Securities Industry Commentator by Bill Singer Esq

January 3, 2020

as featured in today's Securities Industry Commentator:

FINRA Arbitrators Award Damages On 2008-Solicited Annuity When Contract First Delivered in 2018. In the Matter of the Arbitration Between Larry A. Longhi, Claimant, v. James W. Ray, Respondent (FINRA Arbitration Decision)

FINRA Needs To Better Coordinate Its Admonition of Statutory Disqualification ( Blog)
As reported by Oisin Breen, Plaintiff BlackCrown alleged that the pending Schwab-TD merger will potentially cripple smaller RIAs that rely heavily on the support of their custodians. In filing its federal suit, the Plaintiff RIA argued that a remedy for the anticipated anti-competitive damages would be to require the sale of TD Ameritrade Institutuional to BlackCrown.


SEC Charges Six Individuals in International Microcap Fraud Schemes (SEC Release)

An Indictment filed in the United States District Court for the Southern District of New York, charges Blacklight, S.A. and its founder/principal owner Kenneth Ciapala and with one count of conspiracy to commit securities fraud; three counts of securities fraud; one count of conspiracy to commit wire fraud; wire fraud; conspiracy to commit money laundering; and money laundering. Additionally, the Indictment charges Ulrik Debo  a/k/a "Molgaard Debo," a/k/a "Ulrik Molgaard," with one count of conspiracy to commit securities fraud; two counts of securities fraud; one count of conspiracy to commit wire fraud; and wire fraud. As alleged in part in the DOJ Release:

[F]rom at least 2013 through December 2019, CIAPALA and his firm, BLACKLIGHT, as well as others, conspired to defraud the investing public by orchestrating and facilitating the manipulation of multiple publicly traded stocks, commonly referred to as "pump and dump" schemes.  The vast majority of the stocks that CIAPALA, BLACKLIGHT, DEBO, and their co-conspirators sought to manipulate were "penny" or "microcap" stocks that traded in the United States on the over-the-counter ("OTC") market.  In executing these pump and dump schemes, CIAPALA, BLACKLIGHT, DEBO, and their co-conspirators (i) secretly amassed beneficial ownership of all, or substantially all, of the stock of certain publicly traded companies; (ii) began manipulating the price and demand for these stocks through, among other means, the release of materially false information to the investing public and manipulative trading practices, thereby causing the share price of these stocks to become artificially inflated; and (iii) sold out of their secretly-amassed positions at artificially inflated values at the expense of the investing public. 

CIAPALA, using his firm BLACKLIGHT, primarily furthered the stock manipulation scheme by helping other participants in the scheme to obscure their beneficial ownership and control of all or substantially all of the shares of companies whose securities they sought to manipulate.  CIAPALA caused BLACKLIGHT to establish nominee entities that were registered in the names of various third parties to hold the shares that were, in reality, beneficially owned and controlled by the scheme participants.  In order to obscure their ownership interests, CIAPALA, BLACKLIGHT, DEBO, and others typically caused these nominee entities' holdings to be structured so as to ensure that no single nominee entity held more than five percent of the outstanding stock of any of the relevant companies.

CIAPALA also caused BLACKLIGHT to open bank accounts in the names of these nominee entities and to trade shares owned by these nominee entities through various brokerage accounts.  Through BLACKLIGHT, CIAPALA exercised trading authority over these nominee entities' shares, and CIAPALA directed brokers to execute trades on behalf of these nominee entities in furtherance of the stock manipulation scheme.  After CIAPALA, BLACKLIGHT, DEBO, and others participating in the scheme had obtained control of all or substantially all of the shares of a company, the scheme participants manipulated the share price and trading volume of the stock of the company.  This typically occurred through a promotional campaign and through certain manipulative trading practices. 

With respect to the promotional campaign, CIAPALA, BLACKLIGHT, DEBO, and others participating in the scheme caused promotional materials to be distributed to the investing public that contained exaggerated and, at times, false claims about the company whose stock they sought to manipulate. The scheme participants concealed from the investing public that these promotional materials were financed and created at the direction of those who beneficially owned and controlled substantially all of the shares of the relevant company that was the subject of the promotion. 

