Securities Industry Commentator by Bill Singer Esq

December 14, 2018

In the Matter of Saving2Retire, LLC, and Marian P. Young (SEC Order Regarding Subpoena to Produce Documents; Admin. Proc. Rul. Rel. No. 6400; Admin. Proc. File No. 3-17352)
You'd sort of have to practice regulatory law for a living, like I do, and, on top of that, you'd have to literally read every posted bit of crap that comes out of Wall Street's regulators, like I do (sigh), in order to appreciate the Order issued by SEC Chief Administrative Law Judge Brenda P. Murray. We got a pro se respondent, who has understandably fallen afoul of the nuances of administrative law procedure. That respondent incorrectly filed paperwork, which normally sets the stage for a regulator or an ALJ to get all huffy and start lecturing the poor bastard about how things are supposed to be done and either get it back to me in proper order or I'll hold you in default. Instead, we have a seasoned SEC ALJ, the SEC's "Chief" ALJ at that, who seems to have a sense of time and place and simply responds to the non-compliant paperwork with intelligence. As set forth in pertinent part in the SEC Order:

On December 10, 2018, Respondent Marian P. Young, pro se, submitted a subpoena request for documents. Although the subpoena is directed to me and the Secretary of the Securities and Exchange Commission, it is clear from the nature of the documents requested, the requested place of production of the documents, and a prior conversation at a prehearing conference, that Young intended to direct the subpoena to the Division of Enforcement. I have signed the subpoena with that understanding. If this was not Young's intent, she should notify my office and the Division as soon as possible.

The Division should make a good faith effort to work with Young in responding to the subpoena. Nevertheless, if the Division wishes to file a motion to quash or modify the subpoena, it must do so by December 19, 2018, given the discovery deadline and the proximity of the holidays. See 17 C.F.R. §§ 201.161(a), .232(e)(1). . .
On stage is a lonely registered representative who doesn't appear to have done anything wrong. It's pretty much a Compliance Department screw-up and he's the victim. Our victimized rep likely figured that his firm would own up to its error and clear his industry record of some undeserved negative comments. Oddly, the firm sort of agrees that it was all a mistake -- a misunderstanding. In part, the problem was caused by a profanity score. Yeah, a profanity score! Then there's the mistake about the mistaken name and the mistaken characterization of a customer complaint. Unfortunately, from that point, the firm seems to have done little more than shrug. Come down off your Compliance throne, he says. Somebody must change. You are the reason I've been waiting so long. You hold the key. No matter how frequently the rep sings that refrain, no one budges and nothing gets done. Eventually, he gets angry and says, I just ain't got the time. I'm wasted. I can't find my way home or to Compliance or to FINRA. As the chorus swells, we find ourselves at a FINRA expungement arbitration.
READ the Information 

SEC Charges Former New York Investment Advisor and Daughter With Conducting a Ponzi Scheme (SEC Release)
READ the SEC Complaint

The former President of registered investment adviser/financial planning firm Executive Compensation Planners, Inc. ("ECP") Hector May pled guilty in the United States District Court for the Southern District of New York to one count of conspiracy to commit wire fraud and one count of investment adviser fraud.  As set forth in part in the DOJ Release:

[M]AY advised the Victims, among other things, that they should use money from those accounts to have ECP, rather than Broker Dealer-1, purchase bonds on their behalf.  He further represented that by purchasing bonds through ECP directly, the Victims could avoid transaction fees.  Because MAY lacked the authority to withdraw money directly from the Victims' accounts with Broker Dealer-1, he persuaded the Victims to withdraw the money themselves and to forward that money to an ECP "custodial" account (the "ECP Custodial Account"), so that he could use the money to purchase bonds on their behalf. 

With the assistance of his co-conspirator ("CC-1"), MAY guided the Victims, first, to withdraw their money from their Broker Dealer-1 accounts, and second, to send that money to the ECP Custodial Account by wire transfer or check.  At times, MAY falsely represented that the funds being withdrawn from Victims' Broker Dealer-1 accounts were the proceeds of prior bond purchases MAY had made.  After the Victims sent their money to the ECP Custodial Account, MAY did not use the money to purchase bonds.  Instead, MAY and CC-1 spent the money on business expenses, personal expenses, and to make payments to certain Victims in order to perpetuate the scheme and conceal the fraud. 

