Securities Industry Commentator by Bill Singer Esq

December 11, 2018

In anticipation of SEC proceedings, the following three Respondents each submitted an Offer of Settlement that the SEC accepted. In the Matter of:

MUFG Securities Americas Inc.
Citadel Securities LLC
Natixis Securities Americas LLC

(Orders Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and Cease-and-Desist Order; '34 Act Rel. Nos. 84758, 84759, and 84760; Admin. Proc. File No. 3-18914). 

The three Orders involve failures by the Respondents to submit to the SEC complete and accurate data in response to electronic blue sheets ("EBS") requests. The submission of complete and accurate EBS data is critical to the SEC's ability to discharge its enforcement and regulatory mandates; and can ultimately undermine the integrity of its investigations and examinations, and the ability to protect investors. Each Respondent was Censured and ordered to Cease and Desist to pay the civil money penalties noted below. In determining to accept the Offers of Settlement, the SEC asserts that it had considered remedial acts undertaken by each Respondent and the cooperation afforded Staff. 
Bill Singer's Comment: Given the critical importance of the EBS process, it's a bit surprising that the SEC gave meaningful weight to Respondents for their "remedial acts" and cooperation. I wonder if pennystock firms, crypto hustlers, and binary options scammers are so routinely given consideration for their purported remedial acts and whatever breakfast buffet is set out for SEC Staff. 
Much of what the SEC characterizes in the three EBS settlements as "remedial" is nothing more than the retention of outside consultants to engage in conduct that should have been handled in-house by compliance and operations staff. Why did these Respondents even need to seek outside help? Likely because they had failed to allocate sufficient funding and resources to bolster their in-house compliance and operations staff in order to avoid the very misconduct cited. Moreover, the lack of in-house staffing and resources likely forced the firms to seek outside, third-party assistance. And that is the stuff for which the SEC provides concessions when calculating sanctions?
The larger question is whether the resort to outside consultants presents a larger, more cynical problem; namely, Wall Street's intentional under-staffing of its compliance and operations staff with the back-up plan of engaging in "remediation," only if and when a regulator may discovers any non-compliance. If no such discovery is made by a regulator, the gambit was well played. If a regulator does discover any misconduct, well, you know, let's hire an outside consultant, wring our hands, promise to be more diligent, play nice with the regulators, and just pay the fine. It may all work out as less costly than hiring the additional in-house bodies in the first place. 
With the anticipated implementation of the so-called Consolidated Audit Trail ("CAT"), the initial data upon which CAT will be inaugurated is essentially the existing data archived at the very same firms that have repeatedly poured garbage into the EBS pipeline, failed to timely detect the errors in their production, and only reluctantly sought outside consultants to demonstrate whatever remediation will be deemed the minimal necessary to placate the regulators. The proposed foundation for CAT will be poured from very dubious concrete -- as the ongoing failures of the EBS system warn. Let us hope that these three EBS settlements are merely the opening salvo in a more substantive and meaningful effort to force Wall Street to implement more responsible EBS processing protocols and to allocate the funds and staff necessary to get the job done. 
As set forth in the respective "Summary" portion of each Order:

NATIXIS: $1,250,000

From December 2012 to February 2017, Natixis submitted 1,237 EBS to the Commission, all of which contained inaccurate trade execution times, resulting in incorrect reporting of trade execution time data for approximately 148,763 trades. As a result, Natixis violated the recordkeeping and reporting requirements of Section 17(a)(1) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder. . .

CITADEL: $3,500,000

From November 2012 to August 2016, Citadel submitted 2,774 EBS to the Commission, all of which contained deficient information, resulting in incorrect reporting of trade execution time data for approximately 80 million trades. As a result, Citadel violated the recordkeeping and reporting requirements of Section 17(a)(1) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder. . .

