Securities Industry Commentator by Bill Singer Esq

October 8, 2019

featured in today's Securities Industry Commentator:
Perry Santillo pled guilty in the United States District Court for the Western District of New York to conspiracy to commit mail fraud, mail fraud, and conspiracy to launder money; and he also agreed to plead guilty to a mail fraud charge pending against him in the Middle District of Pennsylvania. 
As alleged in part in extensive extract below from the DOJ Release:

[B]etween January 2008 and June 2018, the defendant conspired with an individual identified as C.P., and others, to obtain money through an investment fraud commonly known as a Ponzi scheme. Specifically, in 2007, Santillo and C.P., as equal partners, formed a business known as Lucian Development in Rochester. Prior to approximately July 2007, Lucian Development raised millions of dollars from investors in Rochester, and elsewhere, by soliciting investments for City Capital Corporation, a business operated by Ephren Taylor. In July 2007, Santillo and C.P. were advised by Ephren Taylor that their investors' money had been lost. In response, in August 2007, Santillo and C.P. agreed to acquire the assets and debts of City Capital Corporation. The acquisition proved financially ruinous, with the amount of the acquired debt far exceeding the value of the acquired assets. Taylor was later prosecuted and convicted of operating a Ponzi scheme.

Subsequently, Santillo and C.P. chose not to disclose the truth to investors that their money, entrusted to Lucian Development for investment in City Capital Corporation, was gone. Instead, the defendant and C.P. continued to solicit ever-increasing amounts of money from new investors in an unsuccessful attempt to recoup the losses.  In order to find potential investors to solicit and defraud, Santillo and C.P. purchased businesses from established investment advisors or brokers who were looking to exit their businesses. Between approximately 2008 and September 2017, Santillo and C.P., using money obtained from prior investors, purchased the businesses of at least 15 investment advisors or brokers, located in Tennessee, Ohio, Minnesota, Nevada, California (5 businesses), Florida, South Carolina (2 businesses), Texas, Pennsylvania, Maryland, and Indiana.

The investment offerings pitched by Santillo and C.P. consisted principally of unsecured promissory notes and preferred stock issued by various entities controlled by Santillo and C.P. Potential investors were offered an apparent array of investment options to create the illusion of a diversified investment portfolio. Those investment options included products issued by purported issuers such as First Nationle Solutions (FNS), Percipience Global Corporation, United RL Capital Services, Boyles America, Middlebury Development Corporation, and NexMedical Solutions, among others. None of these issuers had substantial bona fide business operations or used investor money in the manner and for the purposes represented to investors. To the extent that an issuer may have had some minor legitimate business activities, it was not profitable and insufficient revenues were generated to pay investors any returns (let alone return the principal amounts of their investments). Santillo, and others, sold fraudulent investments from these issuers to investors who were told that the money received would be used to conduct the purported business of each respective issuer. In fact, however, such issuers were the defendant's various Ponzi schemes. Santillo, and others working with him, fraudulently induced investors to invest at least $46,000,000 in the First Nationle offering since February 2012, $22,000,000 in the Percipience offering since July 2012, and $25,000,000 in the United RL offering since March 2015.

Over the years, to keep the Ponzi scheme from being detected, a substantial portion of incoming new investor monies were depleted by making promised interest and other payments to earlier investors. Most of the rest of incoming investor money was used by Santillo, C.P. and other co-conspirators: to finance lavish lifestyles of the conspirators, their families and associates; to expand the scheme by purchasing investment advisor/brokerage businesses to obtain access to fresh investors; and to pay operating expenses - salaries for a sales force and administrative staff, office rents and related expenses, housing for employees, and interest on loans-all of which were used to keep the scheme going and maintain a facade of legitimate business operations.

