Securities Industry Commentator by Bill Singer Esq

December 5, 2018

Honor. Decency. Grace. Class. Respect. Now the stuff of a bygone era.
The geniuses who designed our current regulatory theories were reacting to a particular reality, one in which transactions required paper instruments to be transferred from person to person. They imposed responsibility on humans because they understood that humans make mistakes, and cheat, lie and steal. Liability, they reasoned, would keep humans careful and honest. I don't disagree with any of that. But it does raise this question, and it is fundamental to blockchain-enabled securities transactions: Who can you blame when no humans are involved?

United States of America, Appellee, v. William T. Walters, Defendant/Appellant and Thomas C. Davis, Defendant (Opinion, United States Court of Appeals for the Second Circuit; 17‐2373(L), 17‐3169(Con), 17‐3425(Con))
After a three-week jury trial, professional sports gambler Defendant William T. Walters was convicted in the United States District Court for the Southern District of New York of securities fraud and related crimes based on his insider trading in shares of Dean Foods, Inc. (ʺDean Foodsʺ) and Darden Restaurants, Inc. (ʺDardenʺ). Walters was sentenced to 60 monthsʹ imprisonment and a $10 million fine, and ordered to forfeit $25,352,490 and pay restitution of $8,890,969.33. As set forth in part in the 2Cir Opinion:

On appeal, Walters argues that the indictment in this case should be dismissed because of what he terms ʺextraordinary government misconductʺ ‐‐ a special agent of the Federal Bureau of Investigation (the ʺFBIʺ) leaked confidential grand jury information about the investigation to reporters from The Wall Street Journal (the ʺJournalʺ) and The New York Times (the ʺTimesʺ), in violation of the grand jury secrecy provision of Federal Rule of Criminal Procedure 6(e) and the Due Process Clause of the Fifth Amendment.  Walters also challenges his conviction on the grounds that (1) the prosecution suborned perjury at trial and (2) there was insufficient evidence to support the counts of conviction related to Darden.  Finally, Walters contends that the district court erred in ordering restitution and forfeiture.  

2Cir AFFIRMED the judgment and Order of Forfeiture; VACATED the Order of Restitution; and REMANDED. In addressing Walters' allegations of government misconduct, 2Cir conceded that the conduct of FBI Special Agent David Chaves:

was highly improper . . .  The leaking of confidential grand jury information to members of the press, whether to satisfy public interest in high profile criminal prosecutions or to generate evidentiary leads, is serious misconduct and, indeed, likely criminal.  

Page 23 of the Opinion

As noted in the Opinion, from April 2013 through June 2014:

FBI Special Agent Chaves had provided information about the investigation to as many as four reporters from the Times and the Journal.  

Page 7of the Opinion

Notwithstanding Chaves misconduct, the Court finds in part:

[A]lthough the misconduct at issue is deeply disturbing and perhaps even criminal, it simply is not commensurate with the conduct in those cases where indictments were dismissed for coercion or violations of bodily integrity.  See United States v. Bout, 731 F.3d 233, 239 (2d Cir. 2013) (affirming denial of motion to dismiss indictment on due process grounds and explaining that defendant ʺhas not alleged anything akin to ʹeither coercion or a violation of [his] personʹʺ (quoting Al Kassar, 660 F.3d at 121)).  The Court certainly does not condone the conduct, but we are hard‐pressed to conclude that the leaking by a government official of confidential information to the press ʺshocks the conscience.ʺ  While there may be circumstances where strategic leaks of grand jury evidence by law enforcement rises to the level of outrageous conduct sufficient to warrant dismissal, those circumstances are not present here.    

In any event, Waltersʹs constitutional claim fails because he has not demonstrated prejudice in this case. . .