MUFG ("MUSA"): $1,400,000

From May 22, 2015 to March 30, 2018 (the "relevant period"), MUSA submitted 860 EBS to the Commission, containing 687,176 transactions, nearly all of which contained missing or deficient data. As a result, MUSA violated the recordkeeping and reporting requirements of Section 17(a)(1) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder. . .
Former licensed financial advisor and broker-dealer affiliate Steven Pagartanis pled guilty in the United States District Court for the Eastern District of New York to conspiracy to commit mail and wire fraud for orchestrating a Ponzi scheme from January 2000 to March 2018, Pagartanis solicited elderly victims to invest in real estate-related investments and promised that their principal would be secure and would earn a fixed return, which he typically set at between 4.5% and 8% annually. Victims were instructed to make checks payable to an entity secretly controlled by Pagartanis, and he then utilized a network of bank accounts to launder the stolen funds, which he used to pay personal expenses, buy luxury items and make the guaranteed "interest" or "dividend" payments to other victims. Victims invested over $13 million and sustained actual losses of over $9 million, and many lost substantial portions of their life savings as a result of the scheme.
Onijah Crighton pled guilty to conspiracy to commit mail and wire fraud in the United States District Court for the District of Maryland and was sentenced to 57 months in prison plus three years of supervised release and ordered to pay $396,157. Consider the horrific nature of Crighton's fraud as set forth in part in the DOJ Release:

[B]eginning in April 2013, Crighton and a co-conspirator began contacting Victim 1, an elderly man living in Virginia who suffered from Parkinson's disease. Crighton falsely told Victim 1 that he was the second-place winner of the $10 million "grand prize draw" that Publishers Clearing House and the Better Business Bureau sponsored. Crighton fraudulently represented that the second-place prize was $2.5 million. Over the following months, Crighton and his co-conspirator contacted Victim 1 hundreds of times, convincing Victim 1 to send the conspirators 44 payments totaling approximately $112,000. Victim 1 made the payments through Western Union, by adding money to Green Dot cards controlled by Crighton and a co-conspirator, or by sending cash in the mail. 

During the course of the conspiracy, Crighton e-mailed a "leads list provider" to purchase a list of names and personal identification information that Crighton could use to mass-market the lottery scam to elderly individuals across the country. Crighton and other members of the conspiracy successfully defrauded over 100 elderly victims of at least $396,157. 

Crighton admitted that, beginning in 2012, he also used the personal identifying information of elderly individuals to fraudulently enroll debit cards in their names without their knowledge or consent. To conceal his involvement in the scheme, Crighton listed a number of different e-mail addresses on the debit card applications, and listed street addresses on the applications that belonged to others involved in the scheme. In this manner, Crighton enrolled or caused to be enrolled hundreds of debit cards that were applied for using the stolen identities of at least 10 elderly individuals.
Eugene Marotta pled guilty to conspiracy to commit mail fraud in the United States District Court for the Southern District of Florida and was sentenced to 46 months in prison plus two years of supervised release, and ordered to pay restitution. Marotta participated in a mail fraud scheme that falsely promised a $350,000 prize via mailings purportedly sent from a business called Art Masters LLC, d/b/a Palm Beach Liquidation Gallery, which was a shell company registered by Marotta and for which he was responsible for receiving over $1 million in payments from victims, who were targeted as elderly and vulnerable, and handling other administrative responsibilities for the scheme.  Marotta admitted that the victims had in fact won no prizes and never received anything for their submitted money. READ the Plea Agreement
In a Complaint filed in the Northern District of Ohio, the SEC charged Jared Jeffrey Davis and various shell companies controlled by him and his business partner, Dale Burke Pinchot, with having engaged in the fraudulent offer and sale of unregistered binary option securities under the brand names OptionMint, OptionKing, Option Queen, and OptionPrince. Allegedly, the Defendants effectively took the opposing position on cited trades and, accordingly, made money when customers entered into losing binary options trades. Further, Davis allegedly failed to inform investors that he frequently manipulated the options trading software to increase the odds of investor losses. Specifically, the Complaint charged Davis with 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, the registration provisions of Sections 5(a) and 5(c) of the Securities Act, and the broker-dealer registration provisions of Section 15(a)(1) of the Exchange Act and charges Pinchot with violating antifraud provision Section 17(a)(2) of the Securities Act. Without admitting or denying the SEC's allegations, Davis and Pinchot consented to the entry of judgments that permanently enjoin them from violating the above-mentioned provisions of the federal securities laws, and from participating in the issuance, purchase, offer, sale, or promotion of any binary option security. The Court will determine disgorgement and civil penalties at a later date. READ the Complaint
There may come a time if you are a FINRA member firm or associated person when the self-regulatory-organization comes a knockin' and asks you some questions.  In addition to that chit chat, FINRA may also ask that you provide documents. A tad less politely, FINRA may tell you to stand aside and make way as its Staff enters your premises to inspect your records and make copies of various materials. What gives FINRA the right to demand answers to its questions and to barge into your professional and personal lives? Generally, it all starts with FINRA Rule 8210 and may end with FINRA Rule 9552.

