Securities Industry Commentator by Bill Singer Esq

April 10, 2019

 A two-count felony criminal Information was filed in the United States District Court for the District of Columbia charging Standard Charter Bank with illegally conspiring to violate International Emergency Economic Powers Act ("IEEPA"). The first count alleges SCB's participation in a criminal conspiracy from 2001 through 2007; the United States first charged SCB with this illegal conduct on Dec. 10, 2012, and under the terms of a Deferred Prosecution Agreement ("DPA") entered the same day, the government agreed to defer prosecution and SCB agreed to pay a financial penalty of $227 million. The second count alleges SCB's participation in a criminal conspiracy to violate IEEPA from 2007 through 2011 that resulted in SCB intentionally processing U.S. dollar transactions through the U.S. financial system for the benefit of Iranian individuals and entities worth approximately $240 million. In the amended DPA, SCB admitted and accepted responsibility for its criminal conduct, agreed to extend the term of the agreement for an additional two years and, among other things, agreed to additional cooperation, compliance and disclosure obligations. READ the:
Also, the New York County District Attorney's Office ("DANY") announced that SCB has agreed to amend its DPA with DANY and extend for two additional years, and to pay an additional financial penalty of $292,210,160. Under the amended DPA with DANY, SCB has admitted that it violated New York State law by, among other things, falsifying the records of New York financial institutions. SCB has also entered into separate settlement agreements with the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC"), the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the New York State Department of Financial Services ("DFS"), and the United Kingdom's Financial Conduct Authority ("FCA") under which SCB shall pay additional penalties totaling more than $477 million. The Justice Department has agreed to credit a portion of these related payments and, after crediting, will collect $52,210,160 of the fine, in addition to SCB's $240 million forfeiture. Finally, in connection with the conspiracy, a former employee of SCB's branch in Dubai, United Arab Emirates pled guilty to conspiring to defraud the United States and to violate IEEPA. A two-count criminal indictment was unsealed today in federal court in the District of Columbia charging Mahmoud Reza Elyassi, an Iranian national and former customer of SCB Dubai, with participating in the conspiracy. As set forth in part in the DOJ Release:

As part of the amended DPA announced today, SCB admitted that, from 2007 through 2011, two former employees of its branch in Dubai, willfully conspired to help Iran-connected customers conduct U.S. dollar transactions through the U.S. financial system for the benefit of Iranian individuals and entities. One of these Iran-connected customers was Elyassi, an Iranian national who operated business accounts with SCB's Dubai branch while residing in Iran. SCB's former employees helped Elyassi manage these accounts, concealed their Iranian connections, and facilitated foreign currency transactions in U.S. dollars. SCB's former employees knew that Elyassi's business organizations operated from Iran and conducted U.S. dollar transactions for the benefit of Iranian interests, and helped Elyassi disguise his Iranian connections to avoid suspicion.

According to the indictment unsealed today, Elyassi and his co-conspirators registered numerous supposed general trading companies in the UAE, and used those companies as fronts for a money exchange business located in Iran. Between November 2007 and August 2011, Elyassi used a business account at SCB's Dubai branch to cause U.S. dollar transactions to be sent and received through the U.S. financial system for the benefit of individuals and entities ordinarily resident in Iran in violation of U.S. economic sanctions. The charges in the indictment as to Elyassi are merely allegations, and Elyassi is presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

SCB admitted to processing approximately 9,500 U.S. dollar transactions through the United States totaling approximately $240 million on behalf of Elyassi's companies between 2007 and 2011. More than half of these U.S. dollar transactions were the result of deficiencies in SCB's compliance program which allowed customers to request U.S. dollar transactions from within sanctioned countries, including Iran.

In Complaints filed in federal district courts in Nevada, Texas, and Florida, the SEC charged  Defendants Alexander Bevil, Richard Bohnsack, Daniel Broyles, Charles Davis, Michael Duke, Joel Duncan, Martin Lewis, Mark Parman, William Roth, Paula Saccomanno, Kenneth Shelton, Billy Ray Statham, Jr., Glenn Story, Dennis Swerdlen, and Harold Wasserman with either direct or indirect violations of the broker-dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act. Twelve of the defendants were further charged with violating the securities registration and antifraud provisions of Sections 5(a), 5(c), and 17(a) of the Securities Act, and one defendant was charged with violating the securities registration provision of Section 5(a) and (c) of the Securities Act. Without admitting or denying the SEC's allegations, 11 Defendants agreed to the entry of final judgments that enjoin them from violating these provisions, enjoin them from future solicitation of the purchase or sale of securities, impose penny stock bars, and order them to pay disgorgement of ill-gotten gains and civil monetary penalties. READ:
Saccomanno, et al. Complaint
Duncan Complaint
Duke, et al. Complaint
Bevil, et al. Complaint
The charges were made in connection with the Defendants' actions as unregistered brokers or aiding-and-abetting such activity in connection with Intertech Solutions, Inc.'s fraudulent and unregistered securities offerings. In part the SEC Release asserts that Defendants were hired by Intertech Solutions:

to engage in or facilitate cold-call solicitations of hundreds of prospective investors throughout the United States and Canada from at least February 2014 through December 2016. The complaints allege that, as a result of the defendants' conduct, Intertech Solutions raised over $7 million from retail investors. According to the complaints, Intertech Solutions paid the defendants exorbitant commissions ranging from 35% to 50% of the funds provided by each investor. The complaints allege that the defendants did not disclose their commission rates to investors and instead distributed private placement memoranda that indicated that only 10% of investor proceeds would be used as commissions. The SEC previously charged Intertech Solutions and its control persons with orchestrating the fraudulent and unregistered offerings.

