Securities Industry Commentator by Bill Singer Esq

January 9, 2019

One of my all-time favorite AWC fact patterns!!! Any other bidders?
In the Matter of Jaime E. Carvallo, Respondent (FINRA AWC 2017054419802, January 8, 2019).
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Jaime E. Carvallo submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Jaime E. Carvallo a Bar in all capacities from associating with any FINRA member. Carvallo entered the industry in 2001 and from 2010 through May 2017, he was  registered with FINRA member firm Park Sutton Advisors, LLC, where he served as President and Chief Compliance Officer until being permitted to resign via a Form U5 that is characterized in the AWC as disclosing that Carvallo had been:

charged with two counts of forgery, two counts of identity theft, and two counts of falsifying business records, that Carvallo had pled not guilty, and that the "d]isposition[s] [were] subject to negotiation with District Attorney of New York County." The Form U5 also disclosed that the Firm had initiated an internal review of Carvallo's conduct on August 16, 2016 in connection with a grand jury subpoena it had received from the New York County District Attorney's Office. On January 25, 2018, the Firm filed an amended Form U5 to reflect a date of disposition of December 20, 2017 for the criminal matter. The Firm also disclosed that, "[a]fter meeting certain conditions set by the Court, Mr. Carvallo's case was closed with entry of a plea of guilty to a violation of 'disorderly conduct.'" 

Disorderly conduct? Really -- that's how this all panned out? Look . . . after some four decades on Wall Street, I've seen some weird regulatory crap but this case may well go into my Hall of Fame (or Shame). Rather than lawyer-splain the fact pattern to you, let me cite the AWC in pertient part:

By 2009, several auction houses had prohibited Carvallo from participating in their auctions, because on multiple occasions, he had bid for and won items at auction and then failed to pay for and collect the items. From approximately November 2011 through June 2015 (the "Relevant Period"), Carvallo had access to the Firm's confidential personnel records in his role as the Firm's President and Chief Compliance Officer ("CCO"). In order to circumvent the auction houses' bans and continue to bid in auctions as he desired, Carvallo impersonated ten current and former Firm employees (the "employees") during the Relevant Period. 

Carvallo obtained the employees' personal information from the Firm's personnel files to create approximately 20 false online bidding accounts at three auction houses (collectively, the "Auction Houses") that were purportedly opened for these employees and to which these employees did not consent. To create the false accounts, Carvallo input the employees' names into the Auction Houses' online account opening systems to create the false impression that these individuals were opening the accounts. In addition, Carvallo invented fictional email addresses, physical addresses, and dates of birth for each employee and submitted that false information electronically to the Auction Houses in order to open the false accounts. 

In or about March 2012, Carvallo also falsified his own telephone bill to create a fictitious proof of address for one of the false accounts. He removed his own name from the bill, inserted the name of one of the employees and changed the address on the bill to match the fictitious address associated with the false account. Carvallo submitted that falsified bill to Auction House A in response to its request for proof of address for the false account. 

After opening these false accounts, Carvallo used them to participate in 26 online or telephone auctions during the Relevant Period. To do so, Carvallo registered each account with the relevant Auction House conducting the auction. As part of the registration process, the Auction Houses asked account-holders for proof of identification. In response to those requests, Carvallo obtained copies of the employees' driver's licenses and passports from Firm personnel files, and provided them to the Auction Houses via email from fictitious email accounts he created using the employees' names, without authorization from the employees. Carvallo then used the false accounts to bid on items during auctions that the Auction Houses conducted online via the Internet or via telephone. 

Carvallo participated in the auctions during Firm business hours, at the Firm's office, using the Firm's computer equipment. 

By bidding on these items, Carvallo purported to bind the employees to the Auction Houses' conditions of sale, which governed their respective auctions. Pursuant to these conditions of sale, a successful bid in an auction created a sales contract between the seller and successful bidder, and successful bidders could be held legally responsible for the winning bid price of the item won. 

On 26 occasions, Carvallo used the false accounts he created to win bids at the Auction Houses for items totaling over $500,000 in value. In all but one of these instances, Carvallo did not pay for or collect these items. 

On one occasion in June 2015, Carvallo won an online auction at Auction House B using a false account under the name of Employee B - a then-current Firm employee. Carvallo forged Employee B's signature on Auction House B's documents relating to the items won at the auction. Carvallo also forged Employee B's initials on a form authorizing Auction House B to collect tax on the items. In addition, Carvallo submitted a credit card authorization form containing his own credit card number, authorizing payment of $9,526.56, which included the tax. Carvallo used his own credit card to pay for the items. However, he forged Employee B's name on the credit card authorization form. . .