Specifically, in some cases, MAY used Victims' funds to make purported bond interest payments to other Victims.  In other cases, MAY used Victims' funds to make payments to other Victims who wished to withdraw funds from their accounts.  MAY and CC-1 also created phony "consolidated" account statements that they issued through ECP and sent to the Victims.  These "consolidated" account statements purported to reflect the Victims' total portfolio balances and included the names of bonds MAY falsely represented that he purchased for the Victims and the amounts of interest the Victims were supposedly earning on the bonds.  In order to create the phony consolidated account statements, MAY provided CC-1 with bond names and false interest earnings, and CC-1 created ECP computerized account statements and had them distributed to the Victims.

To keep track of the money that the co-conspirators were taking from the Victims, CC-1 processed the Victims' payments for the purported bonds, entered them in a computerized accounting program, and, through that program, kept track of how MAY and CC-1 received and spent the Victims' stolen money.  In this way, from the late 1990's through March 9, 2018, MAY and CC-1 induced Victims to forward them more than $11,400,000.

In the parallel SEC Complaint, Hector May and his daughter, Vania Bell (also ECP's former Controller and Senior Compliance Administraotr) were charged with  misappropriated over $7.9 million in a Ponzi scheme. The Complaint alleg4ed that with Bell's help, May lied to investors by promising to invest their money in bonds when they actually used the money to pay for personal and business expenses, as well as extravagant items, such as jewelry, furs, vacations, and a limousine driver. To conceal the fraudulent scheme, they sent bogus account statements to clients referencing the bonds that had never been purchased.  May has agreed to the entry of a partial judgment against him in which he consents to injunctive relief with monetary and other relief to be decided in the future.
Mark E. Fisher and Joseph F. Capuozzo pled guilty in the United States District Court for the  Southern District of Florida to one count of conspiracy to commit securities fraud in connection with a $1 million pump and dump securities fraud scheme involving the shares of beauty products supply company Valentine Beauty Inc.("VLBI"), which marketed its products on television infomercials and elsewhere.  Previously, Eddy Ubaldo Marin and Shane R. Spierdowis, were charged with securities fraud offenses in connection with the same VLBI scheme and both pled guilty and were sentenced, respectively, to 210 months in prison and 5 probation. Moreover, the SEC filed parallel civil enforcement actions against Fisher, Capuozzo, Marin and Spierdowis. As set forth in part in the DOJ Release:

[I]n approximately November 2013, Marin and other accomplices arranged to secretly obtain a controlling interest in VLBI stock by issuing shares to certain third parties, including Green Tree Capital, Inc., a company controlled by Marin and Capuozzo, based in Ft. Lauderdale, Florida. 

Fisher, formerly a practicing lawyer licensed to practice in Florida and New York, was a securities lawyer based in Boca Raton who allegedly became involved with the manipulation of VLBI shares at the invitation of Marin.  Fisher allegedly executed various false and fraudulent documents to facilitate the scheme, including certain legal opinion letters that falsely indicated that shares controlled by Marin and other conspirators, were not in fact owned or controlled by "affiliates" of the companies.  Such letters allowed shares of VLBI to be falsely classified as "free trading" and thus sold to the public, when in reality that were restricted.  In March and April, 2014, Marin, Fisher, Capuozzo, Spierdowis, and other conspirators arranged to transfer a substantial number of shares into brokerage accounts in the name of fictitious entities, but in reality controlled by the conspirators.  In addition, according to court documents, Fisher, Capuozzo and other conspirators knew that Marin was a convicted felon and attempted to conceal his role in the scheme by keeping his name off of corporate documents.   To facilitate the concealment of Marin's role, Capuozzo became the listed owner of an entity that held Marin's VLBI shares and traded the shares at the direction of Marin.  Capuozzo also served as the nominee Chief Executive Officer of VLBI, while acting at the direction of Marin and the conspirators.

Thereafter, beginning in approximately May 2014 and continuing through in or around September 2014, Marin, Fisher, Capuozzo, Spierdowis, and others arranged for VLBI to issue rosy press releases, while also using internet marketing and penny stock newsletters to tout VLBI stock.  These efforts were intended to artificially increase the trading volume and price of VLBI shares, so that Marin, Fisher, Capuozzo, Spierdowis and their co-conspirators could secretly sell shares at a profit.   During the conspiracy period, the conspirators sold approximately $1 million worth of VLBI shares to the investing public.

