Securities Industry Commentator by Bill Singer Esq

May 30, 2019

Straight from the Top: Fireside Chat with Robert Cook and Bari Havlik (FINRA Unscripted)
This episode from FINRA's Annual Conference presents a "fireside chat with FINRA's President and Chief Executive Officer Robert Cook and Executive Vice President of Member Supervision Bari Havlik, moderated by Chip Jones, Senior Vice President of Member Relations and Education." Oh my . . . an online fireside chat! Like, what the hell does that actually mean? Perhaps I should get some chocolate and marshmallows and make me some smores while I'm listenin' ? Respectfully, we got a host and FINRA's CEO, a FINRA EVP, and a FINRA SVP all tied up doing a 32-minute podcast and, you know, that hardly strikes me as a great use of regulatory assets. On top of that, to be as polite as I can, this effort comes off as yet another FINRA-produced video or podcast that's more of a snooze-fest than anything particularly useful. You'll be glad to know that FINRA is doing stuff and continuing to do stuff and is listening about how to better do stuff and is planning on doing new stuff and will be interested in your thoughts about the old and new stuff that the regulator is doing and will continue to do. Truly, I can't wait for the Christmas edition of "Straight from the Top: Fireside Chat," which I'm hoping will feature a looping video of logs burning in a fireplace while another fireside chat is raging on. Maybe the CEO will dress as Santa and the other executives as his helper elves?

FINRA Imposes Bars and Expulsion in Mark-Up Case. FINRA Department of Enforcement, Complainant, v. Windsor Street Capital, L.P. f/k/a Meyers Associates, L.P. ; Arthur Tacopino; and Edwin Rodriguez, Respondents (FINRA Office of Hearing Officers Default Decision; Disciplinary Proceeding No. 2016048912703 / May 28, 2019)
As set forth in the OHO Default Decision's "Syllabus":

Respondent Arthur Tacopino willfully misused his firm's proprietary accounts to fraudulently allocate profitable trades to favored individuals and unprofitable trades to the firm's customers or the firm's accounts. Respondent Windsor Street Capital, L.P. (f/k/a Meyer Associates, L.P.) willfully engaged in a fraudulent undisclosed markup scheme and willfully misrepresented or omitted material information on customer confirmations. Respondent Edwin Rodriguez aided and abetted both fraudulent schemes. 

Windsor Street charged customers excessive markups and markdowns and failed to: (1) establish, maintain, and enforce adequate supervisory procedures to prevent undisclosed and excessive markups and markdowns; (2) establish and implement adequate anti-money laundering policies and procedures; (3) make and retain required books and records for hundreds of transactions relating to the fraudulent allocation scheme; (4) report 14 customer complaints; and (5) produce documents and information to FINRA pursuant to Rule 8210 requests. 

Windsor Street allowed Rodriguez and another individual to function in a capacity for which each was not properly registered. Rodriguez functioned in a capacity for which he was not properly registered.  

For this misconduct, the Hearing Officer imposes the following sanctions: (1) Arthur Tacopino is barred from associating with any FINRA member firm in any capacity and ordered to disgorge to FINRA ill-gotten gains of $417,368.71; (2) Windsor Street Capital is expelled from FINRA membership, fined $1,000,000, ordered to disgorge to FINRA ill-gotten gains of $256,550, and ordered to pay restitution of $61,559.02, plus interest; and (3) Edwin Rodriguez is barred from associating with any FINRA member firm in any capacity. 

For the Complainant: Samuel L. Barkin, Esq., Andrew T. Beirne, Esq., Michael P. Manly, Esq., Christopher Kelly, Esq., Department of Enforcement, Financial Industry Regulatory Authority 

For the Respondents: No appearance

Bill Singer's Comment: The OHO Default Decision is very well drafted and makes a compelling case for the imposition of the expulsion and bars. On the other hand, let's not pretend that there's much of a chance that FINRA will collect most (or even any) of the monetary sanctions: Windsor Street is essentially defunct and Tacopino and Rodriguez are not registered with any member firm.
May 30 was originally chosen as Decoration Day because it was supposedly the only day in the Spring calendar that wasn't already commemorating a major Civil War battle. That war was so thick with battles one can well question the premise. Still, General John Logan chose to honor the Fallen on the one day when, at least by his lights, the guns fell silent. He chose a solitary day of peace, a day when no one died in combat, the only kind of day on which a private life can thrive, and I think he chose well. We lost something sacred when we made Memorial Day a mere seasonal three-day weekend.

