Securities Industry Commentator by Bill Singer Esq

December 19, 2018
When it comes to margin accounts on Wall Street, many customers believe that they have the right to prior notification from their brokerage firm before any positions are liquidated to cover margin calls. In fact, many customers sincerely believe that they will be entitled to a modest delay in order to pick and choose which securities will or will not be sold off to cover the debt. Consequently, it often comes as a shock -- a severe one -- when customers discover that their brokerage firm sold their securities without first contacting them. In fast moving markets with dramatic drops or rises, many brokerage firms won't wait for things to get worse and will seek to mitigate damages by going into a non-compliant account and selling whatever they think makes the most sense at the appointed hour. Few interactions between customers and brokerage firms prompt more lawsuits than those involving sell-outs to satisfy margin calls. Few disputes end more overwhelmingly in the brokerage firms' favor than those involving margin sell-outs -- except in today's featured FINRA arbitration.
Douglas E. Castle, the former owner of financial consulting firm Global Edge Technologies Group LLC, pled guilty in United States District Court for the Southern District of New York to one count of wire fraud in connection with an investment fraud scheme, and he was sentenced to 50 months in prison plus three years of supervised release, a $825,000 forfeiture money judgment, and $849,800 restitution. In 2003, Castle had been sentenced to 34 months in prison plus three years of supervised release for his conviction on an investment fraud scheme that caused investor losses of over $1.2 million.  The DOJ Release asserts in pertinent part that:

From about 2014 through 2017, CASTLE defrauded at least three victims of over $800,000, including by encouraging an aging window ("Victim-1") prematurely to withdraw funds from her tax-advantaged retirement savings account to invest with CASTLE.  CASTLE misrepresented that he would invest Victim-1's funds with a United Kingdom-based investment firm ("Firm-1") that purportedly guaranteed the safety of the invested principal.  CASTLE represented that he previously invested his own money with Firm-1, but that because Firm-1 had high minimum investment thresholds, Victim-1 could invest her funds only by adding her money on top of CASTLE's investment.  For that reason, CASTLE said the investment would be structured as a loan between CASTLE's own financial consulting firm, Global Edge, and Victim-1.  In truth, as CASTLE knew, Firm-1 did not exist, and CASTLE spent Victim-1's money instead on his own personal expenses, cash withdrawals, and eventually, in overseas transfers to individuals in Ghana and elsewhere who perpetrated an advance fee scam on CASTLE himself.  CASTLE also defrauded at least two other victims into investing funds with him under false pretenses. 

On June 8, 2016, CASTLE participated in a voluntary interview with the FBI in which he lied about the source of a particular transfer of Victim-1's money he made to a Ghana bank account.  After this meeting with the FBI, CASTLE continued to lie to victims to raise more money.  After CASTLE came to realize that he would not receive a multimillion-dollar windfall in exchange for transferring his and his victims' money, CASTLE attempted to preclude his victims from reporting the fraud to law enforcement by falsely claiming that he was already working with the FBI and multiple other law enforcement agencies on their behalf to recover their funds.
In a Complaint filed in the United States District Court for the Southern District of Texas, Osondu Victor Igwilo, presently a fugitive, was charged with one count of wire fraud conspiracy, one count of money laundering conspiracy and one count of aggravated identity theft. Igwilo remains a fugitive. Federal prosecutors characterize Igwilo as the alleged ringleader of a criminal network of "catchers," who sent phishing emails falsely offering investment funding on behalf of BB&T Corporation. Allegedly, Igwilo dispatched U.S. citizens whom he had recruited over the internet to pose as "representatives" of BB&T to meet in person with the victims and sign a supposed investment agreement on behalf of BB&T. When traveling to the countries where the victims resided, these representatives used fake documents with fraudulent seals of the U.S. government in order to deceive victims into believing that the investment agreement was sponsored by the U.S. government. Victims wired payments to bank accounts in the United States on the false belief that such payments were necessary to effectuate the investment agreements; however, the holders of the U.S. bank accounts were "money movers" who disposed of the funds as purportedly directed by Igwilo, including by purchasing luxury vehicles from brands such as Mercedes Benz and Range Rover and shipping them to Nigeria. In a separate case involving another ringleader of another similar BB&T investment scam, Uche DIuno was indicted on one count of wire fraud conspiracy, one count of money laundering conspiracy and one count of concealment money laundering, and Diuno was arrested in Paris, France and is awaiting extradition. To date, prosecutors have charged Uju Okigbo, Chioma Okafor, Tochukwu Nwosisi, Marita Ranalan Underwood, John Christian Rutledge, Osa May Martin, and Tiffany Sourjohn, for their roles in these scams -- Okigbo, Okafor, Rutledge and Sourjohn pled guilty and are awaiting sentencing. Underwood remains a fugitive. Martin and Nwosisi are pending trial.