Very little investor money was deployed in productive investments, and when so deployed, the investments yielded meager income and were not profitable, or failed altogether.  The Ponzi scheme was headquartered and based out of locations in Rochester, with a number of satellite offices around the country. Administrative and banking functions were largely performed out of Rochester. The conspiracy employed a variety of sales people, including Santillo and C.P., who traveled around the country to meet with and solicit new investors. In the Middle District of Pennsylvania, Santillo, and others, conducted their fraud scheme under the guise of an investment business located in Scotrun, Monroe County, using various business names, including Advice and Life Group, Poconos Investments, First American Securities, and Financial Planners Group of America.

Between January 2012 and June 19, 2018, Santillo and C.P. obtained at least $115.5 million from approximately 1000 investors. By the time the scheme collapsed in late-2017/early 2018, Santillo and C.P., doing business through an array of corporate entities, had returned approximately $44.8 million to investors as part of their scheme, but continued to owe investors approximately $70.7 million in principal. . . .

Bill Singer's Comment: I have provided the extensive above quote because of my familiarity with the case and my personal interaction with several victims. Frankly, the stories of the families defrauded by the participants in this scheme are horrendous. I spoke with family-members and caregivers who related stories of victims who were lured into these bogus investments at times when they were suffering from terminal cancer, dementia, or severe disabilities. Unfortunately, it was my experience that the victims and their families were not afforded timely, substantive, or compassionate assistance by many of the regulators and prosecutors involved. In some instances, I personally spoke with the regulatory community and I too came away with the sense that no one wanted ownership of the fraud -- or responsibility for allowing it to persist for a decade. For some victims, their experience was the frustration of being shuttled from FINRA to the SEC to the FBI to the Department of Justice and back into that endless loop of useless referrals to nowhere. Moreover, frequent pleas for information and guidance were responded to with what was often viewed as disinterest or a shocking lack of empathy. For some details as to the background of this story, READ: FINRA Buries The Lede With FAS Rep Settlement ( Blog / June 26, 2017)

SEC Charges Four Individuals in Broker Bribery Scheme (SEC Release)
In Complaints filed in the United States District Court for the Southern District of New York, the SEC charged:
violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rules 10b-5(a) and (c) thereunder. The Complaints seek permanent injunctions, disgorgement plus interest, and penalties against all defendants, an officer-and-director bar against Pereira, and penny stock bars against Pereira, Brown, and Mitchell. Pereira agreed to the entry of a partial judgment against him whereby he consents to injunctive relief and bars with other monetary relief to be determined. In a parallel action on Friday, the U.S. Attorney's Office for the Eastern District of New York brought criminal charges against Auerbach. As alleged in part in the SEC Release:

[F]rom approximately July 2014 through October 2015, Jeffrey Auerbach and Jared Mitchell entered into purported "consulting agreements" with Gino M. Pereira, the CEO of Nxt-ID, Inc., a publicly-traded security technology company. The agreements were actually a guise through which Auerbach and Mitchell funneled cash bribes from Pereira to Richard Brown, a registered stockbroker, to buy Nxt-ID stock in Brown's customers' accounts. The SEC alleges that Brown did not disclose the fact or amount of the bribes he received to his customers. Earlier last week, on Monday, September 30th, the SEC filed a complaint against Pereira. All told, the fraudulent scheme cost investors over $100,000.
In a FINRA Arbitration Statement of Claim field in October 2018, associated person Claimant Dizdar sought the expungement of a customer complaint from his Central Registration Depository record ("CRD"). Resondent Invest generally denied the allegations and asserted various affirmative defenses; however, the firm took no position on the request expungement relief and did not appear at the hearing. The customer was notified of the arbitration but did not contest the requested relief and did not participate at the hearing. In recommending expungement, the sole FINRA Arbitrator made a FINRA Rule 2080 finding that the customer's claim, allegation, or information is factually impossible or clearly erroneous; and false.  The Arbitrator offered this rationale:

