Securities Industry Commentator by Bill Singer Esq

Respondent, a fixed income dealer, charged excessive markups on 38 sales of municipal bonds and nine sales of corporate bonds, and excessive markdowns on four purchases of corporate bonds. For these violations, Respondent is ordered to pay restitution and, in lieu of a fine, to retain an independent consultant to review and monitor for fairness the firm's pricing practices. Allegations dismissed as to three sales of collateralized mortgage obligations, six sales of municipal bonds, and two sales of corporate bonds.

[A]s to sanctions, however, we do not find that the firm exhibited a pattern of charging excessive markups. We find that this misconduct is aberrant and not reflective of the firm's overall compliance record. 

We also reject the argument that J. W. Korth's rule violations were intentional or reckless. We do not find that the firm intentionally or recklessly overcharged its customers. It had in place a policy for determining markups that it openly explained to FINRA and reliably implemented. Although misguided on some of the trades at issue, we do not find that the firm exhibited a pervasive and deliberate intent to charge excessive markups. To the contrary, we find that the firm attempted to calculate fair markups, although it did not achieve this across the board.

Enforcement also argues that J. W. Korth has not accepted responsibility for its misconduct and has instead chosen to claim that its focus on profits was proper. While we agree that it is aggravating when a respondent refuses to accept responsibility for its misconduct, we do not find that J. W. Korth's actions should be so characterized. J. W. Korth launched a vigorous defense and contested the allegations against it. Through Korth, its managing partner, the firm provided a detailed explanation of the nature of its business and the many factors that it considers in making pricing determinations. Korth also explained the multiple layers of oversight that the firm employs for its pricing practices. While none of these facts excuse the firm's prices on the 42 violative trades, we will not hold against the firm that it defended its practices. 

We find that J. W. Korth's misconduct is serious and aggravated by the fact that it resulted in the firm's monetary gain and losses to customers. . . .

[R]etain an independent consultant with experience in establishing pricing procedures for sales and purchases of debt securities to review the firm's pricing procedures with a view towards ensuring, going forward, that J. W. Korth does not charge prices in excess of what is fair and reasonable, taking into consideration all relevant factors. . . .

In sum, we affirm the Hearing Panel's findings that contemporaneous cost is the appropriate indicator of the prevailing market price in this instance and that J. W. Korth failed to rebut this presumption. We further affirm that J. W. Korth has not proffered sufficient evidence to support its contention that it invested unusually significant time, energy, or expense into each of the bond sales at issue to justify its markups and markdowns. At most, it has shown only that it engaged in basic due diligence before recommending a bond, as required of all broker-dealers. Therefore, we find that the Firm violated MSRB Rules G-30 and G-17 by charging excessive markups on 38 sales of municipal securities, and NASD Rule 2440, NASD IM-2440, and FINRA Rule 2010 by charging excessive markups in nine sales of corporate debt securities and excessive markdowns in four purchases of corporate debt securities.  

Falci controlled a number of investment funds under the names "Saber Funds" and "Vicor Tax Receivables LLP." The Saber Funds were a collection of investment funds that Falci created and operated, starting in the early 2000s. Many of his earliest victims were friends, family, and associates. Falci served as a fire chief in Middletown, and many early victims were policemen, fireman, and retirement funds for first responders. The Saber Funds grew to have more than 200 investors from whom the defendant raised more than $10 million.

Falci falsely told investors that the Saber Funds were conservatively invested in tax liens - which generated high returns with little risk. In reality, Falci diverted investor money to himself, his family, and to other companies he controlled. Some of the diverted funds were used for riskier ventures, such as day trading and real estate. Falci concealed losses and his own theft from investors. Based on these misrepresentations, investors continued to entrust additional funds to Falci and left previous investments under his control.

In early 2012, Falci started the Vicor Fund, targeting wealthier investors with greater sophistication in financial affairs. The investors in the Vicor Fund included financial industry professionals, and Falci ultimately raised $20 million from these victims. He again falsely represented that he had experience and a track record of success investing in tax liens, and promised that he could produce high rates of return with little risk. In reality, the assets of the Vicor Fund were rapidly depleted by Falci's theft. 

In order to support his own lifestyle and repay investors the gains he had promised, Falci stole more than $10 million from the Vicor Fund between 2012 and 2016. At the same time, he reported fake investment gains to his investors on every monthly statement. Falci concealed his theft in several ways, including by diverting funds to a fake company that he created to steal from investors. He also forged emails and reports, and created fake assets for the fund.

Appel and associates that he recruited and directed to buy and sell shares, secretly acquired ownership or control over enough of the companies' stock that he effectively controlled the float. Then he and his associates artificially created a market for these stocks by engaging in matched trading designed to create the false appearance of genuine demand for the stock. During and after his alleged manipulative conduct, Appel obtained over $3 million in profits by selling his shares in the companies into the public market. Appel was previously convicted of criminal conspiracy to commit securities fraud and was on probation when some of the charged conduct occurred.

SEC Charges Unregistered Broker Who Sold Woodbridge Securities to Retail Investors (SEC Release)
https://www.sec.gov/litigation/litreleases/2019/lr24476.htm
In a Complaint filed in the United States District Court for the Central District of California, https://www.sec.gov/litigation/complaints/2019/comp24476.pdf, the SEC charged Charles Nilosek, an external sales agent for Woodbridge Group of Companies LLC, with  with violating the registrations provisions of Sections 5(a) and 5(c) of the Securities Act and Section 15(a)(1) of the Securities Exchange Act and seeks disgorgement of allegedly ill-gotten gains, with interest, and financial penalties. Previously, the SEC had charged Woodbridge Group, Robert H. Shapiro (the firm's former owner), two former directors of investments, and other unregistered brokers. In January 2019, a federal court in Florida ordered Woodbridge, related companies, and Shapiro together to pay $1 billion for operating a Ponzi scheme. As set forth in part in the SEC Release:

[F]rom at least September 2013 to September 2015, Nilosek and his alter-ego company, Position Benefits LLC, raised more than $23 million by selling Woodbridge securities to more than 200 retail investors located in at least four states. Nilosek was not registered in any capacity with the SEC, and allegedly received more than $1.4 million in transaction-based compensation. The SEC amended its Complaint in the Central District of California and added Nilosek as a defendant.

Sunsets, Russets, and Rule Resets (Speech by SEC Commissioner Hester Peirce; CARE Conference)
https://www.sec.gov/news/speech/speech-peirce-051719
Among SEC Commissioner Peirce's various ruminations:

We also can do a better job of encouraging our examinations and enforcement staff, who have deep knowledge about what is going on in the industry, to flag for our rulemaking divisions rules that are in need of updating. Enforcement attorneys, for example, have frontline knowledge about how our transfer agent rules need to be updated and strengthened to better protect investors from fraud, and our compliance examiners routinely in the course of their work see the need for updates to our advertising and custody rules. If the only recognition staff receives is linked to enforcement actions, enforcement lawyers and compliance examiners are unlikely to be part of the agency's broader effort of identifying rules that need to be modernized. We need, therefore, to reward staff whose insights inform our rulemaking priorities, rather than simply counting the number of completed enforcement actions their work generates.

• Securities Industry Commentator
• Bill Singer