Securities Industry Commentator by Bill Singer Esq

January 28, 2020
the SEC charged Senior Portfolio Manager Edward Walczak with fraudulently misrepresenting how he would manage risk for the fund. In parallel action, the Commodity Futures Trading Commission settled charges against CCA and Szilagyi, and filed a district court action against Walczak. 
The SEC Order alleged that CCA violated the antifraud provisions of the federal securities laws, and that Szilagyi was a cause of CCA's violations and failed reasonably to supervise Walczak. Without admitting or denying the findings, CCA and Szilagyi agreed to be censured, to cease and desist from future violations, and to certain undertakings as described in the order. Further, CCA agreed to pay $8,176,722 disgorgement plus $731,759 interest and a $1,300,000 civil penalty; and Szilagyi agreed to pay a $300,000.  
As alleged in part in the SEC Release:

[A]lthough CCA told investors that it abided by a strict set of risk parameters for the Catalyst Hedged Futures Strategy Fund, it breached those parameters and failed to take the required corrective action during a majority of the trading days between December 2016 and February 2017. As alleged, the fund lost hundreds of millions of dollars - approximately 20% of its value - from December 2016 through February 2017 as markets moved against it.  The SEC's complaint against Walczak alleges that he told investors that the fund employed a risk management strategy involving safeguards to prevent losses of more than 8%, when in fact no such safeguards limited losses and Walczak did not otherwise consistently manage the fund to an 8% loss threshold.
For many FINRA member firms and associated persons, the self-regulatory-organization's response to infractions of its rules may be the imposition of a suspension, expulsion, or bar. In some cases, aggrieved respondents file an appeal with the SEC. What happens to the FINRA sanctions during the pendency of the appeal to the federal regulator? As it often the case, the best answer is that it "depends;" and there are numerous rules, requirements, and tests by which one either overcomes or is frustrated by such dependency. As demonstrated in a recent appeal by an expelled FINRA member firm, the quality of the SEC's mercy is not only strained but it is also sliced, diced, chopped, and pureed. 

Florida Criminal Defendant to Serve Additional Prison Time for Lying on Pre-Sentencing Financial Disclosure Form / Concealed Assets, Including a Boat, Mercedes, and Cash (DOJ Release)
Casey Padula was sentenced to an additional 20 months in prison today for willfully omitting assets from a pre-sentencing financial disclosure form he provided to the Justice Department. As set forth in part in the DOJ Release, Padula:

made the false statements on a financial disclosure statement he was required to submit to the government after pleading guilty to tax and bank fraud. On July 17, 2017, in the prior prosecution, Padula was sentenced to 57 months in prison on one count of conspiracy to defraud the United States and to commit bank fraud. Padula admitted he used offshore entities and accounts to commit the tax fraud and carried out the bank fraud by conducting a fraudulent short-sale transaction designed to reduce or eliminate his $1.5 million mortgage. As part of his plea agreement, Padula was required to provide a full and accurate financial disclosure statement to the government. Instead, Padula submitted a false financial disclosure statement in which he omitted numerous assets, including a boat valued at almost $340,000, at least $80,000 in cash, and a $90,000 Mercedes he had recently purchased for his daughter.
Christopher Parris was charged in the United States District Court for the Western District of New York with conspiracy to commit mail fraud, mail fraud, and conspiracy to engage in money laundering. From about January 2012 to June 2018, Parris allegedly operated Lucian Development with partner Perry Santillo (who previously pled guilty and awaits sentencing) and engaged in an alleged Ponzi-scheme that defrauded some 1000 investors out of at least $115,500,000. 
As alleged in part in the DOJ Release:

The investment offerings pitched by Parris and Santillo consisted principally of unsecured promissory notes and preferred stock issued by various entities that they controlled.  Potential investors were offered an array of investment options to create the illusion of a diversified investment portfolio.  Those investment options included products issued by purported issuers such as First Nationle Solutions (FNS), Percipience Global Corporation, United RL Capital Services, Boyles America, Middlebury Development Corporation, and NexMedical Solutions, among others.  None of those issuers had substantial bona fide business operations or used investor money in the manner and for the purposes represented to investors.  To the extent that an issuer may have had some minor legitimate business activities, it was not profitable and insufficient revenues were generated to pay investors any returns (let alone return the principal amounts of their investments).

