Securities Industry Commentator by Bill Singer Esq

August 1, 2019

Owner of High-End Wine Storage Facility Sentenced to Federal Prison for Embezzling From His Customers / Over Nearly 5 Years, Holder Stole Between $550,000 and $1.5 Million Worth of Customers' Wine (DOJ Release)
As some readers of Securities Industry Commentator know, I was the third generation of my family in the wine and liquor business before I became a lawyer. Some folks wonder why the hell anyone would want to practice law rather than drink fine wine. That's a fair question. When I made the career change, I had a lot of great reasons. In particular, I thought that I would become a lawyer for a huge wine company or distillery. Instead, I wound up in the Legal Department of Smith Barney, Harris & Upham. Some 37 years later, I'm not exactly sure just what the hell I was thinking. Smith Barney is long gone but, then again, so is Heublein's Brass Monkey (look it up all you Millennials).

In any event, notwithstanding all the horrific crime and fraud that has been covered in the Securities Industry Commentator,few caused more carnage than the dastardly acts of William Lamont Holder, who pled guilty in the United States District Court for the District of Maryland to wire fraud. Holder was sentenced to 18 months in prison plus three years of supervised release, and he was ordered to pay $1.5 million in restitution. As set forth in part in the DOJ Release:

[W]illiam Lamont Holder was the sole owner and operator of Safe Harbour Wine Storage, LLC ("Safe Harbour").  Through Safe Harbour, Holder stored and transported upscale wines for private collectors and commercial establishments.  In return for a monthly fee, Holder would arrange for the transportation of a customer's wine to Safe Harbour's storage facility in Glen Burnie, Maryland, where it would be inventoried and stored.  Holder did not possess a license to sell wine in the State of Maryland.  

From January 2013 through December 2017, Holder developed a scheme to obtain payments and wine from the customers of Safe Harbour for his own personal financial gain. Unbeknownst to his customers, he offered their wine for sale to wine retailers and brokers around the country, including in Napa, California, all the while continuing to collect the customers' monthly storage fees and accept additional wine for storage.

Holder represented to potential third-party buyers that he was the lawful owner of the wine that he was offering to sell.  By e-mail and facsimile, he sent them lists of bottles of wine stored in his warehouse with detailed descriptions of the winery, vintage, and asking price.  After the buyers selected the bottles they wanted to purchase, Holder boxed and shipped the wine, and sent his bank account information.  After inspecting the shipment of wine, the buyers would either wire the money directly into Holder's bank account or send a check.  Holder kept the proceeds from the sales and spent it on personal expenses.
The Madoff Victim Fund began its fourth distribution, which includes $469.6 million in additional disbursements, to  over 25,000 victims in connection with the Bernard L. Madoff Investment Securities LLC ("BLMIS") fraud scheme.  The distributions to date amount to some $2.4 billion, which purportedly raises the total recovery to 66.85% of losses.  Allegedly, tThe Madoff Victim Fund will ultimately return over $4 billion in recovered assets to victims, of which about $2.2 billion was collected from the estate of Jeffry Picower; and a further $1.7 billion was collected as part of a Deferred Prosecution Agreement with JPMorgan Chase Bank N.A. for Madoff-related Bank Secrecy Act violations. 

Following a federal jury trial in the United States District Court for the District of Maryland, after less than five hours of deliberation, Defendant Dawn J. Bennett was convicted on 17 federal charges including conspiracy, securities fraud, wire fraud, bank fraud, and making false statements on a loan application. Bennet was sentenced to 20 years in prison plus five years of supervised release; and she was ordered to pay $14,504,290 in restitution and a $14,306,842 forfeiture. On August 25, 2017, the SEC filed a related action against Dawn J. Bennett and DJB Holdings, LLC d/b/a/ DJBennett and alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Bennett's co-defendant, Bradley Mascho, pled guilty to conspiracy to commit securities fraud and to making a false statement; and he is required to pay restitution in the full amount of the victim's losses, which is at least $5,720,457, minus amounts repaid with money not derived from his criminal conduct, but in no event less than $3,650,238.  As set forth in part in the DOJ Release:

