Securities Industry Commentator by Bill Singer Esq

January 17, 2020

Casino Cheaters Caught / Dealer and Player Conspired to Cheat two Maryland Casinos out of More Than $1 Million (FBI Release)

SEC Charges Eight Unregistered Brokers for Their Participation in Fraudulent Offerings of Microcap Securities (SEC Release)
Patrick McDonnell pled guilty in the United States District Court for the Eastern District of New York to wire fraud and was sentenced to 33 months in prison and ordered to pay $224,352 in restitution.  As set forth in part in the DOJ Release:

Between approximately November 2014 and January 2018, McDonnell portrayed himself on social media as an experienced trader in virtual currency, promising investors he would provide trading advice and purchase and trade virtual currency on their behalf.  Beginning in approximately May 2016, McDonnell made similar representations and promises to investors through his Staten Island-based company, CabbageTech, Corp., also known as Coin Drop Markets.  However, neither McDonnell nor CabbageTech provided investment services.  Instead, McDonnell sent investors false financial statements showing that their investments had been profitable, and stole their money for his personal use.  In total, McDonnell defrauded at least 10 victims of at least $194,000 in U.S. currency, 4.41 Bitcoin, 206 Litecoin, 620 Ethereum Classic and 1,342,634 Verge currency, for a total loss of $224,350.32.  In addition to lying to investors about his company's prowess, McDonnell also solicited customers using a false alias, "Jason Flack," an individual that did not actually exist.

Casino Cheaters Caught / Dealer and Player Conspired to Cheat Two Maryland Casinos out of More Than $1 Million (FBI Release)

You know . . . if that day-trading ain't workin' out for ya, here's another idea. Not that I'm suggesting that you do anything illegal or anything but, hey, it's just a thought. Then again, the FBI did catch these idiots so, if you think about it, maybe you should just stick to day-trading, unless I can interest you in some Cannabis-infused Bitcoin futures? As noted in part in the FBI Release:

After just a few hours of playing baccarat at a Maryland casino in September 2017, Chenguang Ni headed home to New York with more than $850,000 in winnings.

The odds of winning any given hand of baccarat stand at just under 50 percent. But Ni and his tablemates won an astounding 18 of 21 hands-including one run of 14 straight wins.

The next day, the casino called the FBI's Baltimore Field Office. Ni had cheated, they believed, and one of their dealers had likely helped him. But the dealer they suspected, Ming Zhang, denied any involvement when questioned by the casino.
In today's blog we are confronted with criminal conduct by an associated person. In discharging its regulatory role, FINRA promptly investigated the matter and entered into a settlement by which the individual will effectively be disqualified from industry registration. All in all, FINRA did its job in a compelling and timely manner. Notwithstanding that justice seems to have been served, there are still some minor problems with the AWC settlement document, which offers us the opportunity to explore what Wall Street's employees are expected to disclose about their criminal histories., the SEC charged Gregory Drake, Scott Messier, Jay Scoratow, Jason St. Amour, and David Wolfson with fraud for their role in a matched-trading scheme involving dozens of microcap securities. 
The SEC alleged that Drake, St. Amour, Wolfson, Messier, and Scoratow with violating the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; and further charged Drake, Grossman, Moleski, St. Amour, Wolfson, Brooks, and Messier with violating the broker-dealer registration provisions of Section 15(a)(1) of the Exchange Act, and Scoratow with aiding and abetting Messier's violation of Section 15(a)(1). Drake, St. Amour, Brooks, Messier, and Scoratow consented to the entry of final judgments that impose permanent injunctions, conduct-based injunctions from soliciting purchases or sales of securities, disgorgement of ill-gotten gains, and civil monetary penalties. Wolfson consented to the entry of a permanent injunction and an injunction from soliciting purchases or sales of securities and reserves the issues of disgorgement and a civil penalty for determination by the court. 
As alleged in part in the SEC Release:

[B]etween at least December 2014 and March 2018, Drake, Messier, Scoratow, St. Amour, and Wolfson ran boiler-room operations to carry out a matched-trading scheme to enable shareholders of microcap companies sell their shares. Solicitors working for the boiler rooms, such as Brooks, Grossman, and Moleski, allegedly cold called prospective investors and convinced them to purchase shares of microcap companies in the investors' own brokerage accounts at prices and volumes that were coordinated by the boiler-room operators and the selling shareholders. The complaint alleges that selling shareholders simultaneously entered sell orders at the coordinated prices and volumes, making it highly likely that the selling shareholders' sell orders and the solicited investors' buy orders would match. Through this matched trading, the selling shareholders were able to offload their shares into a ready market.

SEC Charges Individual with Acting as an Unregistered Broker (SEC Release)
In a Complaint filed in the United States District Court for the District of Minnesota, the SEC charged Allan L. Lundervold with violating the broker-dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act. As alleged in part in the SEC Release:

[F]rom 2012 through 2015, Lundervold, who currently resides in Arizona, raised nearly $9 million for ARP Wave, LLC, through selling unregistered ARP Wave securities to more than 100 investors in Minnesota and elsewhere. As alleged in the complaint, he was not registered as a broker-dealer or associated with a registered broker-dealer when selling these securities, as required by the federal securities laws. For his fundraising efforts, Lundervold received a 10% commission on the amount of funds raised, for a total of nearly $900,000.
Gregory Gibbons, 54, pled guilty in the United States District Court for the Eastern District of New York to conspiracy to commit wire fraud affecting a financial institution; and he was sentenced to time served and ordered to pay $1,458,847.90 in restitution to the U.S. Department of Housing and Urban Development, CitiBank, and M&T Bank. As alleged in part in the DOJ Release:

[B]etween June 2008 and February 2009, the defendant conspired with others, including Alagi Samba, a realtor, and Daniel Badu, to devise a scheme to obtain eight loans for unqualified borrowers for homes in the Bronx, NY.  As part of the scheme, Gibbons acted as the mortgage broker and altered income and asset documents of the borrowers before they were sent to financial institutions.

For instance, Gibbons altered and created documents to make it appear that defendant Badu qualified for a mortgage on a property at 814 Faile Street in the Bronx. The defendant indicated that Badu was a research ophthalmologist and earned a specific income when in fact, Badu was not a research ophthalmologist nor did he receive the income stated on a loan application. Gibbons knew that these false loan documents were submitted to

The Funding Source, a mortgage bank, in order to secure a loan insured by the Federal Housing Administration. Based on that false application and supporting documentation, the loan was approved. The Funding Source then sold the loan on the secondary market to M &T Bank, which wired funds from New York through the State of Ohio to purchase the loan.

The defendant and his co-conspirators arranged for additional fraudulent loans to be approved, including another loan for Badu, and caused wire communications to be transmitted in interstate commerce for those loans. These fraudulent transactions caused losses of approximately $4,800,007 affecting M&T Bank and other financial institutions including SunTrust Bank, JPMorgan Chase Bank, and Citibank.

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, Royal Alliance Associates, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Royal Alliance Associates, Inc. a Censure and a $400,000 fine. As set forth in part in the "Overview" section of the AWC:

Between 2009 and 2017 (the Relevant Period), two registered representatives at Royal Alliance, acting independently of each other, stole customer funds by directing wire transfers or checks from customer accounts into accounts for entities they created. Some of the transfers were made in violation of firm policies and procedures for third-party payments, which the firm failed to enforce, and in some instances the transfers were also accompanied by red flags to which the firm failed to reasonably respond. By virtue of  the foregoing, Royal Alliance violated NASD Rules 3010 and 3012(a)(2) and FINRA Rules 3110, 3110(c)(2), and 2010.

Not quite captured in the "Overview" is the extent of the reps' misconduct. Pointedly, the AWC alleges that $3,8 million was stolen from four customers, of which one was a disabled widow. The two subject reps were sentenced to prison terms of 70 months and 87 months after pleading guilty in criminal proceedings. I urge all industry compliance professionals to review the AWC.