The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

June 17, 2019

2019 FINRA Board of Governors Election (BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/4649/finra-board-election/
The 2019 FINRA Board of Governors election is upon us. As one of the founders of the NASD Dissident/Reform Movement (now the FINRA Dissident/Reform Movement), and as a member of the 1998 slate of the first four petition candidates to successfully challenge the self-regulatory-organization's process of anointing its industry Board members, I am a fervent proponent of robust, contested elections as a means of democratizing FINRA's Board, which I view as a gerrymandered body designed to entrench the power of the regulator's Large Member Firms and industry special interests. That rigged construct rebuffs meaningful Wall Street reform, artificially constrains the Small Firm Members' influence, and denies proportionate representation for the industry's associated persons and public customers. 

New Jersey Broker Pleads Guilty In "Cherry-Picking" Scheme (DOJ Release)
https://www.justice.gov/usao-ma/pr/new-jersey-broker-pleads-guilty-cherry-picking-scheme
Former FCG Advisors and FCG Wealth Management securities broker Michael Bressman was indicted United States District Court for the District of Massachusetts, and he pled guilty in the United States District Court for the District of New Jersey to securities fraud and investment advisor fraud. As set forth in part in the DOJ Release:

Bressman misused his access to an omnibus or "allocation" account to obtain at least $700,000 in illicit trading profits over a six-year period ending in February 2018. Bressman used the allocation account to place trades and cherry-picked profitable trades, which he then transferred to his own account and the account of family members, while placing unprofitable trades in other customers' accounts. 

Former stockbroker sentenced for defrauding clients (DOJ Release)
https://www.justice.gov/usao-ndga/pr/former-stockbroker-sentenced-defrauding-clients
Stockbroker and investment adviser Sean Kelly pled guilty to wire fraud and securities fraud in the United States District Court for the Northern District of Georgia and he was sentenced to five years in prison plus three years of supervised release, and ordered to pay $1,457,043.99 restitution. As set forth in part in the DOJ Release:

For almost five years, from January 2014 through October 2018, defendant Sean Kelly defrauded his investor clients.  Kelly was a stockbroker and investment adviser who purported to provide tax planning, insurance brokering, and other financial services to his clients.  Kelly advised his victims to invest in various ways, including through private placements, annuities, investments funds, and real estate investment trusts. 

Despite the claimed investments, Kelly instead took his victims' money and used it for personal expenses, to include mortgage payments, Super Bowl tickets, vacations, and significant cash withdrawals.  Ultimately, he stole over $1.4 million from more than 18 clients.  In October 2018, closely following the filing of a lawsuit by the U.S. Securities and Exchange Commission, the FBI obtained a warrant based on Kelly's fraud and arrested him.  At his sentencing, the Court found that Kelly's fraud injured vulnerable victims, including the elderly and veterans.

https://www.justice.gov/opa/pr/second-new-york-broker-dealer-pleads-guilty-rigging-bids-financial-instruments-violation
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Industrial and Commercial Bank of China Financial Services LLC ("ICBC") pleaded guilty to an antitrust charge and was sentenced to pay a criminal fine in excess of $3 million for its involvement in a bid-rigging conspiracy involving certain financial instruments, the Department of Justice announced today. Pursuant to its plea, ICBC admitted that from May 2012 until at least August 2014, it conspired with other institutions and individuals to submit rigged bids to borrow pre-release American Depository Receipts (ADRs). As set forth in part in the DOJ Release:

ICBC pleaded guilty to conspiring to borrow pre-release ADRs from U.S. depository banks at artificially suppressed rates.  During the conspiracy, a U.S. depository bank began using an auction-style process and invited ICBC and other broker-dealers to submit competitive bids for rates to borrow ADRs.  In response, ICBC and its co-conspirators intensified their coordination in an effort to artificially increase their profits under the auction-style process.  On at least 24 occasions, ICBC reached an agreement with one or more co-conspirators as to the bids they would submit to U.S. depository banks.  On many occasions, the conspirators agreed that they would all submit the same bid.

Without admitting or denying the SEC's findings in an Order Instituting Proceedings, https://www.sec.gov/litigation/admin/2019/33-10647.pdf the Industrial and Commercial Bank of China Financial Services LLC ("ICBCFS"), a wholly-owned subsidiary of Industrial and Commercial Bank of China Limited agreed to be censured, return nearly $24 million in ill-gotten gains, and pay $4.4 million in prejudgment interest and a $14.3 million penalty. The SEC Order found that  ICBCFS violated the antifraud provisions of Section 17(a)(3) of the Securities Act and failed reasonably to supervise its securities lending desk personnel.  Separately, ICBCFS pled guilty to an antitrust charge relating to the bid-rigging of pre-released ADRs by the same securities lending desk. In part the SEC Release states that ICBCFS had:

improperly obtained pre-released ADRs from depositary banks when ICBCFS should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.  This inflated the total number of a foreign issuer's tradeable securities and resulted in abusive practices such as inappropriate short selling and dividend arbitrage.  In certain countries, demand for ADR borrowing increased around dividend record dates, so that certain tax-advantaged borrowers could - through a series of transactions - collect dividends without any corresponding tax withholding.  Pre-released ADRs that were improperly obtained by ICBCFS were used to satisfy that demand.