[B]etween December 2014 and April 2017, Bennett solicited individuals to invest money in her Internet clothing business, offering an annual interest rate of 15% via convertible or promissory notes.  In order to entice individuals to invest, Bennett made false and misleading statements, including: the risks of investing in DJB Holdings; how investors' funds would be used; and that the loans were liquid and guaranteed by DJB Holdings' inventory and assets, and by Bennett herself.  Witnesses testified that Bennett concealed the true financial condition of her companies from investors.  Bennett convinced several investors to withdraw a significant portion of their retirement accounts to invest in, and loan money to, her companies.  The evidence showed that Bennett misappropriated investor funds, using them to fund a lavish lifestyle, pay her personal legal expenses, and repay previous investors with funds she received from new investors.  This is consistent with a Ponzi scheme--a fraudulent investment scheme where the operator of the scheme solicits investors by promising high rates of return with little risk.  The scheme operator then funds payments to the earlier investors through funds obtained through new investors. Typically, the operator of the scheme will use investment funds for purposes other than what was conveyed to the investors.

According to testimony at trial, over the course of the scheme, Bennett obtained more than $20 million from 46 investors, many of them retirees who knew of Bennett from a radio show she hosted.  Some of those funds were used to pay earlier investors and the rest was used for her personal benefit, including: a luxury suite at a football stadium; to pay a website operator to arrange for priests in India to perform religious ceremonies to ward off federal investigators; to purchase astrological gems; and for cosmetic medical procedures.

Evidence at trial showed that in May 2015, DJB Holdings, LLC also obtained a $750,000 line of credit, with Bennett as guarantor.  According to witness testimony, in support of this line of credit, Bennett made false statements to the bank, including that she had a brokerage account with a net portfolio value of over $4 million.  In reality, Bennett's net portfolio value for that same account was only $35.  The loan proceeds were to be used solely for business operations, but Bennett used the funds to pay off investors and to pay her personal expenses.  In February 2016, the lender declared the loan in default.  Bennett told the lender that she was unaware of the default because she had been in China for the preceding eight months.  According to trial evidence, there was not any international travel for Bennett during the time in which she claimed to be in China, and her personal American Express card showed numerous transactions during that time in the Chevy Chase, Maryland and Washington, D.C. area.
For those of you that have never been through the FINRA Hearing process, here's a quick rundown of how it works. FINRA Enforcement attorneys, FINRA location, and a FINRA Hearing Officer. Who is FINRA kidding?

In the Matter of Department of Enforcement, Complainant, vs. Allen Holeman, Respondent (FINRA National Adjudicatory Council Decision, Complaint No. 2014043001601 / May 3, 2017)
As set forth in the Syllabus to a Financial Industry Regulatory Authority ("FINRA") Office of Hearing Officers ("OHO") Hearing Panel Decision:

For willfully failing to timely update his Form U4 to disclose two tax liens and making false statements to his firm on annual compliance questionnaires, Respondent is suspended from associating with any FINRA member firm in any capacity for 30 business days and fined $10,000. His willful violation subjects him to statutory disqualification. Respondent is assessed the costs of the hearing. 

Holeman denied that he had willfully failed to timely disclose the tax liens; and he argued that 1) he did not receive notice of the liens,  and  2) an Internal Revenue Service  agent advised him that the liens applied to his property, not him personally. Accordingly, Holeman argued that he was not required to report these liens. Holeman was represented by counsel before the OHO Panel.

