Securities Industry Commentator by Bill Singer Esq

February 22, 2019
As set forth in part in the CNBC article:

Each year, an estimated 50 percent of people are victims of financial fraud, according to a study from the Stanford Center on Longevity and the FINRA Investor Education Foundation. While that includes all sorts of scams and schemes, 16.5 percent of people surveyed for the research reported being a victim of investment fraud.

Public Customer Alleges That E*Trade's Futures Trading Platform Malfunctioned. In the Matter of the Arbitration Between Michael R Somerby, Claimant, vs. E*Trade Securities LLC, Respondent (FINRA Arbitration Decision 18-02428 / February 21, 2019)
In a FINRA Arbitration Statement of Claim filed in July 2018, public customer Claimant Somerby representing himself pro se asserted negligence; misrepresentation; omission of facts; and unauthorized trading in connection with his "use of Respondent's computerized platform for trading futures and due to an alleged malfunction of the system, Claimant's loss of $1,181.00." Claimant Somerby sought $1,181.00 in compensatory damages; $3,543.00 in treble damages; and "Specific Performance, specifically for Respondent to fix its futures platform." As to the procedural aspects of the FINRA Arbitration, the Decision states in part that:

On November 9, 2018, Claimant filed a Motion for Orders of Production and Sanctions against Respondent, based on Respondent's alleged failure to comply with Claimant's discovery request. On November 19, 2018, Respondent filed its opposition to the motion. On November 26, 2018, Claimant filed his reply. On November 30, 2018, Respondent filed an additional submission in relation to the motion. By Order dated December 3, 2018, the Arbitrator rejected Respondent's additional submission as it was "beyond the allowed responses. Respondent had the opportunity to file an opposition, and did so. A further response after Claimant's Reply to its opposition is not permitted."

By Order dated December 6, 2018, the Arbitrator requested Respondent provide the following additional information by January 11, 2019, to assist her in deliberating the motion: 1) applicability of 17 CFR 1.35 (a)(iii) to Respondent, and Respondent's policy on recording of telephone conversations that lead to a trade, and its policy of recording telephone calls in general; 2) a copy of Respondent's Securities Customer Agreement; and 3) an explanation of how electronic future trades are placed on Respondent's futures platform with any manuals, or instructions on how to place a trade that are available to customers placing future trades. On January 11, 2019, Respondent provided the requested additional information.

In adjudicating the public customer's dispute, the sole FINRA Arbitrator decided to deny Claimant's claims and his Mortion for Orders of Production and Sanctions. The Arbitrator waive Claimant's $175 FINRA filing fee (which had been deferred by FINRA's Office of Dispute Resolution).
Bill Singer's Comment: I don't care how many industry apologists out there disagree with me but the form of this FINRA Arbitration Decision is outrageous.  Public customers are forced into FINRA's  hermetically-sealed-industry-controlled arbitration process (yeah, sure, go ahead and try -- just try -- to cross out the arbitration provision in any new account application for any FINRA member firm and see if they will open an account for you!). Once captured inside this alternative dispute resolution nightmare, the public customer quickly finds that if the arbitrators provide a rationale in the Decision for ruling against the customer, such explanation is often terse to the point of uselessness. I take no issue if FINRA member firms embroiled in an intra-industry dispute wish to impose upon the proceedings whatever privacy and confidentiality they desire. Once a public customer's or an associated person's name makes its way into a FINRA arbitration caption, however, the privacy and confidentiality crap is inappropriate unless those additional non-FINRA-member-firms agree. Seriously -- would it have been such an outrage for this FINRA Arbitration Decision to simply explain what constituted Claimant's allegations about the "malfunction" of E*Trade's "computerized platform for trading futures?" After all, if such an alleged malfunction were to recur, at least subsequent customers would have prior notice of a potential issue. I don't blame the parties. I don't blame the arbitrator. I do blame FINRA for allowing the shoddy memorialization of customer disputes with FINRA's member firms and the attendant rationale for the adjudication of same. For a further discussion of this issue, READ "Debating The Riddle Wrapped In An Enigma Of FINRA Intra-Industry Arbitration" ( Blog / February 1, 2019)
Alchemy appears alive and well at FINRA. A Respondent in a FINRA Arbitration allegedly transferred $X from his bank account into a new brokerage account at Claimant Vanguard Marketing, and then transferred the same $X from the brokerage account to some third-party. $X in. $X out. Somehow, that in-and-out produced over a half million dollars in damages.
In a Complaint filed in the United States District Court for the Middle District of Florida, the SEC alleged that:
  • broker-dealer Spartan Securities Group, Ltd violated Section 15(c)(2) of the Exchange Act and Rule 15c2-11 thereunder, and that the firm's principals Carl E. Dilley, Micah J. Eldred and that David D. Lopez aided and abetted those violations; 
  • Spartan Securities, Island Stock Transfer, Dilley and Eldred violated, and aided and abetted violations of, Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange Act; and 
  • Spartan Securities, Island Stock Transfer, and Dilley violated Sections 5(a) and 5(c) of the Securities Act.
Read the SEC Complaint
As set forth in part in the SEC Release:

In its complaint, the SEC alleges that broker-dealer Spartan Securities Group, Ltd. and transfer agent Island Capital Management LLC, which does business as Island Stock Transfer, helped create and sell at least 19 purportedly legitimate public companies that were in fact shams. To effectuate the scheme, the complaint alleges that Spartan Securities filed fraudulent applications with Financial Industry Regulatory Authority (FINRA) to publicly list the companies' common stock and ultimately enable the shares to become free-trading and available to public investors. The complaint also alleges that Spartan Securities' principals, Carl E. Dilley and Micah J. Eldred, signed the false applications even though they knew or at least were reckless that the companies were fake and David D. Lopez failed to investigate red flags raised by FINRA or even familiarize himself with the companies. The SEC further alleges that Island Stock Transfer and Dilley facilitated the public sale of the stock of at least 12 of the sham companies through the bulk issuance and transfer of the "free-trading" securities.
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC alleged that  former Trinity Biotech plc employee Joseph Frank Vacante violated the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act, and Rule 10b-5 thereunder. READ the SEC Complaint
Without admitting or denying the allegations in the Complaint, Vacante consented to the entry of a final judgment permanently enjoining him from violating the charged laws and ordering him to pay disgorgement of $70,827 plus interest of $6,247 and a civil penalty of $70,827. As set forth in part in the SEC Release:

[O]n September 29, 2016, Vacante learned that the FDA had recommended that Trinity withdraw two products which Vacante believed represented the future of the company. The complaint further alleges that, that same day, Vacante twice communicated with his broker in efforts to sell Trinity American Depository Receipts (ADRs) which he had received as part of his employment, including lowering the price to ensure the sale occurred. On October 4, 2016, Trinity announced that it was withdrawing the two products from FDA consideration. At the close of trading that day, Trinity's ADRs closed more than 50% lower than the prior day's closing price. The SEC alleges that, by selling his ADRs before Trinity's announcement, Vacante avoided a loss of over $70,000.

LPR? As in "Leper?" LPR Indicted for Smuggling More than $1 Million (DOJ Release)
According to the DOJ Release, "LPR" is a "Legal Permanent Resident;"however according to the United States Citizenship and Immigration Service ("USCIE") a "LPR" is a "Lawful Permanent Resident." Legal. Lawful. Sure, those terms mean about the same but it would be nice if DOJ and USCIE would define the same acronym with the same words.. In any event, according to the USCIE website, this is the actual definition:

Lawful Permanent Resident

Any person not a citizen of the United States who is living in the U.S. under legally recognized and lawfully recorded permanent residence as an immigrant. Also known as "permanent resident alien," "resident alien permit holder," and "Green Card holder."

Permanent residents are also commonly referred to as immigrants; however, the Immigration and Nationality Act (INA) broadly defines an immigrant as any alien in the United States, except one legally admitted under specific nonimmigrant categories (INA section 101(a)(15)). An illegal alien who entered the United States without inspection, for example, would be strictly defined as an immigrant under the INA but is not a permanent resident alien. Lawful permanent residents are legally accorded the privilege of residing permanently in the United States. They may be issued immigrant visas by the Department of State overseas or adjusted to permanent resident status by U.S. Citizenship and Immigration Services in the United States.

So . . . now that we got that LPR nomenclature out of the way, let's see what the hell happened here. Turns out that LPR Alberto Hernandez Gallegos was indicted in the United States District Court for the Southern District of Texas. In part, the DOJ Release alleges that: 

[O]n Jan. 25, 2019, Gallegos attempted to exit the United States via vehicle at the Hidalgo Port of Entry. Customs and Border Protections Officers (CBP) conducted an outbound inspection which allegedly led to the discovery of approximately $1,081,375.00 in bulk U.S. currency concealed in a speaker box in the trunk of the vehicle.

The charges allege Gallegos was aware of the currency in the vehicle but not the total amount. He allegedly planned to smuggle the currency for others in return for $1000.

It is not a crime to carry more than $10,000, but it is a federal offense not to declare currency or monetary instruments totaling $10,000 or more to a CBP officer upon entry or exit from the U.S. or to conceal it with intent to evade reporting requirements.

If convicted, Gallegos faces up to five years in federal prison along with a possible $250,000 fine. Gallegos could also lose his status as an LPR. . . .