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SEC Files Fraud Charges in Healthcare Investment Scheme (SEC Release)
https://www.sec.gov/litigation/litreleases/2019/lr24501.htm

In an Indictment filed in the United States District Court for the Southern District of New York https://www.justice.gov/usao-sdny/press-release/file/1173621/download, David Wagner and Marc Lawrence were each charged with two counts of securities fraud, one count of conspiracy to commit securities fraud, one count of conspiracy to commit wire fraud, and one count of wire fraud. As set forth in part in the DOJ Release:

From at least in or about December 2013 through at least in or about 2017, WAGNER, the chief executive officer of Downing, and LAWRENCE, the president of several Downing entities, solicited investments in Downing, a purported venture capital firm that would invest in healthcare start-ups referred to as "portfolio companies" and provide sales, operations, and management expertise to the portfolio companies in order to bring their products to market and generate returns for Downing investors, who also worked for Downing (the "employee-investors").  WAGNER and LAWRENCE, and others acting at their direction, solicited more than approximately $8 million in investments in Downing from employee-investors located across the United States, including in the Southern District of New York, as a requirement of employment with Downing. 

After making the required investment of between $150,000 and $250,000 in Downing and starting their employment at Downing, employee-investors soon learned, among other things, that contrary to representations made by WAGNER and LAWRENCE, and others acting at their direction, Downing did not have access to millions of dollars in funding, often could not make payroll, had virtually no products to sell, and that employee-investors were the overwhelming source of funding.  Employee-investors also learned that WAGNER and LAWRENCE had misrepresented the companies in Downing's portfolio, their product readiness, and ability to generate revenue.  While the particular formulation of these misrepresentations shifted over time, WAGNER and LAWRENCE systematically sought and obtained employee-investor money through materially false and misleading statements. 

Beginning in or about May 2016, after several employee-investors had brought lawsuits against WAGNER, LAWRENCE, and several Downing entities, alleging claims based on, among other things, fraud, WAGNER and LAWRENCE continued the scheme by recruiting employee-investors into a new company called Cliniflow Technologies, LLC ("Cliniflow"), through materially false and misleading statements about Cliniflow's cash reserves, portfolio companies, and exposure to litigation.  In fact, Cliniflow purportedly held majority ownership in the same primary portfolio company as other Downing entities and was simply a new name used by WAGNER and LAWRENCE to solicit investments from new employee-investors that was not tainted by the lawsuits filed against Downing entities.  A majority of the over $1.5 million raised by WAGNER and LAWRENCE through Cliniflow was transferred to other Downing entities and used to pay for, among other things, WAGNER's personal expenses and the repayment of prior investors.

Finally, in or about January 2017, WAGNER obtained a $400,000 loan and $100,000 grant from the Connecticut Department of Economic and Community Development ("CTDECD") for Cliniflow on the basis of materially false statements made by WAGNER to the CTDECD.  WAGNER transferred a majority of the funds obtained from the State of Connecticut, which were required to be used for Cliniflow's purported relocation from New York to Connecticut, to other Downing entities and also used a portion of the funds to purchase a luxury car for his daughter.

In a Complaint filed in the United States District Court for  the Southern District of New York, https://www.sec.gov/litigation/complaints/2019/comp24501.pdf, the SEC charged  unregistered investment adviser David Wagner, Mark Lawrence, Downing Partners, Downing Investment Partners, and Downing Digital Healthcare Group with primary and aiding and abetting 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 charges Wagner with control person liability for violations of the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder by Downing Partners, Downing Investment Partners, and Downing Digital Healthcare Group. The complaint also charges Wagner and Downing Partners with primary violations of the antifraud provisions of Sections 206(1), (2), and (4) of the Investment Advisers Act and Rule 206(4)-8 thereunder and charges Lawrence with aiding and abetting those violations. Parallel criminal charges were filed against Wagner and Lawrence. As set forth in part in the SEC Release, between may 2014 and January 2017, the Defendants allegedly:

raised over $9 million from at least 38 investors in certain healthcare funds. According to the SEC's complaint, the Defendants purported to acquire, manage, and resell companies that provided healthcare services and related technologies for the funds' investment portfolios. Wagner controlled the healthcare funds and their bank accounts and with Lawrence, solicited investors on behalf of the funds. To entice new investors, Wagner and Lawrence falsely inflated the available cash reserves of the funds, which included Downing Investment Partners and Downing Digital Healthcare Group, and revenue from the funds' portfolio companies. The SEC further alleges that Wagner secretly negotiated an agreement requiring Downing Digital Healthcare Group to pay management fees to himself and an entity that he controlled, thereby resulting in the fund paying over $540,000 in undisclosed management fees.