In the Matter of Department of Enforcement, Complainant, vs. Allen Holeman, Respondent (FINRA National Adjudicatory Council Decision, Complaint No. 2014043001601 / May 21, 2018)
On appeal to the NAC,  Holeman represented himself pro se before the NAC, which affirmed the OHO findings and modified the sanctions by increasing the suspension to four months and increasing the fine to $20,000. The NAC affirmed the hearing costs and Holeman's statutory disqualification. As set forth in part in the NAC Decision [Ed: Footnotes omitted]:

The Hearing Panel concluded that Holeman's nondisclosures were merely negligent, and that his violations were serious but not egregious. We disagree. We conclude based on the number of aggravating factors and the absence of any real mitigation that Holeman's misconduct was egregious and necessitates a sanction more meaningful than that imposed by the Hearing Panel. FINRA rules obligate individuals to make truthful and accurate disclosures. Holeman's false certification on his firm's compliance questionnaire and his repeated failures to amend his Form U4 to disclose material information about his financial problems raise serious questions about his ability to comply with regulatory requirements and demonstrate that he is currently unable to meet the high standards required of those employed in the securities industry. 

Finally, we agree with Enforcement that a "chief compliance officer's false statements to his firm on a compliance questionnaire constitute a particularly serious violation." As David Lerner's CCO, Holeman is the steward of his firm's compliance culture. He is responsible for managing compliance issues at David Lerner, including ensuring that his firm is complying with its regulatory requirements and that its employees are complying with internal policies and procedures. We find it deeply troubling that Holeman was aware of FINRA's investigation into his failure to disclose his federal tax liens, yet he failed to timely amend his Form U4 and falsely certified to David Lerner that no such liens existed. Holeman has four decades of experience in the securities industry, specifically in the area of compliance. He cannot legitimately claim any lack of understanding as to the importance of answering truthfully on a compliance questionnaire or the Form U4.

Paged 13 of the NAC Decision

In the Matter of the Application of Allen Holeman for Review of Disciplinary Action Taken by FINRA (Opinion, '34 Act Rel. No. 86523; Admin. Proc. File No. 3-18546)
Representing himself pro se, Holeman appealed the NAC Decision the SEC. As set forth in the Syllabus to the SEC Opinion:

Registered principal of FINRA member firm appeals from FINRA disciplinary action finding that he did not timely update his Form U4 to disclose tax liens, that he provided false information in his firm's Annual Compliance Certification, and that he is subject to a statutory disqualification because he acted willfully and because the information that he failed to disclose was material. Held, FINRA's findings of violations, finding of a statutory disqualification, and imposition of sanctions are sustained.

Expressing its skepticism in response to Holeman's defenses, the SEC Opinion asserts that [Ed: footnotes omitted]:

Holeman acted with extreme recklessness despite his contention that he did not disclose the liens because he thought liens against property did not have to be disclosed. To the extent Holeman found Question 14M to be ambiguous, it was his "duty to determine whether disclosure was required." Indeed, Holeman testified at the hearing that had he known about the liens "it would have been my position at that time to report them or certainly check with counsel about reporting them." Holeman confirmed in response to a question from a hearing panelist that he "would have checked with counsel" even if the lien stated that it attached to property. But the record establishes that Holeman knew about the liens. 

To the extent Holeman claims that he did not see the liens until February 2015, that does not mean he was unaware of them before that time. Holeman stated repeatedly before the hearing that he knew about the liens but did not disclose them because he did not think they were against him, and the hearing panel did not credit his contrary testimony at the hearing. Yet Holeman did not consult counsel to determine if the liens needed to be disclosed. Although he attempts to rely on the email from David Lerner's general counsel and the Wexler letter, those communications occurred after FINRA began its investigation. Holeman cannot rely on these communications to justify his failure to disclose the liens until that time. Holeman's failure to take any steps to probe the liens or resolve his apparent confusion about whether the liens needed to be disclosed in response to a question asking whether he had any unsatisfied liens against him was such an extreme departure from the standards of ordinary care that the danger of misleading investors by not disclosing the liens was so obvious that he must have been aware of it.