Page 36 of the Opinion

After 2Cir oral argument, the Supreme Court issued a decision in Lagos v. United States, 138 S. Ct. 1684 (2018), which addressed the categories of fees recoverable under the Mandatory Victim Restitution Act ("MVRA"), and the Government advised the 2Cir that it consents to a limited remand for reconsideration of the lower court's restitution order per Lagos, and the appellate court agreed. to remand in order to allow a determination whether the fees encompassed in the restitution award are recoverable under the MVRA,
We raise the curtain on a husband and wife headed for divorce. He is a stockbroker. She is a customer. She is not an actual customer. She is not a customer. This shape-shifter-customer-not-a-customer is certainly an estranged wife headed for divorce. The husband's brokerage firm marks up his industry record with the wife's allegations of misconduct. Apparently the divorce court didn't believe her allegations; and apparently, the sole FINRA Arbitrator hearing the husband's expungement request didn't either. They better try this one out of town before hitting Broadway. The audience may get lost in Act I and never catch the drift thereafter.
Former Liberty International Financial services broker Salvatore Colonna pled guilty in the United States District Court for the Southern District of Florida to one count of conspiracy to commit wire fraud, and was sentenced to 78 months in prison and ordered to pay approximately $13 million in restitution. Colonna and co-conspirators obtained over $16 million from investors through materially false and fraudulent pretenses, including (a) that investors' money would be used to buy precious metals; (b) that investors would receive substantial dividends on Liberty investments; and (c) that the defendant would only take a five to fifteen percent commission on investments. Colonna knowingly took commissions on investors' monies as high as forty percent and received about $2.4 million in funds; and only about $3 million was returned to investors.

As set forth in the article:

Wells Fargo says a computer glitch is partly to blame for an error affecting an estimated 500 customers who lost their homes. The giant bank filed papers with the Securities and Exchange Commission last month, revealing it incorrectly denied 870 loan modification requests. About 60 percent of those homeowners went into foreclosure. 

. . .

Wells Fargo said it plans to work with each of those customers to reach a resolution. The bank is also offering no-cost mediation. Meanwhile, non-profit groups and some legislators are pushing for more answers.
An Order to Show Cause was filed in NYS Supreme Court by Tom M. Fini, Esq., to allow Defendants' law firm Catafago Fini LLP to withdraw. The case involves Georgetown University Law Center professor and former FINRA National Adjudicatory Council panelist Christopher Brummer's defamation lawsuit. The Affirmation asserts that:

2. The Defendants Wey and NYG have terminated our representation and with to proceed pro se.  This plus other professional consideration, including financial issues (the details for which are confidential), require that Catafago Fini LLP be permitted to withdraw as counsel.
Brian Thomas Sapp pled guilty in the United States District Court for the Eastern District of Virginia to wire fraud and to aggravated identity theft. Sapp allegedly ran Novus Properties, which purported to have relationships with banks and mortgage lenders who wished to sell distressed lender-owned properties, which ware single-family residences in Virginia, Maryland and the District of Columbia. Sapp obtained loans from investors to purchase the distressed homes and resell 90 days later for promised rates of return as high as 25% because he claimed to have a guaranteed buyer in the form of a construction company standing by. As further explained in the DOJ Release:

To execute the scheme, Sapp stole the identity of the president of the construction company. Sapp, using a cloud-based platform called DocuSign, executed false contracts between Novus and the construction company, using the same IP address within minutes of each other to affix both his own digital signature as seller for Novus and the digital signature of the victim construction company president as buyer. Sapp would send the purchase contracts to victims, along with falsified HUD-1 Settlement Statement summaries, as evidence that he had purchased the properties and already contracted to re-sell them. Altogether, Sapp executed hundreds of false real estate transactions to induce victims to part with money. In truth, Sapp did not close on deals and used victim money to buy a Mercedes, take golf vacations, and to make lulling payments to investors. Sapp targeted close friends and their family who trusted him.

