Securities Industry Commentator by Bill Singer Esq

January 10, 2020

as featured in today's Securities Industry Commentator:

Founder And President Of Online Gaming Company Pleads Guilty To Securities And Wire Fraud (DOJ Release)

FINRA Releases 2020 Risk Monitoring and Examination Priorities Letter (FINRA Release)

FINRA  Fines and Suspends Former Morgan Stanley Rep Over Private Securities Transactions. In the Matter of James R Willing, Respondent (FINRA AWC 2018057629501)
Today's featured FINRA Arbitration comes off as a fairly pedestrian affair. She said. They said. The arbitrators dismissed her case after finding that she lacking the standing to sue. Given Claimant's allegations about forgeries, loans, and lines of credit, it seemed as if there was something serious going on; however, the FINRA Arbitration Decision discloses nothing more than a laundry list of allegations and refutations. All of which prompted me to do some digging. What my research revealed is stunning.
Jason Rhodes pled guilty in the United States District Court for the Southern District of New York, announced to one count of conspiracy to commit securities fraud and wire fraud, one count of securities fraud, one count of wire fraud, and one count of investment adviser fraud.  As alleged in part in the DOJ Release:

Beginning in at least 2013 and through in or about December 2016, RHODES, together with his co-conspirators, solicited investments in Sentinel by falsely representing to investors that their funds would be used for legitimate, specified investment purposes, namely purchasing securities.  In fact, RHODES failed to invest the investor monies as promised, but rather diverted investor funds to his own personal use and the personal use of his co-conspirators and, in a Ponzi-like manner, to make repayments to other investors who were demanding their money.  Among other things, RHODES diverted investor funds to a trucking business operated by RHODES and his wife; to pay more than $1 million to settle an unrelated civil lawsuit filed against RHODES and one of his co-conspirators; and on other personal expenses including a resort stay in Dubai and a luxury time-share vacation club.  Through this scheme, RHODES and his co-conspirators defrauded approximately 25 investors out of a total of approximately $19.6 million.

Among other fraudulent acts, RHODES and a co-conspirator falsified an account statement for an investor ("Investor-1") to conceal the fact that RHODES and his co-conspirators had misappropriated most of the $4.2 million Investor-1 had invested in Sentinel.  After Investor-1 discovered the fraudulent nature of the account statement, RHODES, working with others, obtained funds from yet another investor ("Investor-2") in order to make payments to Investor-1.  RHODES and his co-conspirators then, on multiple occasions, created fraudulent reports for Investor-2, falsely reflecting that Investor-2's funds were invested with portfolio managers in Sentinel's brokerage accounts and were earning returns.  In truth and in fact, and as RHODES well knew, Investor-2's funds had been almost entirely misappropriated upon their receipt to repay Investor-1, and were not being managed by portfolio managers on Sentinel's platform.
Robert Alexander pled guilty in the United States District Court for the Southern District of New York to one count each of securities fraud and wire fraud.  As alleged in part in the DOJ Release:

Beginning in at least 2013 and continuing through in or about 2017, ALEXANDER engaged in a scheme to defraud investors in the Company.  Specifically, ALEXANDER solicited and maintained investments in the Company through numerous false representations, including concerning his own professional background, the Company's financial condition, expected returns on investment, and through false assurances to investors that their investments would be used solely for the Company's business purposes.  

Also in furtherance of his scheme and contrary to representations made to investors, ALEXANDER used more than approximately $1.3 million of the funds he obtained from investors on his own personal expenses instead of for the Company's business purposes.  For example, ALEXANDER used investor funds to make payments toward his personal credit cards, to fund his gambling excursions to multiple casinos, to make rental payments for his personal residence, and to make car payments for a luxury car purchased for one of ALEXANDER's family members.