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Billion-Dollar Medicare Fraud Bust / FBI Announces Results of Operation Brace Yourself (FBI Release) As set forth in part in the FBI Release:

FBI and Department of Justice officials today announced the disruption of one of the largest Medicare fraud schemes in U.S. history. An international fraud ring allegedly bilked Medicare out of more than $1 billion by billing it for unnecessary medical equipment-mainly back, shoulder, wrist, and knee braces.

The FBI and partner investigative agencies announced charges against 24 people -- three were prescribing medical professionals, and the rest were owners or high-ranking officials in medical equipment or telemedicine companies. The indictment alleges the scheme has gone on for about five years.

Medical equipment companies often charge Medicare directly for providing equipment to Medicare patients. While this practice alone is not illegal, the alleged illegal activity in this scheme occurred when the medical equipment companies paid a firm in the Philippines to recruit individuals, through advertising on television or online, who were Medicare patients and may or may not have had a medical need for the braces.
Today's blog presents the disturbing case of a suspended lawyer. The lawyer was employed as an Arbitration Counsel with the New York Stock Exchange before she was admitted to the Bar. About two decades after ending her first stint as a NYSE Arbitration Counsel, the lawyer returned to NYSE in that same capacity; except, in the ensuing period she had been suspended from the practice of law in New York State. All of which made NYSE a two-time-loser that employed an unadmitted lawyer as a counsel and then employed that same lawyer as a counsel while she was suspended. Making matters worse, while suspended, this same lawyer served as an Arbitrator with the Financial Industry Regulatory Authority ("FINRA") and she held herself out to potential litigants as a duly registered attorney! Not the best example of legal ethics by the suspended lawyer. Not the best example of due diligence by NYSE or FINRA.  Certainly, this lawyer seems headed for disbarment.  -- or so you'd think. Think again. And while you're re-thinking, consider how the misfortunes of life inject themselves into our professional careers.

SECret Garden: Remarks at SEC Speaks (Speech at SEC Speaks 2019 by SEC Commissioner Hester Peirce)
As is her penchant and one that I find refreshing, SEC Commissioner Peirce has lit another rag stuffed into a gasoline filled bottle and thrown a regulatory Molotov Cocktail as far as she can. In her latest role as the SEC's agent provocateur, Commissioner Peirce turns a harsh and unflattering light on the time-honored practice of No-Action Letters and Staff guidance. In part, Peirce muses [Ed: footnotes omitted]:

[O]ur rules currently provide that no-action requests and the staff's written responses as a general matter are to be made available to the public "as soon as practicable after the response has been sent or given to the person requesting it."

Requiring these letters to be published has produced several benefits. It enhances consistency in staff-level guidance across time and across similarly-situated market participants. It creates an informal process that sheds public light on areas where our rules may be clunky or ambiguous or where they are producing unintended results (perhaps because they are being applied to novel technologies or business models). It allows for the provision of expressly tailored relief that preserves the integrity of our regulatory framework. It also keeps the staff accountable to the Commission and to the public by ensuring that the no-action process, although it is intrinsically informal, is also-at least at its end point-transparent. Finally, it helps to ensure that the views of the staff as articulated in these letters do not, over time, fall out of sync with the views of the Commission and the realities of the market.

. . .

The problems are a bit different, but no less troubling, when firms have to have access to novel interpretations or non-published or draft staff guidance to get credit for complying with our rules. Market participants begin wondering whether they are subject to the same requirements and standards as their competitors. Firms without access to the high-priced lawyers who have gained a sight into the secret garden may indeed be at a fatal competitive disadvantage. Even more problematically, market participants may be unable to effectively push back when, for example, an examiner insists that a regulation means something that may be doubtful under any reasonable reading of the Commission's rules or policy as spelled out in publicly available materials. Finally, when a patchwork of public and non-public guidance has become so comprehensive that market participants can say, only half-jokingly, that entire sections of our rulebook are irrelevant, similar questions about fairness and transparency arise: Are all similarly situated firms aware of the non-public guidance? Does the staff's guidance reflect a thorough consideration of the likely benefits and costs of that guidance? Does access to our markets depend on hiring counsel that has access to the non-public views of the staff? Will market participants change their behavior in ways that may not make sense under our rules as written to comply with the vast body of guidance, much of which may not be publicly available?