Waterbury Man Guilty of Fraud and Money Laundering Offenses Related to $1.5 Million Fraud Scheme (DOJ Release)
In an Indictment filed in the United States District Court for the District of Connecticut, Leon C. Vaccarelli was charged with three counts of mail fraud, six counts of wire fraud and three counts of money laundering; and, thereafter, a superseding indictment added three counts of wire fraud and six counts of securities fraud. Following a jury trial, Vaccarelli was found guilty on all 21-counts. As set forth in part in the DOJ Release:

[V]accarelli was a registered representative of The Investment Center ("TIC"), a brokerage company, and was an investment adviser associated with IC Advisory Services, Inc. ("IC Advisory").  He also was the owner and only member of LWLVACC, LLC, and conducted business through an entity named Lux Financial Services ("Lux Financial").  Using these various entities, Vaccarelli operated a financial advisory and brokerage service through which he offered investment advice and sold investments and securities to individuals and families in the Waterbury area.

Between approximately 2011 and 2017, Vaccarelli defrauded approximately 15 victim investors of approximately $1.5 million by falsely representing that he would invest his clients' money in IRA rollover accounts, money market accounts, certificates of deposit ("CDs"), or other types of interest-earning investments.  However, instead of investing customers' funds as he had represented, Vaccarelli deposited customer funds into his own personal account and business bank accounts, commingled those funds with his own money, and used the funds to pay both business and personal expenses, including tuition and mortgage payments.  In some instances, he also used customer funds to make bogus "interest payments" to other victim-investors.

Vaccarelli's victims include an elderly woman who Vaccarelli coerced into transferring approximately $300,000 in funds from a safe investment portfolio into a bank account that Vaccarelli controlled.  Vaccarelli subsequently spent the money on personal expenses and to pay off another investor who threatened to sue him.  Vaccarelli also stole nearly $500,000 from a trust, which was established in 1991 to care for a woman with diminished capacity.  Other victims include a retired schoolteacher, a retired construction worker, and medical professionals. 

SEC Obtains Asset Freeze in Offering Fraud Related to Opioid Crisis (SEC Release)
In a Complaint filed in the United States District Court for the Eastern District of Pennsylvania, the SEC charged biometric device and software start-up company Fallcatcher and its founder, Henry Ford, with violations of 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; and the Complaint seeks permanent injunctions, disgorgement plus prejudgment interest, and penalties. As set forth in part in the SEC Release, Ford falsely told over 50 investors that: 

well-known insurers and state governments had expressed interest in Fallcatcher's technology. Ford allegedly told investors that this technology tracked patients receiving opioid addiction treatment to prevent medical billing fraud. The SEC further alleges that Ford showed investors a fabricated letter of interest from a prominent insurance company expressing an interest in starting a pilot program using Fallcatcher's technology. In reality, however, the SEC's complaint alleges that no insurers or state governments had ever expressed any interest in either Fallcatcher or its technology.

SEC Announces Fraud Charges in Real Estate Investment Scam (SEC Release)
In a Complaint filed in the United States District Court for the Northern District of Illinois, the SEC charged George Slowinski, the principal and owner of Rebuilding America, LLC,  with having violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) the Securities Exchange Act and Rule 10b-5 thereunder, and aided and abetted Rebuilding America's violations of the antifraud provisions of Sections 17(a) and 10(b), and Rule 10b-5 thereunder; and, further, the Complaint seeks injunctive relief, disgorgement of ill-gotten gains, and civil penalties. As set forth in part in the SEC Release:

[S]lowinski and Rebuilding America allegedly told investors that Rebuilding America would pool investor proceeds to acquire, refurbish, and sell for profit residential real estate primarily located in the South Side of Chicago. Slowinski and Rebuilding America allegedly lured investors by touting Rebuilding America as a successful real estate program, and falsely promising to pay investors 38% returns in only two years. They allegedly raised more than $20 million from over 600 investors with assistance from London-based Project Kudos Group Limited and Singapore-based Infinity Treasures Private Limited.

