Securities Industry Commentator by Bill Singer Esq

April 23, 2019
Khemraj Dave Hardate pled guilty to five wire fraud charges in the United States District Court for the Central District of California and is awaiting sentencing. As set forth in part in the DOJ Release:

[F]rom August 2014 through November 2018, he falsely held himself out as a successful investor and businessman in the performance beverage and water-bottling industries. Hardat duped his investors by falsely representing that he had advanced educational degrees - including a Ph.D. - and that he maintained relationships with established business figures such as computer entrepreneur Michael Dell and the chief executive officer of PepsiCo.

Hardat also falsely represented that Basketball Hall of Famer Shaquille O'Neal was one of his business partners, and that professional basketball star Stephen Curry would be endorsing one of his company's products, according to court documents. Furthermore, Hardat falsely claimed that PepsiCo and Dr. Pepper Snapple Group, Inc. owed him more than $100 million as the result of purported business deals he consummated with them, the plea agreement states.

Hardat supported his bogus claims of financial success by showing victims doctored digital images of bank account statements showing balances inflated far beyond any amount Hardat actually had at these financial institutions. One doctored image emailed to a victim purportedly showed a balance of nearly $500 million in one bank account, while another phony image purported to show a bank account balance of nearly $170 million, court papers state.

In reality, Hardat never intended to use his investors' proceeds for the business purposes that he represented, the plea agreement states. Instead he used the funds to pay off his personal debts, purchase luxury cars worth more than $100,000 each, pay rent at the Ritz-Carlton Residences, pay tuition for exclusive private schools for his children, and purchase luxury boxes and tickets for sporting and entertainment events, according to the plea agreement. Hardat also admitted that, in the style of a Ponzi scheme, he made payments to prior victim-investors out of subsequent victim-investors' money. 

During the course of the scheme, Hardat took in more than $5 million from investors, who have suffered losses of more than $4 million.
Lori Christine Woodson pled guilty in the United States District Court for the Western District of Oklahoma to one count of bank fraud and one count of wire fraud. While the rest of us are out there, day in, day out, bustin' ass to make a buck, Ms. Woodson came up with an easier way to make ends meet. As set forth in part in the DOJ Release:

[W]oodson induced Fort Sill National Bank to loan her and another person $1,013,902 by making false representations to the bank.  In particular, Woodson overstated the value of her interest in assets, including a condominium in Snowmass, Colorado, and a closely held real estate company.  She additionally understated her liabilities to other banks by approximately $3 million.  Also, according to the information, Woodson defrauded two acquaintances by misappropriating purported investments in Snowmass condominiums.  The information seeks more than $7.5 million in criminal forfeiture.
Allen Stanford may be doing his 110-years prison sentence but the pain from his Ponzi scheme persists. The recent fall-out manifests itself in the form of alleged multi-million damages sustained from victims who purchased Stanford International Bank, Ltd 's Certificates of Deposit. Adding insult to injury, a FINRA Arbitration Panel hears the claims and dismisses them -- but, perhaps arising from Wall Street's collective pang of conscience, the arbitrators raise a lament about ineffective compliance practices. There's the wound. There's the salt. Rub the latter generously and vigorously into the former.

Dickson Attorney Sentenced To Federal Prison For Stealing Over $1.36 Million From Trust Funds Of Clients / Victims Include Daughter of Tennessee State Trooper Killed in the Line of Duty (DOJ Release)
In December 2018, attorney Jackie Lynn Garton was charged in the United States District Court for the Middle District of Tennessee with wire fraud, tax fraud and aggravated identity theft in connection with his theft of $1.36 million from clients' trust funds. After pleading guilty to all charges, Garton was sentenced  to 92 months in prison. As set forth in part in the DOJ Release:

[G]arton served as the trustee for several estates, including the daughter of a Tennessee State Trooper who was killed in the line of duty in 2005.  Beginning in 2009, Garton began withdrawing funds under false pretenses from her account and others, without the clients' knowledge.  Garton converted the funds into cashier's checks and used the money to enrich his lifestyle, including purchasing luxury items including a Jaguar automobile, a boat and a house.

The deceased Trooper's daughter was unaware of the account withdrawals until 2017, when at age 24, she wanted to open a bookstore, only to learn that her account had been depleted.  Garton admitted that he stole approximately $1.2 million dollars from this client and a total of more than $1.36 million from her and other clients.

In conjunction with the preparation of his 2016 taxes, Garton under reported his income to the IRS, claiming his total income was $95,875, while he actually received at least $367,223, which included funds stolen from clients.  Garton failed to report the stolen income from 2009 through 2016 and intended to defraud the IRS of more than $350,000.