In approximately June 2014, Marin began a term of federal imprisonment due to a different federal offense, and was ultimately incarcerated at FCI Miami.  While Marin was at FCI Miami, Fisher, Capuozzo, Spierdowis, and others continued the stock manipulation scheme, while keeping a larger portion of the trading profits for themselves.  The conspirators continued to sell shares of VLBI, while continuing the same pattern of issuing press releases and engaging in coordinated sales of shares, until approximately April 26, 2016, when trading in VLBI shares was suspended by the U.S. Securities and Exchange Commission (SEC). . .
In 2011, in the United States District Court for the Northern District of Illinois, the SEC had charged Gregory E. Webb, the Chairman and CEO of InfrAegis, Inc., and InfrAegis, with conducting a fraudulent, unregistered offering that raised over $20 million from at least 395 investors nationwide.The SEC Complaint alleged that WEbb and InfrAegis had made false and misleading claims about the company's commercial success and the existence of contracts for the installation of InfrAegis' products. In 2014, Webb was indicted on 11-counts in a parallel crimninal proceeding, and after trial in 2016, he was found guilty on nine counts and sentenced to 9 years' imprisonment and ordered Webb to pay $9 million in restitution. The Court entered final judgment on consent on December 11, 2018, to the SEC's Complaint, thereby enjoining Webb from violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and ordering him to pay disgorgement of $550,057 with prejudgment interest of $132,352, but deeming payment of these amounts satisfied by a $9 million restitution order against Webb in the related criminal action. The SEC's litigation against InfrAegis continues. 

Remarks to the SEC Investor Advisory Committee (Speech by SEC Chairman Jay Clayton)
The SEC Chair's brief opening remarks about:

(1) disclosures on sustainability and environmental, social, and governance (ESG) topics, and (2) unpaid arbitration awards. These are issues that I have been thinking about as I focus on ensuring that the Commission carries out its mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. . .

Remarks at the SEC's Investor Advisory Committee Meeting (Speech by SEC Commissioner Kara Stein)
As far as I'm concerned it's about goddamn time that the SEC tackled this issue and forced FINRA to back-up its public customer arbitration awards with a guarantee of payment for compensatory damages. After all, if FINRA member firms are forcing their customers and registered men and women to submit to mandatory arbitration, then the only fair recourse is for FINRA to guarantee payment of awards duly rendered. As Commissioner Stein notes [Ed: footnotes omitted]:

[W]hen investors believe they have been harmed by a broker-dealer, they generally must go through the FINRA arbitration process to make their claim. Unfortunately, even if a retail customer wins their arbitration, they may not get their damages award. In 2016, 27% of cases where damages were awarded remained unpaid. In dollar terms, investors were unable to recover $14 million that had been awarded to them in the arbitration process. Fortunately, the dollar amount of awards going unpaid is decreasing. For instance, in 2013 there was $75 million in unpaid awards, in 2014 there was $23 million, and in 2015 there was $24 million. This is good news, but we still have a ways to go. I am very interested in hearing everyone's best thoughts today on how to continue to improve this process. It is of vital importance to both retail investors and to the broker-dealers who have not broken the rules.

Bill Singer's Comment: I have long advocated for the creation by FINRA of an Anti-Fraud Fund by which public customer's arbitration awards would be guaranteed. As I noted, in part, in "Bill Singer Submits Rare FINRA Comment" ( Blog,  June 1, 2017)

As part of reimagining the SRO into a more expansive PSRO . . . FINRA should establish an Anti-Fraud Fund whereby all defrauded public customers would obtain restitution in the event that member firms or associated persons fail to timely honor any awards for compensatory damages, costs, and fees. Finally, I would abolish mandatory arbitration for customers and associated persons.

Common Ownership: The Investor Protection Challenge of the 21st Century (SEC Commissioner Robert J. Jackson Testimony Before the Federal Trade Commission Hearing on Competition and Consumer Protection)
A thoughtful and compelling discussion about what Commissioner Jackson characterizes as "the increasingly concentrated ownership profiles of America's public companies.". Among Commissioner Jackson's trenchant observations:

[W]hether concentrated common ownership has led to weakened competition can and should be debated. What is not debatable, however, is that we are at a pivotal moment in financial history when corporate elections are increasingly decided by a handful of powerful index fund managers. That concentration of power is an urgent corporate governance challenge of our time.

Unfortunately, the SEC's current rules leave investors largely in the dark about how these institutions are voting the shares that underlie American families' savings. That's why I'm here today to call on my colleagues at the SEC to pursue rules that will take advantage of existing data on institutional voting to empower investors with better information as to how their shares are voted in the elections that will determine the future of American capitalism.