Former USAA Associated Person Awarded Nearly $2 Million In FINRA Defamation Arbitration.
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in June 2017, associated person Claimant Keng asserted defamation arising from disclosures allegedly placed by Respondents in Claimant's Form U5 about his discharge.Claimant sought in excess of $4 million in compensatory damages; in excess of $2 million in punitive damages; plus interest and costs. Further, Claimant sought an order expunging all defamatory information contained on his Central Registration Depository records ("CRD") In the Matter of the FINRA Arbitration Between Leslie Lamar Keng, Claimants, vs. USAA and USAA Financial Advisors, Inc., Respondents (FINRA Arbitration 17-01737 / December 3, 2018). Respondent USAA ("USAA") is not a FINRA member firm or associated person, did not enter an appearance, and the FINRA Arbitration Panel rendered no determination against the company. Respondent USAA Financial Advisors, Inc. generally denied the allegations and asserted various affirmative defenses. The FINRA Arbitration Panel found Respondent USAA Financial Advisors liable and ordered it to pay to Claimant $1,950,000.00 compensatory damages with 5% interest; $7,432.43 in costs. $750.00 FINRA filing fee reimbursement. The Panel recommends the expungement of Claimant's Form U5 "Reason for Termination" and "Termination Explanation" with the reason being changed to "Voluntary" the the explanation left blank.
Former Webster Bank branch manager Stephen Carbonella pled guilty in the United States District Court for the District of Connecticut to one count of embezzlement by a bank officer or employee. Between approximately 2003 and 2017, Carbonella withdrew $879,016.48 from approximately 20 account holders' certificate of deposit accounts without their knowledge or consent, used the embezzled funds for his own purposes, and took steps to conceal his misconduct, including by forging signatures and falsifying documents. Apparnetly, Carbonella was fairly good at the embezzling and forging stuff but not so good with the concealing end of things. Carbonella was sentenced to 21 months in prison plus three years of supervised release (with the first six months of supervised release to be served in home confinement); and ordered to pay full restitution. The Court deferred the start of Carbonella's prison sentence to January 29, 2019 - so, hey, Merry Christmas and Happy New Year!
In response to the SEC intention to institute Cease-and-Desist proceedings against KCAP Financial, Inc., Respondent KCAP submitted an Offer of Settlement that included its admission to the allegations that KCAP violated the reporting, books and records, and internal accounting controls of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; and also had violated Section 19(a) of the Investment Company Act and Rules 19a-1 and 38a-1(a)(1) thereunder. KCAP admitted the findings in, and consented to the entry of, the Commission's cease-and-desist Order. READ the OIP As set forth in part in the SEC Release, Respondent KCAP failed to properly analyze the approximately $35.8 million in distributions it received from its wholly-owned Asset manger Affiliates ("AMAs"). Further, Respondent:

recorded all of the distributions as dividends, despite completing quarterly tax accrual worksheets demonstrating that certain AMAs lacked current or accumulated tax basis earnings and profits from which to pay dividends in certain periods. Approximately $22.3 million (62.3%) of the funds received should not have been recorded as dividends and were actually a return of capital. Additionally, to maintain its status as a Regulated Investment Company for federal income tax purposes, and to avoid paying an excise tax on undistributed income, KCAP distributed approximately 98% of its investment income, including income from AMAs, to its shareholders through quarterly distribution payments. By failing to record the distributions it received from the AMAs in conformity with GAAP, a significant portion of the quarterly distributions KCAP paid to its shareholders were a return of capital and not dividends. The quarterly distribution payments were not accompanied by a contemporaneous written statement disclosing the source of the funds distributed as required by Rule 19a-1 under the Investment Company Act of 1940.
Henry T. Dean, III was convicted in the United States District Court for the Western District of New York on wire fraud, and sentenced to  36 months in prison, and ordered to pay $120, 000 restitution, Dean had advertised on the Internet at least two vacation propertieis in the New York State Finger Lakes Region, As set forth in part in the DOJ Release:

[D]ean accepted payment from customers via wire money transfers or online credit card payments. In reality, the property advertised as the Finger Lakes Guesthouse (FLGH) property was under significant construction, and was not available for rent. A second property, advertised as the Watkins Glen Guesthouse (WGGH), was actually owned by another individual who never gave the defendant permission to rent the property or advertise it for rent.

Dean promised to maintain deposits received from customers in an escrow account, which did not exist. Because of the status of the properties, the defendant later cancelled the reservations for many of the customers and refused to refund payment. Other customers became aware, in advance of their scheduled vacations, that the properties advertised by Dean were not accurately described, and they attempted to cancel their reservations. The defendant however refused to refund their money as well. 

The financial losses to the more than 20 victims totaled approximately $137,272.46.