In addition, to drive investor demand and artificially inflate the share price, CIAPALA, BLACKLIGHT, DEBO, and other participants also engaged in manipulative trading activity in order to artificially increase the trading volume and share price of the issuers whose stock they sought to manipulate.  This manipulative trading activity included "match" trades whereby the scheme participants caused multiple nominee entities they controlled to essentially trade with one another to create the false appearance of trading volume and demand for the stock. 

In a Complaint filed in the United States District Court for the Southern District of New York ("SDNY"), the SEC charged Steve M. Bajic, Rajesh Taneja, Norfolk Heights Ltd., Fountain Drive Ltd., Island Fortune Global Ltd., Crystalmount Ltd., Wisdom Chain Ltd., SSID Ltd., Sure Mighty Ltd., Tamarind Investments Inc., Kenneth Ciapala, Anthony Killarney, Blacklight SA, Christopher Lee McKnight, and Aaron Dale Wise with allegedly helping shareholders secretly dump microcap stock, coordinating illegal stock sales with Ciapala and Killarney, and Swiss-based company Blacklight SA. Additionally, the SEC Complaint alleges that Defendants McKnight and Aaron Wise fraudulently transferred, and hid the sources of, funds used to promote several of the microcap stocks. 

In a second SDNY Complaint, the SEC charged "Ken eth" [sic] Ciapala and Blacklight SA with having facilitated the sale of unregistered shares of EMS Find Inc. (EMSF) while the microcap stock's price was being artificially inflated and dumped into the market; and, further, that Ciapala and Blacklight engaged in manipulative trading of EMSF stock.

Alleged Dark Web Narcotics Trafficker Indicted for Distributing Heroin and Methamphetamine in Exchange for Bitcoin / Offered Free Shipping of Illegal Drugs to Customers in the United States (DOJ Release)
An Indictment filed in the United States District Court for the Eastern District of New York, charged Joanna De Alba a/k/a "RaptureReloaded" with one count of conspiracy to distribute and possess with intent to distribute heroin and methamphetamine; one count of distribution and possession with intent to distribute heroin; one count of distribution and possession with intent to distribute heroin and methamphetamine
As alleged in part in the DOJ Release:

Between June 2018 and May 2019, De Alba allegedly advertised and sold illegal narcotics on the Wall Street Market, using the moniker "RaptureReloaded."  Customers were directed to pay her in Bitcoin, and contact her through encrypted email and messaging services.  De Alba offered customers free shipping to addresses in the United States, and "stealth" delivery options ranging from "Basic Stealth" and "Better Stealth," to "Super Stealth 360."  These options featured measures to conceal the external and internal packaging of illegal narcotics to evade detection by law enforcement, and to inform buyers if law enforcement had intercepted, tampered with, or was monitoring the shipment.

On January 3, 2019, an undercover DEA agent accessed the RaptureReloaded listing on the Wall Street Market and purchased 30 grams of heroin for a total of $1,810.  Later that day, the undercover agent purchased 10 grams of methamphetamine from the RaptureReloaded listing for a total of $160.  As requested, the undercover agent paid for the drugs with Bitcoin.  On January 14, 2019, the undercover agent retrieved a package shipped by RaptureReloaded via the U.S. postal service to a mailbox in Queens, New York.  The package contained a small plastic container containing approximately 30 grams of a substance that tested positive for heroin, and a clear plastic bag containing approximately 10 grams of a substance that tested positive for methamphetamine.  Between August 2018 and January 2019, law enforcement agents intercepted five packages containing methamphetamine pills and fentanyl that were shipped from the Netherlands and Canada and addressed to De Alba's deceased husband at an apartment in southern California.  Allegedly, since her husband's death in March 2018, De Alba used his identity and credit cards to fund her narcotics business on the Wall Street Market.