Former JP Morgan Rep Wins One and Loses One Expungement Request. In the Matter of the Arbitration Between Rhyan Khawar Young, Claimant, v. J.P. Morgan Securities, LLC, Respondent (FINRA Arbitration Decision 18-03570 )
In a FINRA Arbitration Statement of Claim filed in October 2018, associated person Claimant Young asserted that two customer complaints had inaccurately been reported on his Central Registration Depository file ("CRD"), and he sought the expungement of those disclosures. Occurrence 1703214 involved alleged unauthorized trading attendant to liquidation of stock. Occurrence 1738465 involved alleged misrepresentation and suitability attendant to an AXA annuity. FINRA member firm Respondent J.P. Morgan Securities did not oppose Claimant's request. stated that it does not oppose Claimant's request for expungement. The customers were notified of the expungement request. The customer involved with Occurrence 1703214 did not submit a response; however, the customer involved with Occurrence 1738465 objected to the relief requested. Although notified of the hearing, neither customer participated. The sole FINRA Arbitrator denied expungement of Occurrence 1738465. The Arbitrator recommended expunge of Occurrence 1703214 based upon a FINRA Rule 2080 finding that the customer's claim, allegation, or information is factually impossible or clearly erroneous; and false. In pertinent part, the Arbitrator stated that:

The trade in question was not made through Claimant or his firm at the time. It was executed by a different brokerage firm. The customer acknowledged the mistake, apologized for the allegations, withdrew the complaint, and sought no compensation. . . .

SEC Charges Microcap Fraudster with Running a Pump-and-Dump Scheme (SEC Release)
Without admitting or denying the allegations in a Complaint filed in the United States District Court for the District of Arizona by the SEC, David M. Loflin consented to the entry of a judgment permanently enjoining him from violating the registration provisions of Sections 5 of the Securities Act and the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act  and Rule 10b-5 thereunder, barring him from serving as an officer and director of a public company and from participating in any offering of penny stock, and ordering him to pay disgorgement with prejudgment interest and a civil penalty in amounts to be determined by the court. In connection with the stock of Greenway Design Group, Inc., which the Complaint alleges was secretly controlled by Loflin's deceased business partner, the SEC Release asserts in part that:

[I] 2013, Loflin helped his business partner gain control of Greenway, using a front company to hide his partner's identity. Loflin then created back-dated convertible promissory notes to document debts owed by Greenway that could be repaid with the company's stock. Loflin purchased portions of the notes, converted them into stock and prepared all of the paperwork. Loflin secured false attorney opinion letters in order to obtain stock certificates and deposit them for sale with his brokerage firm. The letters and paperwork contained false and misleading information, meant to give the impression that Loflin was permitted to sell the shares into the open market.

The complaint also alleges that in 2015 and 2016, Loflin and his business partner orchestrated a promotional campaign, including blast emails, to tout Greenway shares and pump its stock price and trading volume. This allowed Loflin to dump his Greenway shares during and after that campaign for about $152,000 in trading proceeds.

Custodian of Books 
and Records / 
SEC Approves Amendments to FINRA Rule 4570 
(FINRA Regulatory Notice 19-16)
Effective August 19, 2019, amended FINRA Rule 4570 will:
  1. provide a member firm that is filing a Uniform Request for Broker-Dealer Withdrawal (Form BDW) the option of designating another FINRA member firm as the custodian of its books and records on the form; 
  2. clarify the obligations of the designated custodian; and 
  3. require the designated custodian to consent to act in such a capacity.
FINRA Does NOT Find Untimely Disclosure of Tax Liens "Willful". In the Matter of Guy Michael Cheatham, Respondent (FINRA AWC 2017054932701, February 26, 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, Guy Michael Cheatham submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA alleged failures to timely disclose three reportable events in violation of Article V, Section 2(c) of FINRA's By-Laws and FINRA Rules 1122 and 2010; and imposed upon Cheatham a $5,000 fine and a three-month suspension from association with any FINRA member firm in any capacities. Notably absent from the AWC was an allegation that Cheatham had "willfully" failed to untimely disclose reportable events, which would have resulted in a statutory disqualification. As set forth in part in the AWC:

Between 2011 and 2013, Cheatham learned of the following liens (collectively, the "Reportable Events") entered against him:
  • By November 30, 2011, Cheatham received notice of a December 8, 2009, Internal Revenue Service ("IRS") tax lien filed against him in the amount of $399,696;
  • By April 30, 2013, Cheatham received notice of a November 9, 2011, tax lien in the amount of $101,982 filed against him by the State of Virginia; and
  • By October 1, 2013, Cheatham received notice of an August 3, 2012, tax lien in the amount of $113,410 filed against him by the IRS.1
Although Cheatham was required to disclose the Reportable Events via the filing of an amended Form U4 within thirty days of receiving notice of their existence, Cheatham did not report the Virginia tax lien or the 2012 IRS tax lien to Kestra or via an amended Form U4 until April 6, 2016, approximately three years late. Additionally, Cheatham did not disclose the 2009 IRS tax lien to Kestra or via an amended Form U4 until July 27, 2017, approximately five-and-a-half years late.  

From 2013 to 2017, while completing Kestra's annual compliance questionnaires, Cheatham also falsely stated that he did not have any unsatisfied judgments or liens that were not disclosed on his Form U4. . . .
Footnote 1: The Virginia tax lien was satisfied in 2017; the 2009 and 2012 IRS tax liens remain outstanding.