In a criminal Complaint filed in the United States District Court for the District of New Jersey, Pavandeep Bakhshi is charged by complaint with one count each of conspiracy to commit securities fraud and securities fraud.  READ the Complaint A separate criminal Complaint was filed against Parmjt Parmar a/k/a "Paul Parmar", Sotirios Zaharis a/k/a "Sam Zaharis,"  and Ravi Chivukula (presently fugitives) for their alleged roles in the scheme.  Separately, the U.S. Securities and Exchange Commission filed a civil complaint on May 16 against Parmar, Zaharis and Chivukula. It is alleged in part that from May 2015 through September 2017, that conspirators Bakhshi, Parmar, Zaharis, and Chivukula allegedly:

orchestrated an elaborate scheme to defraud a private investment firm and others out of hundreds of millions of dollars in connection with the funding of a transaction to take private a healthcare services company (Company A) traded publicly on the London Stock Exchange's Alternative Investment Market. To fund the transaction, the private investment firm put up $82 million and a consortium of financial institutions put up another $130 million.  The scheme allegedly utilized fraudulent methods to grossly inflate the value of Company A and trick others into believing that Company A was worth substantially more than its actual value.

The complaint alleges that to present a positive picture of the company's financial wealth, the conspirators allegedly sought to raise tens of millions of dollars in the public markets, purportedly to fund Company A's acquisitions of various operating subsidiaries.  In reality, the complaint alleges, a number of those entities either did not exist or had only a fraction of the operating income attributed to them. The conspirators allegedly funneled the proceeds of these secondary offerings through bank accounts they controlled and used the money for a variety of purposes that had nothing to do with acquiring the purported targets. The money from one of the offerings was instead used to make it appear as if the operating subsidiary had substantial customer revenue when, in fact, the funds were simply transfers of the money that had been raised in the secondary offering, the complaint alleges.  The conspirators allegedly went to great lengths to make it appear that these funds were revenue, concocting phony customers and altering bank statements to make it appear as if the funds were coming from customers.
Litigation Release No. 24371 / December 10, 2018
In a Complaint filed in the United States District Court for the Southern District of New York the SEC charged Rajeshwar Gannamaneni, his wife Deepthi Gandra,  and his father Linga Rao Gannamaneni with violating Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder, and Rajeshwar Gannamaneni and Linga Gannamaneni with violating Section 14(e) of the Securities and Exchange Act of 1934 and Rule 14e-3 thereunder. The Complaint alleges that The SEC's complaint alleges that Rajeshwar Gannamaneni provided nonpublic information about impending mergers, acquisitions, and tender offers to his wife and his father  (who lives in India). Also, Rajeshwar Gannamaneni allegedly traded in an account that he controlled, that was opened in the name of a family member, who was living in the U.S. at the time.  According to the allegations in the SEC's complaint, the three collectively reaped approximately $600,000 in profits by trading while in possession of inside information in advance of at least 40 corporate events.Separate charges were filed against an IT contractor and two others he illegally tipped with confidential client information he stole while working in the Singapore branch of an investment bank.  The SEC obtained a court-ordered freeze of assets in three U.S. brokerage accounts and one U.S. bank account connected to the alleged trading.  READ the Complaint
In an Indictment filed in the United States District Court for the Central District of California, Defendants Mikayel Hovhannisyan, Mikayel Hmayakyan, 41,Vahan Aloyan, and Gayane Hakobyan were charged with engaging in a "bust-out" scheme in which theyfraudulently charged nearly $2 million in less than a year to credit cards often opened with "synthetic identities." All four defendants are charged with one count of conspiracy to commit bank fraud and 10 counts of bank fraud. Hmayakyan is charged separately with six additional counts of bank fraud. Hmayakyan and Aloyan also are charged with possessing "unauthorized access devices," which included credit cards, debit cards, bank account information and Social Security numbers belonging to other people. Hmayakyan is also charged with two counts of aggravated identity theft. As set forth in part in the 
DOJ Release:

The defendants allegedly conspired to carry out a wide-ranging credit card fraud scheme, using the fraudulently obtained cards to purchase hundreds of thousands of dollars' worth of liquor and luxury watches. The 22-count indictment alleges a bust-out scheme in which the defendants obtained credit cards - sometimes under their real names, but often with synthetic identities created with a combination of real and fictitious information - that were run up to the credit limit. Members of the scheme then allegedly "paid down" by submitting payments from accounts with insufficient funds or through fake accounts to restore the credit line, which allowed them to make additional purchases. 