The claim is clearly erroneous and false. The complaint was made by the son of the named customer, based upon hearsay evidence with no supporting proofs. A charge was made that the customer had dementia when the sale went through. But a subsequent document was submitted in which witnesses swore that the customer was in good normal mental health. A claim was that the customer gave incorrect information to the applicant and somehow this applicant was at fault. The complaint that gave rise to the notation on the CRD was made more than a year after the transaction in question and never mentioned the Claimant. The Claimant was not employed by the Respondent at the time of the complaint. Claimant was never informed of the complaint and never had an opportunity to investigate or defend himself.
FINRA has a mandatory system of customer arbitration. Many dispute my contention. They say that it's not mandatory because public customers are not forced to arbitrate their disputes against stockbrokers and brokerage firms. Absolutely not the case, some argue. Arbitration is not mandatory, they insist. Arbitration is a private contract, they proclaim. It's freely bargained for, they assert. Really?  You go try and open a brokerage account with any FINRA member firm and tell me what happens when you cross out the so-called "voluntary" arbitration clause. In today's featured FINRA customer arbitration case, we consider some of the troubling rules by which this forum operates.

The OHO Decision found that associated person Yoro, who did not appear, had cheated on his Series 7 examination in violation of NASD Rule 1080 and FINRA Rule 2010, and FINRA barred him from associating with any FINRA member firm in any capacity. The Decision asserts that Yoro was first associated with FINRA member firm Charles Schwab & Co., Inc. in October 2017, and, thereafter, was terminated on July 26, 2018, based upon the issues underlying the regulatory case. As alleged in part in the OHO Default Decisionn [Ed: footnotes omitted]:

When Yoro took the Series 7 examination on November 22, 2017, however, he violated FINRA's Rules of Conduct. He brought a laminated commercial study guide for the exam to the testing center, and placed it in his locker. The study guide consisted of a laminated note sheet produced by a commercial test preparation company, which contained information relating to the Series 7 exam. During the exam sessions, Yoro took three unscheduled breaks, which he used to consult his study guide.' After consulting the study guide, Yoro reviewed his previously answered questions from the exam, and changed several incorrect answers to correct answers. . . .

Bill Singer's Comment: I note that there were three -- count 'em -- three attorneys representing Enforcement at this hearing. This was a Default Hearing. A Default as in the Respondent never showed up. As in he never answered the Complaint. As in he never responded to the Motion for Default. I note that FINRA's financial health ain't all that robust in recent years, as evidenced by its release of public financials. Also, as one of only two lawyers in the mid-1980s who handled the investigations and prosecutions for the entire NYC-metropolitan area of FINRA's predecessor the NASD, I recall representing NASD in matters such as Yoro's all by my lonesome self. I'm not quite sure why FINRA needs three lawyers to take up space at a default hearing. Is the intent to stare down an empty chair of a missing respondent?
Jordan Mouton, a/k/a Big Cheeze pled guilty in the United States District Court for the 
Eastern District of California to wire fraud, aggravated identity theft, and engaging in monetary transactions involving criminally derived property. The charges arose in connection with his claiming to be able to secure well-known artists to perform concerts, and using that fraud to victimize investors to the tune of some $550,000.  As alleged in part in the DOJ Release:

[M]outon held himself out as a person of substantial reputation in the entertainment industry who could secure the services of entertainment artists to perform concerts in Asia and elsewhere, including the services of artists known as Snoop Dogg, Maroon 5, and Rihanna, among others. Mouton provided concert promoters and investors numerous fraudulent documents, including documents containing forged signatures of entertainment artists and their managers. For example, Mouton gave one victim an "Artist Management Agreement" containing a forged signature of Snoop Dogg. The agreement purportedly appointed Mouton to serve as Snoop Dogg's "[m]anager, adviser and representative throughout China and greater Asia." Mouton provided the same victim with counterfeit passports purportedly belonging to members of Maroon 5. Additionally, Mouton admitted that he gave another victim letters containing forged signatures that purportedly authorized Mouton to book and organize performances by Rihanna and another artist on what Mouton and others referred to as the "Asia Monster Tour" or "Asian Monster Tour."

