Securities Industry Commentator by Bill Singer Esq

February 13, 2019

Wall Street's Biggest Traders Are Building Their Own Exchange (Bloomberg Businessweek by Nick Baker)
As noted in the Bloomberg Businessweek article:

Among the nine companies behind the Members Exchange are Citadel Securities and Virtu Financial Inc., which probably handle about 40 percent of the market's trading volume, often on behalf of better-known retail brokers. Fidelity Investments, Charles Schwab, Morgan Stanley, and Bank of America are some of the other backers. The exchange still hasn't filed for regulatory approval, so it likely can't open until late this year or 2020. But if big players are able to direct trades its way, then "NYSE, Nasdaq, and Cboe will be in significant pain," says Bill Karsh, who once ran Direct Edge, an earlier upstart exchange.
Bill Singer's Comment: All of which makes you wonder -- if the nine Big Boys simply say bye-bye to NASDAQ and NYSE, and relocate to their own Members Exchange subject to their own rules, how much longer will it be before FINRA's Large Member Firms relocate to their own self-regulatory-organization, where they too will draft the rules and call the shots?
In today's featured FINRA regulatory settlement, a former employee of an unnamed bank is barred because of her alleged misconduct at that unnamed bank, and, well, odd, but, Wall Street's fearless self-regulatory-organization seems fearful to name the bank by name. All of which conjures up the frightening visage of Lord Voldemort -- he who must not be named! Has the Dark Lord infiltrated the American banking system? Is FINRA cowering under his spell? Where is Harry Potter when Wall Street needs him?

Six Convicted for Roles in Multi-Million Dollar Black Market Peso Exchange Money-Laundering Scheme (DOJ Release)
After a five-week trial, a jury in the United States District Court for the Southern District of Texas convicted Adrian Arciniega-Hernandez, Adriana Alejandra Galvan-Constantini, Luis Montes-Patino, Ravinder Reddy Gudipati, Harsh Jaggi, and Neeru Jaggi of a money laundering conspiracy. Further, Harsh Jaggi and Adrian Arcinieg-Hernandez were each convicted of two counts of money laundering and Neeru Jaggi was convicted of one count of money laundering. Also, Gudipati was convicted of two counts of money laundering, two counts of causing a trade or business to fail to file a Form 8300, and one count of causing a trade or business to file a Form 8300 containing a material omission and misstatement of facts. Arciniega-Hernandez was found not guilty of a third count of money laundering.  Co-defendant Carlos Velasaquez pled guilty to conspiracy to launder money and is awaiting sentencing. As set forth in part in the DOJ Release:s. 

[F]rom 2011 through 2013, Galvan-Constantini, Montes-Patino and other co-conspirators helped to move millions of dollars derived from the sale of drugs throughout the United States, including New York, Kentucky, North Carolina, Illinois, Mississippi, and multiple cities in Texas to Laredo, Texas.  The U.S. currency was moved by couriers, including Galvan-Constantini and Montes-Patino, via cars, commercial buses, commercial planes, and a private plane in bulk cash amounts of up to hundreds of thousands of dollars at a time.  The money, in heat sealed packs, uneven rubber-banded money stacks, or loose U.S. currency, arrived in plastic bags, cloth bags, suitcases, backpacks, and even cereal boxes.  The money was then distributed among downtown Laredo, Texas perfume stores, including El Reino International Inc., and NYSA Impex LLC.  The owner of NYSA Impex LLC, Gudipati, and the owners of El Reino International Inc., Harsh Jaggi, and Neeru Jaggi, accepted loose bulk-cash, even after being told it was "narco dinero."  The store owners also failed to file Form 8300s which are required when more than $10,000 in cash is received by a business, or filed Form 8300s which omitted pertinent information such as the name of the courier who brought the bulk cash.    

FINRA Says Promissory Notes Ain't What Was Promised
In the Matter of Thomas A. Gallo, Respondent  (FINRA AWC 2017053921601 / February 12, 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, Thomas A. Gallo, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed on Gallo a $10,000 fine, a 60-calendar-day suspension from associating with any FINRA member firm in any capacity, and an order to pay $33,337 restitution plus interest to customer SM. The regulatory settlement was in connection with FINRA's allegations that Gallo had made negligent misrepresentations attendant to the sale of $100,000 in promissory notes to two investors in violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and thereby violated FINRA Rule 2010. As set forth in part in the AWC under the heading "Facts and Violative Conduct":

Between August 2014 and October 2014, Gallo solicited two accredited investors to each invest $50,000 in a convertible promissory note offering (the "Private Placement") by NGT, Inc. ("NGT"). The purpose of the Private Placement was to provide NGT a bridge loan to finance NGT's operations until it received anticipated long-term financing through a public offering. Corinthian acted as placement agent on the Private Placement and Gallo received a total of $8,000 in compensation in connection with the investments. 

The promissory notes were for one year and included a 12-15% coupon. Both investors received at least 12,500 restricted shares of common stock, and had an option to convert the notes into additional stock. The Securities Purchase Agreement for the Private Placement, which each investor signed, indicated that NGT's assets were sufficient to conduct its business taking into account projected capital availability and that additional information concerning the company's solvency was available in SEC filings on EDGAR. 

Gallo was aware of significant negative fmancial information about the company in SEC filings, including its history of losses, lack of working capital, and an independent public accountant expressing doubt that the company would continue as a "going concern" without substantial additional capital or financing. 

Gallo mistakenly believed that NGT had an agreement with a third-party brokerdealer to conduct a firm commitment public offering that would raise needed capital for NGT based on his discussions with that third-party. However, there was no binding agreement for a firm commitment offering, and Gallo did not confirm whether there was a binding agreement. 