All four defendants allegedly used the fraudulently-obtained credit cards to purchase hundreds of thousands of dollars in alcoholic beverages on behalf of the now-closed Liquor Spot in Glendale, where Aloyan was a manager.

The indictment also charges Hmayakyan with bank fraud for using fraudulent credit cards in the names of various aliases  -- including "Liam Sarcozzy" -- to purchase plots at Forest Lawn Cemetery in Glendale, which he then sold at a profit. Hmayakyan is also accused of conspiring with others to fraudulently apply for loans under an alias to obtain a Kia Optima and in a real person's name for a 2016 Lexus GX460. The indictment alleges that Hmayakyan never intended to pay any credit card bills nor made any payments on the loans. 

During the execution of a search warrant in 2016, law enforcement seized more than 37,000 bottles of alcoholic beverages, worth approximately $300,000, from the Liquor Spot. They also seized nearly $13,000 in U.S. currency from the store, as well as nearly $13,000 and 37 watches and other jewelry items from Aloyan's residence.
The SEC Orders allege that Agria Corporation sold its Chinese operating company in return for stock and land use rights to 13,500 acres of undeveloped land in a remote, mountainous area of China's Shanxi Province. The Order found that Agria overstated the value of the stock it received by $17 million and assigned a value of nearly $60 million to the effectively worthless land use rights. A separate Order found that in March 2013, Agria's Executive Chariman Lai Guanglin a/k/a Alan Lai used nominee brokerage accounts to engage in manipulative trading in Agria's American Depository Shares in order to inflate their price above $1 and prevent the securities from being delisted by the New York Stock Exchange. Without admitting or denying the findings, Agria agreed to pay a $3 million penalty and cooperate with the Commission's staff in future investigations; and Lai agreed to pay a $400,000 penalty and be barred for a period of five years from acting as an officer or director of any public company.  

In the Matter of Lai Guanglin (Alan Lai), Respondent (Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and Cease-and-Desist Order; '34 Act Rel. No. 84764; Admin. Proc. File No. 3-18918).

In the Matter of Agria Corporation, Respondent (Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and Cease-and-Desist Order; '34 Act Rel. No. 84763; Acct. Aud. Enf. Rel. No. 3996; Admin. Proc. File No. 3-18917).
Emily Moerdermo Fu pled guilty to mail fraud in the United States District Court for the Northern District of Georgia in connection with charges of having defrauded her clients out of $22 million. Fu operated Capital Management, which offered a wide range of commercial real estate services, and from 2004 to 2017, Fu established several investment companies for a group of clients for the supposed purchase of commercial real estate; however, in November 2017, the investors discovered irregularities in the books of some of the investment companies and confronted Fu, who admitted to having embezzled around $930,000. In fact, Fu had never purchased several commercial real estate properties, each valued in the millions of dollars,  although she had represented to her victims that she had completed the closings and was managing the properties. Fu was sentenced to seven years and three months in prison plus three years of supervised release, and ordered to pay $22,043,640.67 restitution.

In the Matter of the FINRA Arbitration Between Raymond, James & Associates, Inc., Claimant, vs. Stephen A. Murray, Respondent (FINRA Arbitration  18-02556, December 7, 2018). In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2018, FINRA member firm Claimant Raymond, James & Associates, Inc. asserted breach of a 2011 and 2015 loans both of which Respondent Murray allegedly failed to repay upon his termination of employment. Claimant sought :
  • $142,389.24 in compensatory damages from breach of contract plus 10% interest; 
  • $149,900.08 for indemnification of settlement amounts plus attorneys' fees and costs allegedly paid by Claimant in connection with three arbitration claims involving Respondent's customers; and 
  • attorneys' fees and costs in connection with the instant FINRA arbitration.
Respondent Stephen A. Murray did not appear. The sole FINRA Arbitrator found Respondent Murray liable and ordered him to pay to Claimant $3,389.51 plus 10% interest on the 2011 Note; $138,999.73 plus interest on the 2015 Note; and $149,900.08 plus 5% interest in indemnification. Additionally, the Arbitrator awarded $7,000.00 in attorneys' fees and $1,000 in filing fees.