According to the complaint, while Slowinski touted Rebuilding America's profitability, he hid from investors that between 34% and 42% of every investment dollar would be diverted, upfront, to Slowinski and other Rebuilding America principals in the form of undisclosed fees and commissions. Slowinski allegedly quickly realized that Rebuilding America's business model was untenable, and would not be able to repay investors as promised. Yet, Slowinski allegedly continued to solicit investors and accept the hidden fees. The SEC further alleges that Slowinski diverted more than $2.8 million of investor funds, which had been earmarked for construction on specific Rebuilding America projects, to improperly pay for his companies' payroll, overhead, and cost overruns on other projects.
Brian Kucharski and Jolanta Kucharski pled guilty to mail fraud in the United States District Court for the Middle District of Florida. As set forth in part in the DOJ Release:

[K]ucharski assisted her son, Brian Kucharski, in obtaining from publicly available websites personal identifying information of unsuspecting individuals, including their names and birthdates, and using that information to create fake eBay selling accounts. Brian Kucharski then used those accounts to negotiate the fraudulent sale of products, predominantly gift cards, through eBay, Inc. Unsuspecting eBay customers paid for ordered items through fraudulent PayPal accounts that Jolanta and Brian Kucharski had created. Brian Kucharski used the fraudulently obtained proceeds of the illegal activities to purchase precious metals, which were delivered to the Kucharskis through the U.S. mail.

Meanwhile, instead of mailing the purchased items to the eBay customers, Jolanta and Brian Kucharski also used the U.S. Postal Service (USPS) to disguise their fraudulent activities, by mailing random items to other individuals and using the USPS tracking numbers for those items to represent to eBay customers, and eBay, that they had mailed the purchased eBay items. The customers never received their items, and their demands for refunds were routinely denied.

The scheme was uncovered when postal customers all over the United States received priority mail packages containing random items of no value and contacted their local police departments and post offices. U.S. Postal Inspection Service investigators then identified Brian and Jolanta Kucharski as the perpetrators of the eBay scheme.

A Quarter Century of Exchange-Traded Fun! (Speech by SEC Commissioner Hester Peirce at the ETFs Global Markets Roundtable)
As always, Commissioner Peirce delivers some provocative remarks -- this time she casts her gaze upon Exchange Traded Product ("ETP"), which essentially hit the markets with the 1993 launch of the first Exchange Traded Fund ("ETF"). Unlike many of her predecessors, Commissioner Peirce always asks whether a particular SEC policy is still relevant, still pertinent, still cost-effective. In her hectoring style, which I find refreshing, she refuses to simply get into the regulatory boat and row in the designated direction. Peirce will not merely pick up her oar without asking where we're going, why, and whether it's worth it. She has her detractors. I get it. On the other hand, it's always comforting to know that there's someone at any regulator who provokes debate. In part, Peirce's recent speech mused about the following [Ed: footnotes omitted]:

The earliest relevant prospectuses make absolutely clear that the ETFs operated pursuant to daily investment objectives, that they utilized leveraged investment techniques to achieve those objectives, and that mathematical compounding combined with leveraging prevented the ETFs from achieving their stated objectives over a period of time greater than one day. [The] prospectuses make clear that ETFs used aggressive financial instruments and investment techniques that exposed the ETFs to potentially "dramatic" losses "in the value of its portfolio holdings and imperfect correlation to the index underlying."

As I read them, leveraged and inverse ETF prospectus disclosures clearly lay out their investment objective, strategy, risks, and target audience-which they underscore is not your typical buy and hold retail investor.

Denying new fund sponsors the ability to offer leveraged and inverse ETFs has created an oligopoly for the ETF sponsors that obtained a leveraged or inverse ETF order before the moratorium took effect. New sponsors cannot enter the market and thus investors seeking to invest in leveraged and inverse fund products must choose among the suite offered by the two remaining ETF sponsors or from among the mutual funds that offer similar investment strategies. Given the advantages of easy entry and exit that the ETF structure offers, the leveraged and inverse space is one in which investors might particularly welcome additional ETF options.

Our unwillingness to allow more competitors to offer geared ETFs seems to be another example of our denying or curtailing access to an investment product that would be useful to some investors. The combined effect of the investor alert and moratorium has caused many investment professionals to refuse to offer leveraged and inverse ETF investments to retail investors. The same "protect them from their wild selves" logic courses through our accredited investor definition, which keeps most investors out of the private markets through which they could diversify their portfolios and gain exposure to companies during their early growth phases. Our urge to protect investors is laudable, but protecting them by limiting their options for portfolio diversification and risk mitigation is not the approach Congress directed us to take.