( Blog)
In yesterday's blog, we considered the preemptive gambit of a stockbroker who went on the opening offensive of suing his former brokerage employer in an effort to prevent being forced to repay allegedly outstanding balances due on promissory notes (also frequently referred to as "Employee Forgivable Loans" or "EFLs"). In today's consideration of another EFL dispute, we have the more typical opening combination of a brokerage firm suing its former employee in an effort to recover unpaid EFL balances. In response to the former employer's FINRA arbitration, the former employee fights back with his own counterclaim. There's an expression that when everyone wins, no one loses. Sometimes expressions spring from wisdom. Sometimes, not so much. In the world of litigation, even when everyone wins, one victor may limp off but the other victor is a bloody corpse. 

Federal Courts Address Government Shut-down via Amended Standing Order
As the shut-down of the federal government continues, the federal courts grappled with a number of issues attendant to the ongoing furloughs as exemplified in Standing Order No. 18-4 published on December 27, 2018, by the United States District Court for the District of New Jersey: In re: Stay of Civil Matters Involving the United States as a Party.
On January 7, 2019, DNJ issued an Amendment to Standing Order 18-4 that states in part that:

all civil litigation, with the exception of Federal Trade Commission v. Gerber, Civil Action No. 14-677 1 (SRC) and all pending Social Security cases, in the United States District Court for the District of New Jersey involving as a party the United States of America, its agencies. its officers or employees (whether in their individual or official capacity and whether cmTent or former employees), and/or any other party represented by the Department ofJustice or the United States Attorney's Office is immediately suspended, postponed and held in abeyance continuing either (1) until the federal government is funding through congressional appropriation or (2) for a period of thirty (30) days from the date of entry of this Order, whichever comes sooner.

For purposes of clarification. the language of the Standing Order included actions brought by federal prisoners seeking to vacate, set aside or collect their sentences pursuant to 28 U.S.C. § 2255, as well as those actions brought by immigration detainees pursuant to 28 U.S.C. § 2241. Standing Order 18-4 also provided that this Court could modify the Standing Order . . .

FINRA NAC Affirms Willful Non-disclosure of Tax Liens by OHO
In the Matter of FINRA Department of Enforcement, Complainant, vs. Todd B. Wyche, Respondent (FINRA National Adjudicatory Council Decision, Complaint No. 2015046759201 / January 8, 2019)
%20Wyche%20CRD%202186536%20NAC%20Decision%20va.pdf Having found Respondent Wyche guilty of "willfully failing to disclose," FINRA's finding subjects him to a statutory disqualification notwithstanding that the NAC reduced the OHO suspension from six months to four months. As set forth in part in the NAC Decision:

Todd B. Wyche appeals a February 2, 2018 Hearing Panel decision. The Hearing Panel
found that Wyche failed to timely amend his Uniform Application for Securities Industry
Registration or Transfer ("Form U4") to disclose a federal tax lien, in willful violation of Article V, Section 2(c) of FINRA By-Laws and FINRA Rules 1122 and 2010. For his misconduct, the Hearing Panel suspended Wyche from associating with any FINRA member firm in any capacity for six months and fined him $10,000.

The primary issue on appeal is when Wyche learned of the federal tax lien. Wyche
contends, as he did before the Hearing Panel, that he did not learn about the lien until FINRA staff questioned him about it six months after it was filed. After an independent review of the record, we reject Wyche's contention and affirm the Hearing Panel's findings. For the reasons explained herein, we modify the sanctions the Hearing Panel imposed. 

In opting to reduce the OHO's term of suspension, the NAC offers this rationale [Ed: footnotes omitted]:

We note, however, Wyche failed to disclose a single lien, the short duration of the delinquency, and the fact that he had paid down, and had otherwise worked with the IRS to reduce, the amount of lien significantly during the delinquency.

Wyche argues that the Hearing Panel failed to consider several other factors that support mitigation. First, Wyche maintains that he did not engage in numerous acts or a pattern of misconduct. While we agree that Wyche failed to disclose only one lien, we reject the characterization that his misconduct was isolated. Despite being aware of the lien, he falsely answered FINRA staff's personal activity questionnaire and filed two Forms U4 amendments during the five-month span in which he falsely answered question 14M that he did not have any outstanding liens. Even after he disclosed the lien on his Form U4, Wyche falsely stated on his Form U4 and testified that he learned about the lien on August 7, 2014. We do not find Wyche's misconduct consistent with an aberrant lapse in judgment.

FINRA NAC Affirms False Document Findings by OHO
In the Matter of FINRA Department of Enforcement, Complainant, vs. Trevor Michael Saliba Sperry Randall Younger, Richard Daniel Tabizon and Arthur Mansourian, Respondents (FINRA National Adjudicatory Council Decision, Complaint No. 2013037522501 / January 8, 2019)
As set forth in part in the NAC Decision:

Respondents Trevor Saliba, Sperry Younger, and Arthur Mansourian appeal a December 15, 2017 Extended Hearing Panel Decision. The Extended Hearing Panel (the "Hearing Panel") found that Saliba caused his firm to violate certain restrictions placed on it by FINRA by acting in a principal capacity when he was prohibited from doing so. The Hearing Panel also found that Saliba provided falsified documents and false and misleading information to FINRA and failed to cooperate fully with FINRA's investigation. The Hearing Panel found that Younger failed to reasonably supervise Saliba while he was restricted from acting as a principal. The Hearing Panel also found that Younger provided false testimony to FINRA. Finally, the Hearing Panel found that Mansourian participated in obtaining falsified documents that were provided to FINRA and caused the firm to maintain inaccurate books and records. For these violations, the Hearing Panel barred Saliba, Younger, and Mansourian in all capacities. 

