Securities Industry Commentator by Bill Singer Esq

December 17, 2019

featured in today's Securities Industry Commentator:

SEC Charges Former Goldman Sachs Executive With FCPA Violations (SEC Release)

FINRA NAC Affirms OHO Findings of Conversion and Misrepresentation. In the Matter of the Department of Enforcement, Complainant, v. David O. Braeger, Respondent  (FINRA NAC Decision)

Tennessee Man Sentenced To 4 Years In Prison For Defrauding Investors In A Pet Food Company And A Purported Caffeinated Snack Company Of More Than $2.9 Million / Defendant also Sentenced for Aggravated Identity Theft, a Firearm Offense, and a Narcotics Offense (DOJ Release)

Jamaican Defendant Pleads Guilty to Conspiracy to Commit Wire Fraud for Lottery Scam that Defrauded Elderly Victims (DOJ Release)
"Chicken Insider" appears to be a restaurant under construction. I say "appears" because I'm just not sure -- there's nothing on the sign to indicate exactly what the hell this establishment will be. I can't quite figure it out. Maybe it's going to be a restaurant. Maybe not. Maybe it's a storefront legal clinic for poultry? Maybe it's a newfangled Securities and Exchange Commission franchise attempting to monetize tips about insider trading?
A sobering warning from FBI News. Over a period of 12 years, trust attorney Albert Hessberg III stole over $2 million from his clients, and used the money to fund such expenses as vacations, country club dues, and his children's weddings and tuition. As set forth in part in the FBI Release: 

FBI agents spoke to one victim who tried to access his deceased parents' trust. He needed the funds to pay for medical care for his sister who had cancer. Hessberg used delay tactics, and the sister died before the family received any money. If Hessberg had disbursed the funds, the sister may have been able to pursue other cancer treatment options, the victim told the FBI.

"She had a medical necessity for this money. The parents set this money aside for their children years ago," said Special Agent Vinesh Manglavil, who investigated this case out of the FBI's Albany Field Office. "The victim passed away and never got the treatment she could have had. That's when we knew there was a real emotional impact in this case, not just financial."
In response to an administrative Order Instituting Proceeding, former Goldman Sachs Group Inc. executive Tim Leissner onsented to the SEC's order finding that he violated the antibribery, internal accounting controls, and books and records provisions of the federal securities laws;  and Leissner agreed to be permanently barred from the securities industry. Additionally,  Leissner is ordered to pay disgorgement of $43.7 million, which will be offset by amounts paid pursuant to a forfeiture order as part of a resolution in a previously instituted parallel criminal action by the U.S. Department of Justice. As alleged in part in the SEC Release:

[B]eginning in 2012, Leissner, as participating managing director of Goldman Sachs, used a third party intermediary to bribe high-ranking government officials in Malaysia and the Emirate of Abu Dhabi.  The order finds that these bribes enabled Goldman Sachs to obtain lucrative business from 1Malaysia Development Berhard (1MDB), a Malaysian government owned investment fund, including underwriting $6.5 billion in bond offerings. The order further finds that Leissner personally received more than $43 million in illicit payments for his role in facilitating the bribe scheme.

On July 20, 2016, FINRA's Department of Enforcement ("Enforcement") filed a two-cause complaint against Braeger. Enforcement alleged that, instead of depositing the couple's $30,000 check with Rubicon's escrow agent and investing it in Rubicon as SE and TH intended, Braeger caused the check to be deposited elsewhere and never invested the funds. Enforcement further alleged that, in order to conceal his misuse and conversion of the customer funds, Braeger embarked on a years-long series of written and oral misrepresentations and omissions to the customers concerning their investment. The complaint alleged that Braeger omitted to disclose to the customers that Rubicon had been closed and liquidated. Instead, Braeger made written and oral misrepresentations, including that: (1) the couple was invested in Rubicon; (2) Rubicon was open and performing fairly, when in fact it had been closed and liquidated; and (3) the couple's Rubicon investment was tied up and lost in Rubicon's clearing firm's bankruptcy proceeding. 

Specifically, cause one alleged that Braeger improperly used and converted the couple's $30,000, in violation of NASD Rule 2330 and FINRA Rules 2150 and 2010. Cause two alleged that, for a period of more than four years, Braeger made numerous written and oral material misrepresentations and omissions to these customers concerning their investment, in violation of FINRA Rule 2010. Braeger filed an answer, denying that he engaged in the alleged misconduct. 

