Securities Industry Commentator by Bill Singer Esq

October 17, 2019

featured in today's Securities Industry Commentator:
In a Complaint filed in the United States District Court for the District of Massachusetts the SEC charged 18 traders with with violating and aiding and abetting violations of the antifraud provisions of the securities laws. In addition to an asset freeze and other emergency relief granted by the Court, the SEC seeks disgorgement of ill-gotten gains plus interest, penalties, and injunctive relief. In a parallel action, the U.S. Attorney's Office for the District of Massachusetts announced criminal charges against two of the traders, Jiali Wang and Xiaosong WanAs alleged in part in the SEC Release:

[T]he traders, who are primarily based in China, manipulated the prices of thousands of thinly traded securities by creating the false appearance of trading interest and activity in those stocks, thereby enabling them to reap illicit profits by artificially boosting or depressing stock prices. For example, according to the SEC's complaint, the traders used multiple accounts to place several small sell orders to drive down a stock's price before using a different set of accounts to buy larger amounts of the stock at the artificially low prices. After accumulating their position, the traders then flipped the script and placed several small buy orders to push up prices so they could then sell their stock at artificially high prices.
Years ago, when Bill Singer and I practiced law together, we had a client who was licensed to use the Star Trek brand to sell coffee products. The client marketed a strong coffee that he labeled Klingon Raktajino, after the brew that Worf drank on board the Enterprise. One day, some sample bags of the raktajino coffee were delivered to our law firm while an IT tech was wiring a new computer under Bill's desk. When the tech finished his work, this bona fide geek saw the array of packaging on Bill's desk and asked him, somewhat skeptically, "Is that real Klingon raktajino?" Where do you even begin trying to answer that question?
The 2019 Report on FINRA Examination Findings and Observations is now online at As set forth in part in the FINRA Release:

The report reflects key findings and observations identified in recent examinations, and contains effective practices that could help firms improve their compliance and risk management programs. It summarizes findings and observations across a range of topics, including supervision, cybersecurity, best execution, segregation of client assets, and Uniform Transfers to Minors Act (UTMA) and Uniform Grants to Minors Act (UGMA) accounts.

This year's report includes two material changes to increase its utility. One, it aims to more clearly delineate between material that is an examination finding, which describes a violation of a rule or regulation, and material that is an examination observation. The latter refers to a suggestion around how firms can improve controls to address perceived weaknesses that elevate risk, but does not typically rise to the level of a rule violation or cannot be tied to a specific rule. And two, this year's report includes a new "Additional Resources" sub-section for most topics, with links to relevant additional information such as Regulatory Notices, topic pages and FAQs.

Bill Singer's Comment: I tend to find the annual reports issued by most Wall Street regulators to be little more than "talkin' their book," as we used to say when folks actually had books and talked about them; however,  the 2019 FINRA Report breaks the mold in a positive manner -- and, as such, I compliment the FINRA staff who put this version together. The results are presented in four major categories (see below) and each category is broken out into smaller topics (see below). Within each group's topics, the presented materials are intelligently displayed with numerous links to FINRA Rules, Notices, Guidance, and Release; and in some examples, sample forms are also linked. Great job!

Sales Practice and Supervision
Digital Communication
Anti-Money Laundering (AML)
Uniform Transfers to Minors Act (UTMA) and Uniform Grants to Minors Act (UGMA) Accounts

Firm Operations
Observations on Cybersecurity
Business Continuity Plans
Fixed Income Mark-up Disclosure

Market Integrity
Best Execution
Direct Market Access Controls
Short Sales

Financial Management
Observations on Liquidity and Credit Risk Management
Segregation of Client Assets
Net Capital Calculations
Kevin B. Merrill, was sentenced in the United States District Court for the District of Maryland to 22 years in prison; and he was ordered to repay the full amount of the victims' losses (estimated at over $340 million from some 230 victims). As alleged in part in the SEC Release:

The criminal charges against Merrill stem from the same misconduct alleged in the SEC's complaint, filed on September 13, 2019 in federal district court in Baltimore. From at least 2013 to 2018, Merrill and co-defendant Jay B. Ledford allegedly attracted investors to the Ponzi-like scheme by making false statements about how investors' money would be used and propping up their misstatements through the creation of sham entities and fraudulent documents. Rather than use investor funds to acquire and service debt portfolios as promised, the amended complaint alleges that defendants used the money to make Ponzi-like payments to investors and to fund Merrill's and Ledford's extravagant lifestyles. Ledford and another co-defendant, Cameron R. Jezierski, entered guilty pleas in the parallel criminal case and are awaiting sentencing.
In a FINRA Arbitration Statement of Claim filed in April 2019, associated person Claimant Lott sought the expungement of an unsettled customer complaint from his Central Registration Depository record ("CRD"). Respondent Raymond James did not oppose the requested relief; and the customer did not oppose the request or participate in the hearing. In recommending expungement, the sole FINRA Arbitrator made a FINRA Rule 2080 finding that Lott was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. The Arbitrator offered this rationale:

Claimant presented evidence that led the ("TPA") provided the Customer with all the information needed to establish the 401k plan. The Customer's TPA completed the form, secured the Customer's signature, and provided the completed form to Claimant, signed and with all elections made, clearly establishing the CUstomer's plan as a non-discretionary, safe harbor plan. The Customer's TPA made or implemented all decisions regarding the plan.

Apart from providing the TPA with the blank 401k standardized adoption agreement, Claimant was not involved in completing the form, establishing plan requirements, or otherwise involved in management or oversight of the plan, nor supervision or oversight of any employee involved with the plan. The Arbitrator concluded, therefore, that Claimant was not involved in any unauthorized third-party trading, forgery, breach, security violation misrepresentation, or failure to supervise. 

Las Vegas Man Sentenced To 8 Years In Prison For Committing Nearly $2 Million Business Fraud Scheme (DOJ Release)
Jihad Anthony Zogheib, 53, plead guilty in the United States District Court for the District of Nevada to eight counts of wire fraud; and he was sentenced to eight years in prison, and ordered to pay ordered to pay $1,715,475 in restitution. As alleged in part in the DOJ Release:

[F]rom about 2010 to about 2013, he devised a scheme to fraudulently obtain money from people falsely representing that he would use their money for business purposes. As part of the scheme, he influenced victims' decisions by using forged business documents and fictitious emails from banks. Specifically, in February 2011, Zogheib falsely told one of his victims about forming a mobile crane company and a mobile crane leasing company. He claimed he had millions of dollars in an overseas account, but it was placed on a hold. After showing the victim a fictitious bank record showing millions of dollars on deposit, Zogheib's dupe caused the victim into giving him $548,000 to fund the sham companies. From November 2010 to about August 2013, Zogheib defrauded two other victims by falsely claiming he was in the business of flipping real estate. He made false representations to the victims in order to receive hundreds of thousands of dollars for the nonexistent real estate investments. These two victims sent Zogheib a total of $1,307,475. Zogheib immediately used the ill-gotten proceeds to fund his gambling habit and high-end lifestyle.