In recommending the Private Placement, Gallo explained to the investors that the investment was to provide NGT with a loan to finance its operations until NGT received anticipated long-term financing. Gallo negligently represented to the investors that NOT had a firm commitment offering in place. The misrepresentation was material because NGT's payment of interest on the promissory notes and each investor's recovery of their principal investment depended on NGT raising significant capital in the anticipated public offering and/or on the ability of the investors to sell NGT stock that they received in connection with the Private Placement. In October 2015, the public offering for NGT was conducted on a best-efforts basis and did not raise the anticipated level of capital. Consequently, NGT stock price dropped significantly, and the two investors lost money from the Private Placement, totaling approximately $33,337. . . .

Bill Singer's Comment: The AWC asserts under the heading "Relevant Disciplinary History" that 

In April 2006, FINRA suspended Gallo for failing to comply with an arbitration award or to satisfactorily respond to a FINRA request to provide information concerning compliance with the award (Arbitration Case No. 01-02243). The suspension lasted for approximately two years, until FINRA received notice that the award was paid or satisfied. 

In October 2001, FINRA censured and jointly and severally fined Gallo and M.S. Farrell & Co., Inc. $25,000 for supervisory violations and for Gallo acting in a registered capacity while failing to meet continuing education requirements (AWC No. C10010129).

Although I often express my distaste for the submission of a Corrective Action Statement in response to a FINRA regulatory settlement, Gallo opted to avail himself of that option and offered the following commentary, which, for whatever it's worth, is well crafted:


This Corrective Action Statement is submitted by the Respondent. It does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA, or its staff.

Thomas Gallo, the respondent in the above referenced matter, submits this statement of corrective action in connection with the AWC with FINRA, regarding my actions in connection with the sale of securities in connection with a private placement memorandum in 2014.

While I am no longer associated with a FINRA member firm, and have no intention of doing so in the future, should the occasion arise again, I will endeavor to review all aspects of future offerings and its documentation with the placement agent and representatives of the issuer, and to review the documentation, its attachments, and external links with the prospective investors.

Taking into account Gallo's prior FINRA sanctions and the seriousness of the instant promissory note matter, he's a lucky registered representative to have emerged from his latest encounter with the self-regualtory-organization with only a 60-calendar-day suspension plus the financial sanctions. I'm guessing that he got a second life in large part to the efforts of veteran industry lawyer Mark J. Astarita, Esq.  a Partner with the law firm Sallah Astarita & Cox LLC
In a Complaint filed in the United States District Court for the Southern District of Indiana, the SEC alleged that Lucent Polymers, Inc.'s Chief Executive Officer  Kevin Kuhnash and Chief Operating Officer Jason Jimerson engaged in fraud in violation 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, and the SEC sought permanent injunctions, disgorgement plus interest, civil monetary penalties, and officer-and-director bars. A parallel federal criminal action was filed against Kuhnash and Jimerson. READ the Complaint
he SEC Release states in part that:

[L]ucent Polymers, Inc. premised its business model on its ability to transform "garbage to gold" - that is, to use low-grade, non-prime feedstock to develop high-quality plastics. The company's near-magic "garbage to gold" process, the SEC alleges, was a huge commercial success. However, the complaint alleges that Lucent's business model was a fraud. The complaint alleges that the company routinely lied to its customers and falsified its certifications of test data to show that its products complied with customer specifications, including on important aspects such as fire-retardant measures, when in fact the products did not meet customer specifications. According to the complaint, Kevin R. Kuhnash, Lucent's CEO and Jason P. Jimerson, Lucent's COO, hid Lucent's fraudulent practices and made misrepresentations in the sale of Lucent to Citadel Plastics Holdings, LLC, an Illinois-based plastics manufacturer. The complaint further alleges that, after the sale to Citadel, Kuhnash and Jimerson continued to conceal the fraud in order to secure future escrow payments under the deal and to help secure Citadel's eventual sale, when they would receive additional payments. In March 2015, Citadel's stock was sold to a publicly-traded company. Between the 2013 and 2015 stock sales, Kuhnash received more than $1.3 million, and Jimerson received more than $600,000, according to the complaint.

In a Complaint filed in the United States District Court for the Western District of North Carolina, the SEC alleged that former Swisher Hygiene, Inc.,Chief Financial Officer Michael J. Kipp and Director of External reporting Joanne K. Viard, had engaged in fan earnings management scheme. During the second through fourth quarters of 2011, the SEC Complaint alleges that Kipp took advantage of Swisher's ineffective internal controls and directed his accounting group to change various acquisition-related reserves and expenses to increase earnings to predetermined targets. Additionally, the Complaint alleges that Viard identified potential acquisition-related entries that could be reclassified to meet earnings targets, and made various adjusting entries in Swisher's accounting records without adequate justification or support. Pursuant to their consent to the entry of final judgments, the Court permanently barred Kipp and Viard from serving as officers or directors of public companies.In a parallel criminal action, Kipp and Viard were sentenced to 54 and 24 months imprisonment, respectively.
Andrew Ian Farmer, Thomas Galen Massey, Eddie Douglas Austin Jr., Carolyn Price Austin,Charles Earl Grob, and Scott Russell Sieck pled guilty in the United States District Court for the Southern District of Texas in connection with their roles in a $40 million pump-and-dump microcap securities fraud. The six defendants obtained control of the stock of numerous companies; "pumped" the price through false and misleading press releases and fraudulent trading techniques; and "dumped" their shares for a significant profit. As part of her plea agreement, Carolyn Austin admitted she knew of the intended manipulation of the stock prices and acted to conceal this fact from law enforcement. A seventh defendant, John David Brotherton, pled guilty for his role.