and/or interim review engagements for three microcap company clients. At issue in the above captioned ALJ Order is an SEC Division of Enforcement Motion for a Protective Order. The subject of the pending motion for a protective order is fascinating and likely represents the nightmare scenario of many litigators. Rather than interpret and infer, I have opted to allow Administrative Law Judge Carol Fox Foelak's recitation speak for itself in pertinent part [Ed: footnotes omitted]:

The Motion concerns a voicemail left on the telephone of Wahl's prior attorney, Michael
MacPhail. The Motion states that Division counsel telephoned MacPhail on June 22, 2018, and left a voicemail advising him of the stay. After leaving the message, counsel attempted to end the call by hanging up but did not realize that the call was not actually disconnected, and a discussion, which the Division argues is privileged, with another Division attorney about an unrelated, nonpublic, investigation was recorded on the voicemail. The Division learned of this from a July 26, 2018, letter from Stephen M. Lobbin, Esq., a partner in a different law firm from MacPhail's. The letter identifies Respondents as his clients, argues that the claim against them is meritless, and offers to reach a settlement that would include dismissing the proceeding. The letter contains excerpts, which are redacted from the copy attached to the Motion as Exhibit A, from a transcript of the discussion. The Division obtained the agreement of MacPhail's and Lobbin's law firms not to use or disclose the recording. 

In August 2018, the Division learned that Wahl had provided the recording to Christopher J. Langley, Esq., who represents Wahl in his Chapter 11 bankruptcy proceeding, Gregory Anton Wahl, No. 8:18-bk-12449 (Bankr. C.D. Cal.) (Wahl). The Division requested Langley to direct Wahl to destroy the recording and to refrain from disclosing its contents to others. In response, Langley advised that his firm would not disclose the recording and that he had deleted it from his files. Wahl himself, however, responded by suggesting that he might disclose it to third parties and urged the Division to dismiss this proceeding. The Division then obtained a protective order from the Bankruptcy Court, which was subsequently renewed. Wahl, ECF Nos. 97 (Aug. 29, 2018), 138 (Oct. 2, 2018).

In his opposition, Wahl argues that the undersigned does not have the authority to issue a protective order. While noting that the parties discussed in the voicemail are not relevant to the instant case, he argues that the voicemail shows the "consistent and criminal behavior of the SEC, its ALJ and its employees" as practiced against small businesses and their owners generally. In an August 16, 2018, email to the Division, Wahl had requested that the case be dropped and suggested that, if it is not, he might disclose some damaging information to the news media. Mot. at Ex. 1(G). 

Wahl states that he is not arguing for disclosure of the names of the parties discussed in the voicemail. Opp. at 1, 2. However, it is concluded that it is necessary to go beyond a protective order regarding the names. The undersigned is authorized to issue a protective order regarding the voicemail. See 17 C.F.R. § 201.111(d) (authorizing "Regulating the course of a proceeding and the conduct of the parties and their counsel"). It is clear that the inadvertent disclosure by the Division and subsequent use of the voicemail by Wahl, and by Lobbin on Wahl's behalf, as a Respondent in this proceeding, is "conduct of the parties and their counsel" within the meaning of that rule. The inadvertent disclosure occurred in the process of the Division's communication about a matter in this proceeding with Wahl's then-counsel, and Wahl and an attorney later used the existence of the voicemail in negotiating with the Division to dismiss the proceeding. Wahl also argues that the voicemail is an asset of the bankruptcy estate that should be used for the benefit of creditors. This also suggests that he sees it as a bargaining chip in negotiations to dismiss the proceeding. 

Wahl also argues that restricting the use of the voicemail that he obtained in connection with this proceeding is a violation of his First Amendment rights. However, the Commission has a substantial interest in protecting the integrity of its investigations and proceedings. See Seattle Times Co. v. Rhinehart, 467 U.S. 20, 32 (1984). Wahl remains free to publicize his view that the Commission unfairly targets small businesses while ignoring violations by big business.

ALJ Foelek ordered Wahl and the other Respondents and their attorneys and agents to return/destroy all copies of the voicemail and transcript and to not disclose same or their contents. The ALJ based that ruling on her findings that [Ed: footnotes omitted]:

The voicemail and transcript are privileged and/or attorney work product and are subject to the requested protective order on that basis. Cf. 17 C.F.R. § 201.230(b)(1)(i), (ii) (authorizing the Division to withhold from a respondent material that is privileged or is otherwise attorney work product). The discussion captured in the material at issue is work product because it concerns the merits of an ongoing investigation or litigation. See SafeCard Servs., Inc. v. SEC, 926 F.2d 1197,
1203 (D.C. Cir. 1991). The Division also argues that the material at issue can be protected under the attorney client privilege. However, the extent of attorney client privilege applicable to government attorneys, as opposed to attorneys in a corporate setting, is unsettled. See In re Grand Jury Investigation, 399 F.3d 527, 530-36 (2d Cir. 2005).
Mark Eldon Wilson was found guilty in federal court of mail and wire frauds and sentenced to more than 11 years in federal prison for orchestrating a telemarketing credit card scam that defrauded at least 60,000 victims, many of them elderly, out of more than $18 million. Victims were conned into paying for credit card fraud protection that was nonexistent.
Financial exploitation of seniors is a growing concern as the massive Baby Boomer population and their parents age. Lurid and heart-wrenching tales of elder fraud appear daily in the press, and have prompted new laws and regulations. As we enforce the protections, we come across situations where a senior citizen's right to privacy may need to be lessened or sacrificed  -- is that okay and who gets to make that decision? Similarly, in our rush to protect the vulnerable elderly, we must be vigilant against providing glimpses of confidential financial information to predators, who may be posing as the elderly account-holder, or to seemingly concerned family members, who, in reality, are in desperate need of cash. A recent FINRA AWC doesn't involve the issues noted above but it does provide us with a moment in time for us to stop, pause, and ask some provocative questions about what's going on and whether we need to reconsider (or better consider) the new policies and protocols.
About 10,000 Americans turning 65 each day, and the U.S. Census Bureau projects that the population of Americans over 65 years of age will increase to 83.7 million in 2050, nearly double the estimated population of 43.1 million as of the most recent census. The U.S. Attorney's Office for the District of Columbia is launching an Elder Abuse and Financial Exploitation Initiative to expand its response to criminal and civil violations targeting older adults. More information about the Department of Justice's elder justice efforts can be found on its Elder Justice Website As set forth in part in the DOJ Release: 

In one recent matter, for example, a former personal banker pled guilty to stealing money from an 88-year-old woman by ordering a debit card for his own use and linking it to her account.   He made 17 unauthorized transactions, totaling more than $4,000. In a similar case, another bank manager pled guilty to stealing more than $9,000 from the bank accounts of customers, including senior citizens, by issuing debit cards or changing PIN numbers linked to their bank accounts. In a third case, a woman pled guilty to using a stolen debit card to steal more than $25,000 from the checking and savings account of a 70-year-old man who was in failing health. All three defendants were ordered by the Court to pay full restitution as part of their sentences.
In a Complaint filed in the United States District Court for the Eastern District of New York, the SEC alleged in part that Steven A. Newman and other officers and directors of Xybernaut Corp., had signed registration statements for private investment in public equity transactions ("PIPEs") that were all false and misleading because those registration statements named nominee entities and nominee directors as the control persons and concealed the identify of an investor group that controlled large blocks of Xybernaut's shares. The Court entered a final judgment that permanently enjoins Newman 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, as well as the books and records provisions of Section 13(a) of the Securities Exchange Act and Rules 12b-20, 13a-1, 13a-13, and 13a-14 thereunder. The final judgment also bars Newman from serving as an officer or director of a public company. In addition, the final judgment provides for disgorgement of $429,100, representing Newman's ill-gotten gains, and that the disgorgement shall be deemed satisfied by the criminal restitution paid by Newman in U.S. v. Steven Newman.

In the Matter of Meridian Co., Ltd. (SEC, Order Finding Service by Email; Admin. Proc. Rul. Rel. No. 6360 ; Admin. Proc. File No. 3-18188)
Korea refused to serve the Order Instituting Proceedings ("OIP") on Respondent Meridian Co., Ltd., after the SEC Division of Enforcement sent a delinquency letter to the firm's President and Director. In response to said letter, Meridian replied via it purported "overseas department manager" Steven Kim, who acknowledged receipt of the SEC's letter and provided four methods of subsequent contact: two phone numbers a Skype Username, and an email address. Thereafter, the Division emailed Korean and English transcriptions of the OIP and other documents to the provided email address. The Division asked SEC Administrative Law Judge James Grimes to ratify the email delivery of the
OIP as effective service under Rule of Practice 141(a)(2)(iv)(D), which allows service on persons in foreign countries by any "means not prohibited by international agreement," as ordered by the SEC or presiding ALJ.  The Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters does not prohibit sending judicial documents by email, notwithstanding that Kim may reside in Korea, which objects to Article 10(a) of the Hague Convention permitting service by postal channels. The ALJ found that Meridian was served and had not answered; and the ALJ based that ruling in part on the following [Ed: footnotes omitted]:

In addition to being permitted under the Rules of Practice, email service in these circumstances satisfies due process, which requires "notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Actual notice has been accomplished here, given that receipt of the OIP has been acknowledged by Kim -- who holds himself out as agent for Meridian, who has already posed several questions in defense to the Division, and who has personally responded on Meridian's behalf in response to a prior Commission communication directed to the company president.
Merkourios Alexopoulos and Sabrina Schnekker were indicted in the United States District Court for the Southern District of Florida for conspiracy to commit wire fraud and wire fraud in connection with their alleged operation of , an online retailer purporting to sell salvaged vehicles. The Indictment alleges that about 51 potential buyers paid a so-called $500 entrance fee to bid on the vehicles for sale; and that after a given bid was accepted, Alexopoulos allegedly nstructed the victims to send the purchase monies via wire transfer or money orders to the various bank accounts controlled by him and Schnekker and maintained at City National Bank, Citi Bank, PNC Bank, Wells Fargo, Regions Bank, BB&T, Suntrust Bank, and Chase Bank, among others.  The conspirators alleged converted about $1.2 million in funds to pay their personal expenses and to further the fraudulent scheme. Allegedly, Alexopoulos and Schnekker never delivered, nor did the victims receive, the vehicles ordered through