Bill Singer's Comment: By no means am I making light of the De Alba Indictment -- to the contrary, I take the allegations seriously. That being said, the world is indeed changing. Note that the Defendant is a female -- so the once all-male domain of drug pushers is allegedly being challenged. Additionally, for those who have long lamented that you can't actually buy anything with Bitcoin, we see that, to the contrary, you can buy meth and fentanyl on dark-web "Wall Street Market" in exchange for Bitcoin. For better or worse, progress marches on.
In a Complaint filed in the United States States District Court for the Southern District of New York, the SEC charged Alan D. Seidel and Benjamin Mekawy with aiding and abetting a now-defunct broker-dealer's violations of the net-capital provision of Sections 15(c)(3) of the Securities Exchange Act and Rule 15c3-1 thereunder, and the SEC further charged Mekawy with aiding and abetting the broker-dealer's violations of Section 17(a)(1) of the Exchange Act and Rule 17a-3(a)(19) thereunde. As alleged in part in the SEC Release:

[S]eidel, who knew the firm's net-capital position was precarious, falsely represented to the broker-dealer's outside accounting firm and to the staff of the SEC's Office of Compliance Inspections and Examinations that loan proceeds were a capital infusion. It further alleges that Mekawy forged one of the broker-dealer's account statements to inflate the broker-dealer's cash position and knowingly concealed a substantial six-figure liability., Alan Seidel and Benjamin Mekaway were each charged with one count of conspiracy, falsifying required books and records of a broker-dealer, falsifying records in a federal investigation, and making false statements to the SEC.  
As alleged in part in the DOJ Release:

At all relevant times, SEIDEL was the CEO of Seidel & Co., a Manhattan-based inter-dealer broker registered with the SEC.  MEKAWAY was a Seidel & Co. employee.  As an inter-dealer broker, Seidel & Co. acted primarily as an intermediary between institutional broker-dealers trading bonds of various types. 

SEC regulations required Seidel & Co. to maintain net capital reserves of the greater of $100,000 or six and two-thirds percent of its aggregate indebtedness.  If Seidel & Co.'s net capital fell below the required threshold, the Firm was required to notify the SEC of that fact the same day.  Once a broker-dealer falls out of its net capital requirement, it becomes subject to the suspension or revocation of its registration.

In order to ensure, among other things, that a broker-dealer maintains adequate net capital, SEC regulations require broker-dealers like Seidel & Co. to maintain books and records reflecting each expense incurred relating to their business and any corresponding liability.  Seidel & Co. was also required to file monthly reports with the SEC summarizing information concerning its financial and operational status, including its current net capital position.

Beginning at least in or about late-2016, SEIDEL and MEKAWAY caused Seidel & Co. to maintain inaccurate books and records regarding its net capital position and to submit false reports to the SEC regarding Seidel & Co.'s net capital position.  In particular, in monthly reports filed with the SEC reflecting Seidel & Co.'s financial position for the months of October 2016 and November 2016, SEIDEL and MEKAWAY caused Seidel & Co. to falsely represent that it had the requisite net capital to meet its regulatory requirements for those months.  In fact, as SEIDEL and MEKAWAY well knew, the net capital of Seidel & Co. fell far below the requisite amount in both months.  Specifically, in its filings for month-end October 2016, Seidel & Co. fraudulently represented that its net capital exceeded the minimum amount by: (i) failing to account for a debt of approximately $104,000 that the firm owed to its landlord, and (ii) falsely inflating the balance of a Firm brokerage account, for which MEKAWAY submitted a forged bank statement to the external financial operations entity the Firm engaged to prepare and submit reports to the SEC.  Subsequently, in order to falsely represent that Seidel & Co. met its capital requirements in its filing for November 2016, Seidel & Co. falsely recorded as a capital contribution a $1 million loan that should have been recorded as a liability.

When, in December 2016, the SEC began to examine Seidel & Co.'s true net capital position, SEIDEL made false statements to the SEC's exam staff regarding the $1 million loan.  SEIDEL initially claimed on multiple occasions that the loan was a capital investment.  When the SEC sought verification of this assertion, SEIDEL acknowledged that the money was in fact a loan but claimed, falsely, that he believed it might be converted to a capital investment. 