In September 2017, the Hearing Panel conducted a seven-day hearing, at which nine witnesses testified and more than 170 exhibits were received in evidence. Both SE and TH testified at the hearing. In a December 27, 2017 decision, the Hearing Panel found that Braeger misused and converted his customers' funds. Specifically, the Hearing Panel found that, rather than sending their subscription agreement and check to Newport, Braeger deposited their funds in a Rubicon Wells Fargo account that Braeger controlled, and that he never invested the funds in Rubicon. For this misconduct, the Hearing Panel imposed a bar in all capacities. The Hearing Panel also found that, for a period of more than five years, Braeger made numerous written and oral material misrepresentations to SE and TH about the value and status of their investment and the reasons why they could not recover their funds. For this misconduct, the Hearing Panel imposed a separate bar in all capacities.

at Pages  10 - 11 of the NAC Decision

Respondent Braeger appealed the OHO Decision to the NAC:

On appeal, Braeger argues that the Hearing Panel's credibility findings concerning his testimony demonstrate the Hearing Panel's bias against him. We disagree. First, the Hearing Panel's credibility findings are supported by abundant evidence in the record, and Braeger has not pointed to any evidence, much less substantial evidence, for overturning these findings. See Eliezer Gurfel, 54 S.E.C. 56, 62 n.11 (1999) (explaining that "[c]redibility determinations by the fact finder are entitled to substantial deference and can be overcome only where the record contains substantial evidence for doing so"), aff'd, 205 F.3d 400 (D.C. Cir. 2000). To the contrary, as discussed in detail below (infra Parts III.B and C), Braeger's testimony was repeatedly inconsistent with and contradicted by other evidence. 

Second, Braeger's claim of bias by the Hearing Panel has no basis. Braeger points to the credibility findings made by the Hearing Panel and what he characterizes as "disdain" in the language of the decision. As the factfinders, however, it is the Hearing Panel's responsibility to make credibility determinations, and such determinations are often based on observations of a witness's demeanor. See Richard G. Cody, Exchange Act Release No. 64565, 2011 SEC LEXIS 1862, at *45 n.35 (May 27, 2011) (stating that an initial fact finder's credibility determination is entitled to considerable weight and deference because it is based on hearing a witness's testimony and observing his demeanor). Moreover, bias is not established based simply on the particular language in a decision. See Fuad Ahmed, Exchange Act Release No. 81759, 2017 SEC LEXIS 3078, at *76-77 (Sept. 28, 2017) (rejecting a claim of bias based, in part, on the language used in the Hearing Panel's decision, when the decision was based on the evidence). To the contrary, bias "is disqualifying only when it stems from an extrajudicial source and results in a decision on the merits based on matters other than those gleaned from participation in a case." See Scott Epstein, Exchange Act Release No. 59328, 2009 SEC LEXIS 217, at *62 (Jan. 30, 2009), aff'd, 416 F. App'x 142 (3d Cir. 2010). Here, the Hearing Panel's decision is abundantly supported by the evidence in the record and there is no indication, or even any claim by Braeger, that the Hearing Panel was influenced by anything outside of the record. 

The Hearing Panel found TH's and SE's testimony was credible. The Hearing Panel noted that their testimony was consistent with the documentary evidence in the record. Moreover, TH and SE had nothing to gain financially from this proceeding, as they had already reached a settlement with Braeger and Enforcement did not seek restitution in this proceeding. Braeger has not pointed to any basis for overturning these credibility findings.

at Pages 11 - 12 of the NAC Decision  

Bill Singer's Comment: Ummm . . . why did it take almost two years to the date for FINRA to handle an appeal to its NAC of an OHO Decision? Frankly, it sure as hell seems like a very long time, and given that the appellate body affirmed the hearing panel, it doesn't appear that there was a whole hell of a lot to deliberate over. Pointedly, if we go by the framing of the case in the OHO Decision, we come away with what sets up as a fairly simple, limited dispute involving one and only one question:

The main issue in this case is factual. What did Respondent, David O. Braeger ("Braeger"), do with a $30,000 check that his customers, a married couple, gave him to invest in a private offering of a commodities trading investment fund called Rubicon Capital Appreciation Fund ("Rubicon")? There is no dispute that the money never reached the intended investment. The only question is whether Braeger took it. 

at Page 1 of the OHO Decision 
I mean, wow, is that one hell of a headline for a press release! 
After a seven-day jury trial in the United States District Court for the Southern District of New York, Joel Margulies was convicted on various fraud counts, aggravated identity theft, and the illegal transfer of a firearm to an out-of-state resident; and after the trial, he entered a plea of guilty to participating in a narcotics distribution conspiracy. Margulies, 75,  was sentenced to four years in prison plus three years of supervised release; and he was ordered to forfeit $108,983 and to make  $2,926,702.54 in restitution. Co-Defendant Lisa Bershan pled guilty and was sentenced, in part,  to seven years in prison; guilty plea; and Co-Defendant Barry Schwartz pled guilty and was sentenced, in part, to four years in prison. As alleged in part in the DOJ Release:

The All American Pet Company Fraud Scheme

From October 2013 through May 2017, MARGULIES, co-defendant Lisa Bershan, and a co-conspirator raised more than $575,000 in purported loans for the All American Pet Company ("AAPT"), a penny-stock company that produced, marketed, and sold food bars and other products for dogs, based on the following misrepresentations, among others: (a) that the Internal Revenue Service ("IRS") had accepted an "offer in compromise" from AAPT that significantly reduced the back taxes AAPT owed to the IRS; (b) that Lisa Bershan had paid to the IRS the amount of this offer in compromise and had thus absolved AAPT of its outstanding tax liability, (c) that Lisa Bershan was the beneficial owner of a bank account containing over $6.9 million, (d) that Lisa Bershan would personally guarantee some of the loans, and (e) that Nestlé USA had proposed various business deals with AAPT.  MARGULIES held himself out as AAPT's vice president for marketing and advertising, but in reality he played a number of roles at the company, including communicating with investors and creating fake documents, such as forged bank account statements and letters, to support AAPT's misrepresentations to investors.

Although MARGULIES and his co-conspirators had promised investors that they would use the loans to help improve AAPT's manufacturing and distribution capacities, the conspirators instead used those funds largely for their personal expenses, including the rental of a luxury villa in the Bel Air neighborhood of Los Angeles where all three of them lived.

In connection with the AAPT fraud scheme, MARGULIES used the stolen identities of three individuals - an IRS employee, a Nestlé Purina employee, and a Manhattan attorney - to create false and fraudulent letters that were sent to AAPT investors to induce them to make loans to AAPT.

The Starship Snack Corporation Fraud Scheme

From approximately August 2015 through August 2017, MARGULIES, Bershan, and  co-defendant Barry Schwartz raised more than $2.3 million from investors in a company originally called the Awake Company and later renamed Starship Snacks Corporation ("Starship"), which purported to be in the business of developing and manufacturing caffeinated snack products, based on the following misrepresentations, among others: (a) that investments in Starship were guaranteed against losses by Bershan; (b) that Starship was going to be acquired by Monster Beverage ("Monster") in a one-for-one stock exchange; (c) that Starship was engaged in actual product development and had procured samples of chocolate candies infused with caffeine; and (d) that MARGULIES and others at Starship had entered into non-disclosure agreements with Monster that prohibited them from discussing Starship's purported acquisition by Monster and its purported product development.  MARGULIES's title at Starship was senior vice president; he served as the primary point of contact for investors, to whom he made the aforementioned misrepresentations, and he also created a number of fake documents that were used in connection with the Starship fraud.

After receiving funds from Starship investors, MARGULIES and his co-conspirators used those funds to maintain their own extravagant lifestyles, spending hundreds of thousands of dollars on things like luxury clothing, plastic surgery, interior decorating, the rental of a high-end apartment in New York City, and the down payment for a multimillion-dollar house in Florida. 

The Illegal Firearm Transfer and Narcotics Distribution  

In addition to the fraud and identity theft conduct set forth above, MARGULIES was sentenced for illegally transferring a firearm and ammunition from Tennessee to Bershan in New York via commercial courier without being a licensed firearms dealer.  Finally, MARGULIES was also sentenced for conspiracy to distribute cocaine, a charge that had been severed from the charges that were the subject of the trial. 

Jamaican Defendant Pleads Guilty to Conspiracy to Commit Wire Fraud for Lottery Scam that Defrauded Elderly Victims (DOJ Release)
Kristoff Cain pled guilty in the United States District Court for the Western District of Pennsylvania to one count of conspiracy to commit wire fraud. As alleged in part in the DOJ Release:

[F]rom in and around September 2013, and continuing thereafter until in and around April 2018, Kristoff Cain knowingly and willfully conspired with others to engage in a scheme to defraud elderly victims by contacting them by phone and through a variety of other means to inform them that they had won large cash prizes in a lottery and that the victims needed to send money to specified addresses or recipients to pay taxes or other assessments in order to claim the cash prizes. Additionally, the defendant and other individuals associated with the conspiracy also contacted certain other victims by telephone; represented themselves to be law enforcement officers, and informed the victims that they needed to send money to specified addresses or recipients in connection with investigations involving the individuals' bank accounts. The defendant, and other persons associated with the conspiracy, well knew that the victims were not associated with any lottery or cash prize award, and that they were not involved in any law enforcement investigation involving the relevant bank accounts, and that the victims did not need to send money to the specified addresses or recipients.

The court was also advised that the amount of loss attributable to Kristoff Cain as part of his scheme and artifice to defraud was more than $250,000, and that the victims who were defrauded as a result of his conduct were unusually vulnerable due to age. Specifically, the defendant and other individuals associated with the conspiracy targeted multiple victims over the age of 80, and induced them to send money via wire transactions and other means to addresses specified by the defendant. The court was further advised that Kristoff Cain was a manager of the conspiracy and directed his co-conspirators' extensive criminal activity.