SEC Charges North Carolina Businessman and His Companies with Fraudulent Offering Scam (SEC Release)
https://www.sec.gov/litigation/litreleases/2019/lr24502.htm
In a Complaint filed in the United States District Court for the Eastern District of North Carolina https://www.sec.gov/litigation/complaints/2019/comp24502.pdf,  the SEC charged Alton Perksin and  two companies that he allegedly controlled (Yilaime Corporation of NC ("Yilaime NC") and Perkins Hsu Export Corporation ("Perkins Hsu") and AmericaTowne Holdings, Inc. ("AmericaTowne")) with having violated and/or aided and abetted 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. Additionally the Complaint charged Perkins, Yilaime NC and former Yilame Phuati Vice Chairman/Managing Director Mabiala Phuati with having violated the registration requirements under Section 5 of the Securities Act. Also, the Complaint charged Yilaime Corporation of Nevada with having aided and abetted Perkins's, Yilaime NC's and Perkins Hsu's violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act. Finally, the Complaint charged Perkins and AmericaTowne violated and/or aided and abetted reporting violations of Section 13(a) of the Securities Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13. The Perkins Family Trust was named as a Relief Defendant based on its ownership of assets purchased with investors' funds. As set forth in part in the SEC Release:

[B]etween approximately January 2014 and April 2015, Perkins and the two companies made numerous representations to investors regarding their planned uses of the investment proceeds, entity expenses, related party transactions and Perkins's own compensation. The complaint alleges, however, that through a series of self-dealing transfers and withdrawals, Perkins misappropriated approximately $800,000 of the investors' funds, including approximately $580,000 to purchase his home. Further, Perkins allegedly touted his successful business background, while failing to disclose his prior criminal and disciplinary history, including his felony nolo contendere plea for fraudulent misappropriation in Maryland and a desist and refrain order from California relating to his offer and sale of securities. The complaint further alleges that Perkins and another defendant, Mabiala Phuati, the former Vice Chairman and Managing Director of Yilaime NC, violated the securities registration requirements when offering and selling some of these securities.

Additionally, as alleged, between approximately November 2015 and July 2016, another Perkins-controlled entity, AmericaTowne Holdings, Inc. ("AmericaTowne"), claimed in its public filings with the Commission that it had nearly $2 million in contracts, when Perkins and AmericaTowne knew that the contracts had little to no value.

Pennsylvania Woman Charged with Fraud For Perpetrating "Grandparents Scheme" (DOJ Release)
https://www.justice.gov/usao-edpa/pr/pennsylvania-woman-charged-fraud-perpetrating-grandparents-scheme
Yahaira Diaz was charged in an Information filed in the United States District Court for the Eastern District of Pennsylvania with aggravated identity theft, mail fraud, and access device fraud in connection with her role in a "Grandparents Scheme." As set forth in part in the DOJ Release:

[A] individual called an elderly victim posing as the grandchild of the victim, or posing as an attorney representing the grandchild. The caller claimed that the grandchild was in a vehicular accident and was arrested for driving under the influence (or some type of legal trouble). The caller then said that the grandchild needed money for bail or legal representation, and persuaded the victim to send thousands of dollars in cash via overnight delivery service to an address where the schemers retrieved the package. The schemers then continued to call the victim and demand more money until the victim realized that he or she had been defrauded and stopped sending money.

In those telephone calls, to further convince the grandparents to send cash, the co-schemers described the grandchild's situation as increasingly serious: claiming that the grandchild had been arrested for driving under the influence; that a pregnant woman was involved in the accident; that the pregnant woman and her unborn child were injured or killed; that the grandchild would not be released from prison without additional funds; and that legal and other fees were mounting.

Diaz allegedly played a leadership role in this scheme, which she and her co-schemers perpetrated in Allentown and Bethlehem, Pennsylvania. For example, she identified and arranged for access to residential locations where her co-schemers instructed victims to send the fraud proceeds. Diaz recruited and controlled additional participants in the scheme who allowed her to use their residences for the receipt of proceeds, and who helped retrieve the packages and shared the proceeds with other co-schemers.

Diaz engaged in numerous incidents of the Grandparents Scheme as well as credit card fraud, which is also charged in the Information. In the Grandparents Scheme, Diaz and her co-schemers defrauded at least 10 elderly victims of at least $158,800 and attempted to defraud those victims of at least an additional $69,000. If convicted, the defendant faces a maximum possible sentence of 72 years in prison, including a mandatory minimum term of two years in prison.

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