Subsequently, in or about August 2018, MEKAWAY sought to obstruct an investigation by the SEC's Division of Enforcement into the misconduct at Seidel & Co. by failing to produce relevant documents and emails in response to a subpoena for records and falsely denying that he was in possession of Seidel & Co. records.

SEC Obtains Final Judgments Against Credit Ratings Analyst and Two Friends Charged with Insider Trading (SEC Release)
Final judgments were entered in the United States District Court for the Southern District of New York against credit-rating analyst Sebastian Pinto-Thomaz, who learned of The Sherwin-Williams Co.'s confidential plans to acquire The Valspar Corp. Pinto-Thomaz allegedly tipped his friends, hair salon owner/manager Abell Oujaddou and jeweler Jeremy Millul, who  purchased Valspar securities before the merger was announced. After Valspar's shares rose 23 percent, Oujaddou and Millul sold their positions for about $192,000 and $107,000 in respective profits. As set forth in part in the SEC Release:.

Pinto-Thomaz, Oujaddou, and Millul each agreed to settle with the SEC and consented to the entry of judgments permanently enjoining them from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, ordering Millul and Oujaddou liable for disgorgement of their ill-gotten trading profits, and ordering Pinto-Thomaz liable for disgorgement of a cash payment he received from Oujaddou, with the disgorgement for all three defendants deemed satisfied by orders of forfeiture entered in a parallel criminal action. Pinto-Thomaz, who was convicted after a trial, is serving a 14-month prison sentence. Oujaddou and Millul each pled guilty, and Millul is serving a 5-month prison sentence. In a separate administrative proceeding instituted on November 12, 2019, Pinto-Thomaz also consented to a bar from association with any nationally recognized statistical rating organization.
In a FINRA Arbitration Statement of Claim filed in July 2019, public customer Claimant Longhi asserted breaches of contract and of fiduciary duty, and negligence. Claimant sought $412,000 in compensatory damages, disgorgement, costs and fees. Respondent Longhi did not deny the allegations or assert any defenses, and he did not appear at the hearing. The FINRA Arbitration Panel found Respondent Ray liable and ordered him to pay to Claimant Longhi $159,000.00 in compensatory damages plus interest and $300 in FINRA filing fees. As set forth in the FINRA Arbitration Decision:

[T]he causes of action relate to Claimant's allegation that Respondent breached an agreement to compensate Claimant for Respondent's admitted mistake, regarding how an annuity would operate. Claimant further alleges that the annuity was solicited in 2008, but the annuity contract was not delivered to Claimant until 2018, and the annuity features were misrepresented to Claimant during the ten years of periodic reviews. Claimant also asserts that Respondent agreed to pay Claimant the sum of $159,000.00 in a pre-suit settlement, and that this action is to enforce that settlement.  

A stockbroker who willfully omitted to state a material fact on a Form U4 will likely be deemed statutorily disqualified. You may have settled for $1. You may agree to a 1 day suspension. You may think you dodged the bullet -- however, if you agreed to having willfully failed to update your U4, after the dollar is paid and the day served, you may be in for a nasty surprise. Many of those shocked folks didn't retain a lawyer and thought they had negotiated a great deal with FINRA. All of which explains why FINRA often admonishes in its settlement agreement that an industry disqualification is a likely consequence of any finding of willful omission, regardless of the fines or suspensions imposed. In a recent case, however, FINRA didn't seem to issue its typical warning.
In today's featured FINRA Arbitration case, we have the double-negative issue of a respondent not not being not allowed to not speak. Although the associated person Respondent's testimony was not allowed by the arbitrators, he was, in fact, not allowed to not testify through the brokerage firm Claimant's non-attorney representative, who is likely not not his representative but, in fact, not the Claimant firm's representative, who, as it turned out, was allowed to not not speak. Oh and another thing, although the Panel says it would not have mattered if the non-attorney rep had not spoken about what he was not supposed to not speak about, the Panel would not have changed its Award had it not not heard all of the not allowed information!