In the Matter of Chris D. Rosenthal, Respondent (SEC Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order; '33 Act Rel. No. 10587; '34 Act Rel. No. 84841; Invest. Adv. Act Rel. No. 5076; Invest. Co. Act Rel. No. 33328;Admin. Proc. File No. 3-18936)
Without admitting or denying the findings in the SEC's Order and in anticipation of the institution of proceedings, Respondent Rosenthal submitted an Offer of Settlement, which the SEC accepted. In addition to being ordered to Cease-and-Desist, and to pay a $29,369,032.45 disgorgement with $4,260,199.67 in interest, and a $20,558,322.70 civil money penalty, Rosenthal was
  • barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization;
  • prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter; and 
  • barred from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock; with the right to apply for reentry after five (5) years to the appropriate self-regulatory organization, or if there is none, to the Commission.
 As set forth under the "Summary" portion of the SEC Order [Ed: footnotes omitted]:

1. These proceedings arise out of fraudulent conduct perpetrated by Chris Rosenthal, a former financial adviser with UBS Financial Services Inc. ("UBS"), in the municipal securities market. Between January 2012 and May 2016 (the relevant period), Rosenthal engaged in a series of practices with certain unregistered brokers who falsely posed as retail investors in order to obtain new issue municipal bonds that they may not otherwise have been able to obtain. As discussed below, these unregistered brokers engaged in a market practice called "flipping." Rosenthal and these unregistered brokers exploited a unique feature of municipal bond offerings - a set of rules known as the priority of orders, which typically give retail and institutional customers higher priority over broker-dealers in the allocation of new issue municipal bonds. 

2. During the relevant period, Rosenthal placed fraudulent retail orders with UBS's syndicate desk on behalf of these unregistered brokers who were his UBS customers, and often falsified zip codes to accompany those orders, despite knowing, or being reckless in not knowing, that these orders did not qualify for retail priority in those offerings. Rosenthal also helped UBS municipal bond traders obtain new issue municipal bonds for UBS's account by using these unregistered brokers to place improper customer orders as opposed to dealer stock orders. Rosenthal placed the UBS traders' indications of interest for new issue bonds with the unregistered brokers, who would then place retail or institutional customer orders to obtain new issue bonds from members of the underwriting group. Once they had obtained the bonds,

3. During the relevant period, Rosenthal also engaged in a "parking" scheme with the unregistered brokers by arranging for them to purchase new issue bonds in offerings distributed by UBS, with the agreement that they would hold the bonds for a short period of time (typically a few days), and then UBS would buy back the bonds for UBS's account at a prearranged price.

4. As a result of the conduct described herein, Rosenthal willfully violated Sections 17(a)(1) and (3) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and MSRB Rules G-11(b), G-11(k), and G-17, and caused violations of Section 15(a)(1) of the Exchange Act. 

In the Matter of Paul A. Margis Respondent  (Order Instituting Cease-And-Desist Proceedings, Making Findings, and Imposing a Cease-And-Desist Order; '34 Act Rel. No. 84849; Acct. and Audit. Enf. Rel. No. 4003; Admin. Proc. File No. 3-18938 / December 18, 2018)  
Without admitting or denying the findings, and in anticipation of the institution of SEC proceedings, Paul A. Margis, the former President and Chief Executive Officer of Panasonic Avionics Corporation, submitted an Offer of Settlement, which the SEC accepted. In addition to ordering Margis to cease-and-desist, the SEC ordered him to pay a $75,000 civil money penalty. As set forth in the "Summary" portion of the SEC Order:

1. Beginning in 2007, Paul A. Margis ("Margis") participated in a plan whereby Panasonic Avionics Corporation ("PAC"), a wholly-owned, U.S. subsidiary of Panasonic Corporation ("Panasonic"), offered a lucrative consulting position to a government official ("Government Official") who assisted PAC in obtaining and retaining business from a state-owned airline ("Government Airline"). While PAC was negotiating two agreements valued at over $700 million with the Government Airline, Margis authorized PAC to offer the Government Official a $200,000 a year post-retirement consulting position. Ultimately, PAC retained the Government Official and paid approximately $875,000 for his position, which required little to no work. Margis and others arranged for the Government Official to be paid through a third-party vendor that provided unrelated services to PAC. Margis also authorized payments of more than $900,000 through the third-party vendor for the retention of two other individuals as consultants, although they provided little to no services. Through his conduct, Margis knowingly circumvented PAC's system of internal accounting controls and knowingly falsified the company's books and records. Margis also caused Panasonic to violate the books and records and internal accounting controls provisions of the federal securities laws. Finally, Margis made false representations to PAC's external auditors that PAC did not have any deficiencies concerning its internal financial controls and books and records, thereby misleading the company's auditors.

In the Matter of Takeshi "Tyrone" Uonaga, Respondent  (Order Instituting Cease-And-Desist Proceedings, Making Findings, and Imposing a Cease-And-Desist Order; '34 Act Rel. No. 84850; Acct. and Audit. Enf. Rel. No. 4004; Admin. Proc. File No. 3-18939 / December 18, 2018) 
Without admitting or denying the findings, and in anticipation of the institution of SEC proceedings, Takeshi "Tyrone" Uonaga, the Chief Financial Officer of Panasonic Avionics Corporation, submitted an Offer of Settlement, which the SEC accepted. In addition to ordering Uonaga to cease-and-desist, the SEC denied him the privilege of appearing or practicing before the SEC as an accountant subject to the right to request reinstatement after five years; and ordered him to pay a $50,000 civil money penalty. As set forth in the "Summary" portion of the SEC Order:

1. This matter concerns accounting, books and records, internal accounting controls and reporting violations involving Panasonic Corporation ("Panasonic") and Takeshi "Tyrone" Uonaga, the Chief Financial Officer of Panasonic's wholly-owned subsidiary, Panasonic Avionics Corporation ("PAC"). In July 2012, PAC improperly recognized approximately $82 million in revenue from a contract with one of its largest customers, a state-owned airline ("Government Airline"), by backdating the contract to indicate that it had been signed prior to the quarter ending June 30, 2012. Although Uonaga was aware that a signed contract was necessary to recognize revenue and that the contract had not been signed prior to the end of the quarter, Uonaga provided a false certification and management representation letter to PAC's external auditor stating that PAC's financial statements for the quarter had been prepared in conformity with prevailing audit standards and that there were no deficiencies concerning PAC's internal accounting controls and books and records. 

2. By engaging in this conduct, Uonaga knowingly circumvented PAC's internal accounting controls concerning revenue recognition and caused the company's books and records to contain false information. Also as a result of his conduct, Uonaga caused Panasonic to violate the books and records, internal accounting controls, and reporting provisions of the securities laws. PAC's financial results - including the improperly recognized revenue - were incorporated into Panasonic's books and records and consolidated financial statements for that quarter and included in financial statements Panasonic filed with the Commission. As a result of Uonaga's actions, Panasonic falsely recorded revenue on its books and records, failed to maintain reasonable internal accounting controls, and filed a materially false report with the Commission.

SEC Solicits Public Comment on Earnings Releases and Quarterly Reports (SEC Release)
The SEC requested comment on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies. READ the SEC Request for Comment. As set forth in the "Summary" portion of the SEC Request:

The Commission is requesting public comment on how we can enhance, or at a minimum maintain, the investor protection attributes of periodic disclosures while reducing administrative and other burdens on reporting companies associated with quarterly reporting. We are specifically requesting public comment on the nature and timing of the disclosures that reporting companies are required to provide in their quarterly reports filed on Form 10-Q, including when the disclosure requirements overlap with disclosures these companies voluntarily provide to the public in the form of an earnings release furnished on Form 8-K. We are interested in exploring ways to promote efficiency in periodic reporting by reducing unnecessary duplication in the information that reporting companies disclose and how such changes could affect capital formation, while enhancing, or at a minimum maintaining, appropriate investor protection. We also are requesting public comment on whether our rules should provide reporting companies, or certain classes of reporting companies, with flexibility as to the frequency of their periodic reporting. In addition, we are seeking comment on how the existing periodic reporting system, earnings releases, and earnings guidance, standing alone or in combination with other factors, may affect corporate decision making and strategic thinking - positively or negatively - including whether these factors foster an inefficient outlook among registrants and market participants by focusing on short-term results, sometimes referred to as "short-termism."