Pages 17 - 18 of the SEC Opinion

In sustaining FINRA's imposition of sanctions, the SEC Opinion finds that: [Ed: footnotes omitted]:

Holeman willfully failed to disclose three tax liens totaling over $116,000 on his Form U4 and provided false information about them in his firm's Annual Compliance Certification. The liens were material to the ability of regulators, his employers, and their customers to assess Holeman's capability to function as an associated person of a FINRA member firm.55 Holeman did not disclose the April 2009 federal tax lien while it remained unsatisfied and later deleted the disclosure he made. He did not disclose the October 2009 federal tax lien for nearly six years despite the fact that it remained unsatisfied during that time, and he did not disclose the May 2011 federal tax lien for nearly four years despite the fact that it remained unsatisfied during that time. Holeman's disclosures were made only after FINRA began investigating the liens, and even then he waited six months to make the disclosures. We agree with the NAC that it is "deeply troubling that Holeman was aware of FINRA's investigation into his failure to disclose his federal tax liens, yet he failed to timely amend his Form U4." Indeed, we cannot understand how Holeman can maintain that he did not know about the liens until February 2015 when FINRA asked Holeman about all three liens specifically in November 2014. 

Holeman has worked in the securities industry as a registered person and principal for forty years. As a result, he must have been aware of the importance of accurate, current disclosures on Form U4 not only to his employer but also to firm customers and to the investing public.56 We have noted that "a representative's truthfulness in answering the financial disclosure questions on the Form U4 is a particularly critical measure of fitness for the industry because a commitment to accurate, complete, and non-misleading financial disclosure is central to any securities professional's responsibilities" and, therefore, "untruthful answers call into question an associated person's ability to comply with regulatory requirements."

The Guidelines instructed FINRA to consider as a potential mitigating factor whether a lien that was not timely disclosed had been satisfied. Although the April 2009 federal tax lien was ultimately satisfied in April 2013, Holeman failed to disclose that lien on six different Oppenheimer Form U4 amendments filed when it was unsatisfied. And both the October 2009 and May 2011 federal tax liens still remained unsatisfied at the time of the complaint in June 2016. The October 2009 federal tax lien has since been satisfied, but the record does not indicate that the May 2011 federal tax lien has been satisfied. We therefore find the fact that Holeman eventually satisfied the April and October 2009 federal tax liens warrants no mitigation of the sanctions.

Pages 19 - 20 of the SEC Opinion

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In the Matter of Department of Enforcement, Complainant, vs. Robert Charles McNamara, Respondent (FINRA Office of Hearing Officers Hearing Panel Decision, Complaint No. 2016050924601 / June 13, 2018)
As set forth in the Syllabus to the OHO Decision:

Respondent is fined $10,000, suspended from associating with any FINRA member in any capacity for three months, and required to requalify as a registered representative, for: (1) failing to disclose to his employer firm six outside brokerage accounts; (2) improperly purchasing shares in an equity IPO; and (3) giving a false answer on a Client Affirmation Form of Eligibility for Initial Public Offerings

McNamara represented by counsel argued during the OHO hearing that he should not be subject to a suspension or fine because his violations were the result of mistakes. The OHO Panel rejected that defense and noted in part that he "McNamara showed a cavalier attitude toward compliance. He acted recklessly." at page 15 of the OHO Decision

In the Matter of Department of Enforcement, Complainant, vs. Robert Charles McNamara, Respondent (FINRA National Adjudicatory Council Decision, Complaint No. 2016050924601 / July 30, 2019)
On appeal to the NAC, McNamara reprsented himself pro se, and the NAC affirmed the OHO Decision as set forth in Syllabus:

Respondent failed to disclose to his employer brokerage accounts held at another broker-dealer, improperly purchased equity initial public offering shares in an account held at that broker-dealer, and provided inaccurate information to that broker-dealer in order to purchase those shares. Held, findings and sanctions modified.  