On appeal, the respondents argue that the Hearing Panel based its determinations on inadequate circumstantial evidence. Saliba both denies causing a violation of the FINRA restrictions and argues that, to the extent he may have violated the restrictions, those violations were unintentional and the result of his lack of understanding of principal activities. Saliba also denies providing falsified documents and false and misleading information to FINRA, and argues that the bar imposed by the Hearing Panel is excessive. Younger denies failing to supervise Saliba, argues that Saliba was not acting as a principal, and denies providing false testimony to FINRA. Younger also argues that the bar imposed on him is "extreme and overly punitive." Finally, Mansourian argues that his participation in the falsification of firm documents was done at the direction of his superiors and with FINRA's knowledge, and that the bar imposed on him is excessive. 

After an independent review of the record, we affirm the Hearing Panel's findings of violations and modify the sanctions it imposed.

Public Customer Files Kitchen Sink and Laundry List of Complaints in FINRA Arbitration
In the Matter of the Arbitration Between IRA FBO Jerry Lee LaMaack, Claimant, vs. Feltl & Company, Respondent (FINRA Arbitration 18-02793, January 7, 2019)
public customer Claimant filed a FINRA Arbitration Statement of Claim in August 2018, asserting 

violation of FINRA rules; negligence; gross negligence; negligent misrepresentation/omission; negligent hiring; negligent retention; negligent supervision; breach of duty of good faith and fair dealing; breach of contract; breach of fiduciary duty; aiding and abetting a breach of fiduciary duty; fraud; aiding and abetting fraud; violation of MINN. STAT. § 80A.76; aiding and abetting a violation of MINN. STAT. § 80A.76; violation of Section 10b and Rule 10b-5 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5; aiding and abetting a violation of Section 10b and Rule 10b-5 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5; violation of Section 206 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6; and aiding and abetting a violation of Section 206 of Investment Advisers Act of 1940, 15 U.S.C. § 80b-6. 

Now that's a kitchen-sink and a laundry list! Claimant's allegations were in connection with Respondent Feltl's stockbroker purported improper exercise of discretionary authority to purchase unsuitable investments concentrated in natural resources/energy, real estate, and financial services. Claimant sought :

$37,309.53 in compensatory damages, consequential, special, and equitable damages; disgorgement of the fees Respondent earned from Claimant; all filing fees and forum fees paid, owed, or incurred by Claimant in connection with this arbitration; all costs and expenses paid, owed, or incurred by Claimant in connection with this arbitration; attorneys' fees; punitive damages; remuneration sufficient to cover the taxes applied to any Award made to Claimant; pre- and post-judgment interest at the maximum legal rate permissible under the law on all sums recovered; a referral of Respondent's and Broker's misconduct to FINRA for investigation. . .

Claimant's kitchen sink-laudry list approach proved effective because the sole FINRA Arbitrator found Respondent liable and ordered the firm to pay to Claimant $17,193.00 plus interest until paid in full.

Over $1 million in damages awarded in FINRA Customer Arbitration
In the Matter of the Arbitration Between Rodney Eaves and Melissa Eaves, Claimants, vs. First Financial Equity Corporation, Respondent (FINRA Arbitration 18-00452, January 7, 2019),
public customer Claimant filed a FINRA Arbitration Statement of Claim in February 2018 asserting control person liability under A.R.S. § 44-1999(B) arising from their investments in USA Barcelona Realty Advisors, LLC and its related entities, as offered and sold by a registered representative of Respondent First Equity. Respondent generally denied the allegations and asserted various affirmative defenses.  At the close of the hearing, Claimants requested: Compensatory damages in the sum of $920,197.54; $58,550.91 in costs; and $246,458.27 in attorneys' fees. The FINRA Panel of Arbitrators issued the following Award:

1. Respondent is liable for and shall pay to Claimants the sum of $920,197.54 in compensatory damages. 

2. Respondent is liable for and shall pay to Claimants interest on the above stated sum at the rate of 4.25% per annum from January 6, 2019 until the date that the Award is paid in full. 

3. Respondent is liable for and shall pay to Claimants the sum of $125,000.00 in attorneys' fees pursuant to A.R.S. § 44-2001(A). 

4. Respondent is liable for and shall pay to Claimants the sum of $5,233.60 in costs.

5. Respondent is liable for and shall pay to Claimants the sum of $425.00 to reimburse Claimant for the non-refundable portion of the filing fee previously paid to FINRA Office of Dispute Resolution. . .