New Poll Shows Strong Early-State Support for Wall Street Reform (Lake Research Partners and Chesapeake Bay Consulting Report / October 7, 2019)
As set forth in the preamble to the Report [Ed: footnote omitted]:

Democratic primary voters in the states of Iowa, New Hampshire, Nevada, and South Carolina strongly support a tough approach to oversight of Wall Street, according to a new poll conducted by Lake Research Partners and Chesapeake Beach Consulting. Democrats and independents, and even many Republicans share the views of this crucial set of voters. 

Americans see the need for strong regulation of the financial services industry, tough enforcement of existing rules, and additional measures, even after hearing opposing arguments that stress a danger in the role of government. And they strongly support the changes made in the 2010 Dodd-Frank law that Congress passed in response to the financial crisis. 

The survey also shows broad support for the Consumer Financial Protection Bureau, a marquee accomplishment of Dodd-Frank, which Congress created in order to police the marketplace on behalf of ordinary people. But, they have deep concerns about the direction that the new leadership is taking this vital agency. 

Lake Research Partners and Chesapeake Bay Consulting designed and administered this survey with an eye toward reaching Democratic voters who will likely participate in primaries or caucuses in the first four states. To improve the sample, they surveyed an extra set of voters in each of these early states.

Bill Singer's Comment: When it comes to Wall Street, I will let my published record of pro-consumer and industry reform speak for itself. For several decades I have promoted better investor laws and rules, and criticized the inept and ineffective who serve as regulators and prosecutors. That being said, I don't place much, if any, credibility in the methodology of the Report or its purported conclusions. 

As best I can tell, the Report was a commissioned attempt to yield a pre-determined result. Truly, almost everyone should be in favor or regulation of the financial services community -- and such regulation should be (but is not presently) free of undue influence, corruption, and favoritisim. Similarly, consumers of all stripes should have the protection of well-crafted regulation that is ably enforced by folks up to the task, which, sadly, is also not the case. The finger of shame gets pointed at those of both parties. The Democrats failed to get the job done under the Clinton and Obama administrations, and the Republicans failed under the Bush and Trump administrations. To pretend that only one party is at fault is absurd. 

The Report asserts that Americans "strongly support the changes made in the 2010 Dodd-Frank law that Congress passed in response to the financial crisis;" however, the Report fails to grapple with the perplexing question as to why those same citizens voted for Trump, whose agenda never hid its avowedly anti-regulatory bias and espoused rolling back many of the changes that so many had purportedly "strongly support[ed]." The electorate is fickle. Folks will always favor anything that seems intended to benefit and protect them; however, those same human beings will often shrug and vote against their self interest. Similarly, as wonderful as Dodd-Frank may have appeared when promulgated, the Devil is in the details, and those details are always spread among the costs, how to pay those costs, and the competency of those charged with enforcing and prosecuting such laws. 

Truly, there is no more idiotic question that can be asked then the one cited in the Report's Footnote 2: "How important is it to regulate financial services and products to make sure they are fair for consumers?" The useless response to that question was:

When voters are asked how important it is to regulate financial services and products, nearly 9 in 10 voters in the entire country (89%) say it is important, including 62% who say it is very important. This includes 91% of early Democratic primary voters and 95% of Democrats overall, 88% of independents, and 85% of Republicans.

I say that the question is idiotic and the answer useless because who gives a crap that 89% of Americans feel that it's "important" to regulate financial services and products? I'm guessing at least 89% of Americans feel that it's "important" to have regular bowel movements too. Then there are the 69% who don't think "important" is enough and opt for the more demanding "very important." I'm guessing those are the folks who would also use a stool softener sooner than the rest of us.  Of more importance to me is why did Americans support the creation and launch of the CFPB but then voted for an administration that effectively gutted the CFPB?  Why do Americans favor Dodd-Frank but tolerate outrageous delays in resolving Whistleblower claims by the SEC? 

So . . . sure, thanks for the report showing that there is "Early-State Support for Wall Street Reform." On the other hand, would you statisticians stop muddying the waters? I'm less concerned these days with which way the wind is blowing and more concerned with why. Then again, as Charles Dudley Warner so famously quipped (but Mark Twain got all the credit): Everyone complains about the weather but no one does anything about it.