On appeal, McNamara argued that the OHO Hearing Panel incorrectly held him liable under NASD Rule 3050 for failing to disclose to AAM two IRAs held at Merrill Lynch in his wife's name only. Asserting that he had no financial interest in said IRAs (and did not exercise discretion over same), McNamara contended that he had no obligation to disclose these accounts. Also, he argued the the OHO Panel's sanctions were excessive because he had not acted "recklessly" and that the Panel did not give enough weight to mitigating factors. 

As to McNamara's arguments raising mitigation, the NAC Panel conceded that [Ed: footnotes omitted]:

We find there are several applicable mitigating factors. McNamara accepted responsibility for and acknowledged his misconduct prior to detection and intervention by AAM and FINRA and he made no attempt to conceal it. As soon as McNamara realized the equity IPO transaction was violative, he contacted AAM's CEO and disclosed it. McNamara voluntarily and reasonably attempted to remedy his misconduct. Although we realize McNamara did so at the request of AAM's chief compliance officer, we believe he is entitled to  some credit for immediately selling the equity IPO shares and disgorging his profit before FINRA intervened. McNamara's misconduct under causes two and three was an isolated event that occurred over a period of a few days in November 2010, and he engaged in only a single violative transaction. We also give some mitigative value to AAM's termination of McNamara immediately following the issuance of the Hearing Panel's decision because we believe it materially reduces the likelihood of misconduct in the future.  

Pages 14 -15 of the NAC Decision

In modifying the OHO Panel's sanctions, the NAC found that [Ed; footnotes omitted]:

[(1)] McNamara failed to disclose to AAM accounts held at Merrill Lynch in which he had a financial interest, and therefore violated NASD Rule 3050 and FINRA Rule 2010; (2) McNamara purchased shares in an equity IPO while associated with AAM, and therefore violated FINRA Rules 5130 and 2010; and (3) McNamara provided inaccurate information to Merrill Lynch about his status as an associated person to facilitate the IPO transaction, in violation of FINRA Rule 2010. Accordingly, under cause one, we fine McNamara $5,000 and order him to requalify by examination as a general securities representative before reentering the securities industry in any capacity requiring registration. Under causes two and three (unitary sanction), we fine McNamara $5,000, order him to requalify as a general securities representative before reentering the securities industry in any capacity requiring registration, and suspend him in all capacities for 30 business days. Satisfaction of  the requalification requirement under cause one will satisfy the requalification requirement under causes two and three. McNamara is ordered to pay hearing costs in the amount of $3,804.29.

Pages 15 - 16 of the NAC Decision

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In a Complaint filed in the United States District Court for the Eastern District of Pennsylvania, the SEC charged  Global Transition Solutions, LLC ("GTS"), broker-dealer affiliate Global Transition Solutions, Inc., former Chief Executive Officer John T. Place, former President John P. Kirk, and former General Counsel and Chief Operating Officer Paul G. Kirk with misleading customers and prospects about securities transaction fees. The Complaint alleged that the Defendants told many of their customers that GTS would receive only clearly disclosed commissions charged on customers' trades when, in reality, GTS also received amark-ups and mark-downs charged by other brokers and shared with GTS.Without admitting or denying the SEC's allegations, John Place, John Kirk, and Paul Kirk each consented to the entry of final judgments permanently enjoining them from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and the registration provisions of Section 15(c)(1) of the Exchange Act. 
  • John Kirk agreed to pay $379,795 in disgorgement, prejudgment interest of $99,974, and a civil penalty of $379,795; 
  • Paul Kirk agreed to pay $90,939 in disgorgement, prejudgment interest of $23,938, and a civil penalty of $90,939; and 
    • The Kirks both consented to the entry of SEC orders barring them from the securities industry, and Paul Kirk consented to an SEC order barring him from appearing or practicing as an attorney before the Commission. 
  • John Place agreed to pay $375,803 in disgorgement and prejudgment interest of $57,688.  Place previously consented to an order barring him from the securities industry, and the Court did not order him to pay a civil penalty in light of his cooperation during the litigation. 
  • The SEC resolved its lawsuit against GTS and its brokerage affiliate in April 2017.