All of these issues point, in turn, to a much larger question, which is this: Is the Commission regulating the markets and market participants in a way that is designed to cultivate and maintain the public trust over the long term?
"Investor Alert: Robo-Advisoers" (Texas State Securities Board)
Among my favorite sources of regulatory information is the Texas State Securities Board ("TSSB"), which tends to publish among the most literate bulletins, alerts, and reports to be found on Wall Street. In a no-nonsense recent publication, TSSB scrivened a two-pager which cuts to the chase with these admonitions:

You should consider that robo-advisory services are much more of a one-way street than working with an actual person. While conversations with an investment adviser are likely to result in a valuable exchange of ideas and information, the effectiveness of a robo-adviser can be limited by the information that only you provide.

. . .

One thing you should make sure you're clear on is how often your robo-adviser rebalances assets in your account to ensure that the overall mix of investments doesn't significantly differ from your target allocation.

Florida Executive Sentenced To 20 Years In Prison For Orchestrating $150 Million International Ponzi Scheme (DOJ Release)
In the United States District Court for the District of Minnesota, Antonio Carlos de Godoy Buzaneli pled guilty to conspiracy to commit mail fraud, and he was sentenced to 240 months in prison plus three years of supervised release and ordered to pay $51,353,861.45 in restitution. Buzaneli and co-conspirators Jose Manuel Ordonez, Jr. and Julio Enrique Rivera were the principals of Providence Holdings International, Inc.; and Buzaneli and Ordonez became principals of Providence Financial Investments, Inc. and Providence Fixed Income Fund LLC (collectively, along with Providence Holdings International, Inc., "Providence") in order to raise money from investors. Ordonez was previously sentenced for his role to 120 months in prison, and Rivera is awaiting sentencing. As set forth in part in the DOJ Release

[F]rom about 2010 until June 2016, Providence raised approximately $150 million from investors worldwide by representing that Providence would invest the money in Brazilian factoring. "Factoring" is a financial transaction in which accounts receivable are purchased at a discount. Providence's marketing materials explained that in Brazil consumers write ten separate post-dated checks for $100 - one per month - to pay for $1,000 in retail items such as consumer electronics or groceries. The retailer then sells the post-dated checks to Providence for approximately $820, and Providence earns $180 over ten months as the checks mature. As a result, Providence claimed to make a 48 percent annual return on money invested in Brazil.

According to BUZANELI's guilty plea and documents filed in court, Providence raised more than $64 million from U.S. investors by employing a network of brokers who sold promissory notes bearing annual interest rates between 12 percent and 24 percent. Investors were told their money would be used to factor accounts receivable in Brazil. BUZANELI, ORDONEZ and RIVERA provided the brokers with an Executive Memorandum to show investors that their money would be used to factor accounts receivable in Brazil. The Executive Memorandum falsely stated that funds would be used "for the sole purpose" of making loans to a Brazilian subsidiary of Providence "which will use the proceeds of the loan to acquire receivables or financial instruments such a post-dated checks and/or Duplicatas in the Brazilian Factoring Market."

According to the defendant's guilty plea and documents filed in court, BUZANELI and ORDONEZ instead used a significant amount of the investors' funds to make Ponzi-style payments to other investors and to make commission payments to Providence's nationwide network of brokers. BUZANELI and ORDONEZ also diverted investor funds to other companies they controlled, including an import/export company, a travel company, a realty company, a credit rehabilitation company, and a catering company and food truck operated by BUZANELI'S wife.

According to the defendant's guilty plea and documents filed in court, BUZANELI and ORDONEZ also opened Providence offices and affiliates in locations around the world, including London, Taipei, Shanghai, Singapore, Vancouver, and Panama. For example, in 2011 and 2012, BUZANELI and ORDONEZ opened Providence affiliates in the Bailiwick of Guernsey and in Hong Kong, through which they raised approximately $85 million from offshore investors based on the same lies they told investors in the United States - that their money would be used to invest in Brazilian factoring. Instead, much of the investors' money was transferred to other Providence-controlled entities around the world as well as to bank accounts controlled by BUZANELI and ORDONEZ, where the money was used for payments unrelated to Brazilian factoring, including to pay commissions to U.S. brokers and to make interest payments to American investors in Providence's U.S.-based entities. As a result of the fraud scheme, Providence investors worldwide - including more than 500 victims in the United States alone - lost a total of more than $100 million.

SEC Charges Former SeaWorld Associate General Counsel With Insider Trading (SEC Release)
In a Complaint filed in the United States District Court for the Middle District of Florida,, former senior lawyer at SeaWorld Entertainment Inc. Paul B. Powers was charged with with fraud, and he consented to a permanent injunction with the amounts of disgorgement and penalties, if any, to be decided by the court.  In a parallel action, the U.S. Department of Justice today announced criminal charges against Powers arising out of the same conduct. In pertinent part the SEC Release alleges that Powers had

early access to key revenue information as the company's associate general counsel and assistant secretary, and he purchased 18,000 shares of SeaWorld stock the day after he received a confidential draft of the 2018 second quarter earnings release that detailed a strong financial performance by the company after a lengthy period of decline.  According to the SEC's complaint, Powers immediately sold his SeaWorld shares for approximately $65,000 in illicit profits after the company announced its positive earnings and the company's stock price increased by 17 percent.