In a criminal Complaint filed in the United States District Court for the Eastern District of New York, 
A criminal complaint was unsealed today in federal court in Brooklyn charging Nancy Jean and Carissa Scott with a scheme to defraud concert investors by falsely claiming to act as booking agents for well-known entertainers, including Justin Timberlake and Bruno Mars.  As alleged in part in the DOJ Release:

[I]n September 2019, Jean and Scott were contacted by an investor who was organizing a concert at the Alamodome in San Antonio, Texas, to benefit the Sandy Hook Promise Foundation.  The defendants falsely represented that they could book top-tier musical acts to perform at the concert, and provided the investor with a contract for a total fee of $500,000 that purported to commit Timberlake to perform.  One of the investors then wired a $100,000 deposit to the defendants.  Subsequently, when Timberlake's social media account failed to mention or promote the event, the investor requested confirmation that Timberlake was booked.  In response, the investor received a telephone call from an unidentified individual who falsely claimed to be Timberlake's manager.  The unidentified individual stated that Timberlake would perform at the concert, but that the fee would have to be raised to between $800,000 and $1 million.  In November 2019, the defendants sent the investor an agreement stating that Mars would perform at the concert as an alternative to Timberlake for a fee of $600,000.  The investor agreed that Mars could be the headliner, but did not send an additional deposit to the defendants. 

Within a month of receiving the original $100,000 deposit, approximately half of the money was used by the defendants for personal expenses or withdrawn as cash.
Former investment advisor Steven Pagartanis plead guilty in the United States District Court for the Eastern District of New York to conspiracy to commit mail and wire fraud; and he was sentenced to 170 months in prison and ordered to pay over $6.5 million in restitution.  As alleged in part in the DOJ Release:

From January 2000 to March 2018, Pagartanis, then an affiliate of a registered broker-dealer, solicited victims, almost all of whom were elderly women, to invest in two publicly traded companies, promising an eight percent return.  At Pagartanis's direction, the victims wrote checks payable to an entity he secretly controlled.  Pagartanis then laundered the victims' investments through a series of bank accounts, and used the money to pay personal expenses, purchase luxury items, fund failed business ventures including his wife's pet store and make the guaranteed "interest" or "dividend" payments to other victims.  The defendant's victims invested over $13 million and sustained losses of over $9 million.  Many lost substantial amounts of their life savings, including funds set aside to help ill family members, pay college expenses and maintain their homes.
Jorge Padilla pled guilty to one count of wire fraud in an Information in the United States District Court for the Southern District of New York 
As alleged in part in the DOJ Release:

From at least in or about September 2014 through in or about April 2017, JORGE PADILLA orchestrated a scheme to solicit investments in a sham family investment office, Dunatos Capital.  PADILLA, a financial professional registered with the Financial Industry Regulatory Authority ("FINRA"), worked throughout the period at issue for large financial institutions.  Nevertheless, PADILLA, targeting Argentina-based victim-investors who had been clients of one such institution, claimed he had gone to work for Dunatos Capital, purportedly a family office managing tens of millions of dollars in investments.  In order to solicit investments in this sham firm, PADILLA made false representations, including claiming, for example, that Dunatos had tens of millions of dollars under management, was regulated by U.S. financial regulators, and operated out of non-existent Manhattan-based offices.  After victims transferred funds pursuant to PADILLA's directions, PADILLA prepared and sent fraudulent statements about how the funds were invested.  PADILLA solicited more than $900,000 in purported investments in the sham firm.
FINRA's 2020 Risk Monitoring and Examination Priorities Letter, 
notes, in part, the following 2020 priorities as set forth in the FINRA Release:
  • Communications with the public, with a focus on private placement retail communications and communications via digital channels;
  • Cash management and bank sweep programs;
  • Direct market access controls;
  • Best execution;
  • Disclosure of order routing information; and
  • Cybersecurity

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, James R Willing submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that James R Willing entered the industty in 1960 and by May 2010, he was associated with FINRA member firm Morgan Stanley until his termination in February 2018. . The AWC alleges that Willing"does not have any relevant disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization." In accordance with the terms of the AWC, FINRA found that Willing had violated NASD Rule 3040 and FINRA Rules 3280 and 2010; and the self regulator imposed upon Willing a $7,500 fine and a 35-calendar-day suspension from associating with any FINRA member firm in any capacity. As alleged in part in the AWC:

Willing invested a total of $62,500 in a series of private securities transactions involving pooled investment fund interests offered by a limited partnership pursuant to Regulation D. Specifically, on June 15, 2015, Willing invested $12,500 and in 2016, he invested an additional $50,000 in these pooled investment fund interests which were securities. Willing failed to provide written notice to the Firm prior to participating in these private securities transactions. These investments were solely of Willing's personal assets and did not involve customer assets. In February 2017, Willing provided written notification to the Firm regarding the private securities transactions by filing a private investment disclosure.