Over the years, to keep the Ponzi scheme from being detected, a substantial portion of incoming new investor monies were depleted by making promised interest and other payments to earlier investors. Most of the rest of incoming investor money was used to finance lavish lifestyles of the conspirators, their families and associates; to expand the scheme by purchasing investment advisor/brokerage businesses to obtain access to fresh investors; and to pay operating expenses - salaries for a sales force and administrative staff, office rents and related expenses, housing for employees, and interest on loans-all of which were in furtherance of keeping the scheme going and maintaining a façade of legitimate business operations.

See: "2 Pleas, 2 Federal Courts,1 Horrific Ponzi Scheme, And Lots Of Lousy Wall Street Regulation" ( Blog /  November 6, 2019), in which I noted in part:

Bill Singer's Comment: 

I have provided the extensive above quotes from the two DOJ Release because of my familiarity with the cases and my personal interaction with several victims. Frankly, the stories of the families defrauded by the participants in this scheme are horrendous. I spoke with family-members and caregivers who related stories of victims who were lured into these bogus investments at times when they were suffering from terminal cancer, dementia, or severe disabilities. Unfortunately, it was my experience that the victims and their families were not afforded timely, substantive, or compassionate assistance by many of the regulators and prosecutors involved. 

In some instances, I personally spoke with the regulatory community and I too came away with the sense that no one wanted ownership of the fraud -- or responsibility for allowing it to persist for a decade. For some victims, their experience was the frustration of being shuttled from FINRA to the SEC to the FBI to the Department of Justice and back into that endless loop of useless referrals to nowhere. Moreover, frequent pleas for information and guidance were responded to with what was often viewed as disinterest or a shocking lack of empathy. 

For some details as to the background of this story, READFINRA Buries The Lede With FAS Rep Settlement ( Blog / June 26, 2017)
After a four-day jury trial in the United States District for the Eastern District of Wisconsin, CPA Mark F. Spindler was found guilty of conspiracy to commit wire and mail fraud. As alleged in part in the DOJ Release:

[F]rom the late 1990s to 2017, Spindler provided accounting services to Brian L. Ganos and Milwaukee-based construction companies Ganos controlled, including Sonag Company, Inc.; Sonag Ready Mix LLC; Nuvo Construction Company, Inc.; and C3T, Inc. 

After a four-day trial before the Honorable Pamela Pepper, Spindler was found guilty of conspiring with Ganos and others in scheme to use front companies to obtain set-aside contracts intended for small businesses owned by service-disabled veterans and disadvantaged individuals. The scheme involved operating three construction companies with straw owners who qualified as a disadvantaged individual or as a service-disabled veteran, but who did not actually control the companies.  Ganos then fraudulently obtained small business program certifications to win government-funded contracts to which the companies were not entitled.  Specifically,
  • Nuvo Construction Company, Inc. ("Nuvo") was misrepresented to be majority-owned and controlled by Jorge Lopez in order to obtain certifications as a Small Disadvantaged Business from the U.S. Small Business Administration ("SBA") and as a Disadvantaged Business Enterprise from Milwaukee County.  In reality, Jorge Lopez worked full-time for a different entity in Minnesota and did not actually control Nuvo.
  • C3T, Inc. was misrepresented to be majority owned and controlled by Telemachos Agoudemos to obtain verification as a Service-Disabled Veteran-Owned Small Business.  In reality, for long stretches, Telemachos Agoudemos had virtually no involvement in C3T.
  • Pagasa Construction Company, Inc. was misrepresented to be majority owned and controlled by Odessa Millan in order to obtain certification as a Small Disadvantaged Business from the SBA.  In reality, Odessa Millan relied on the assistance of Ganos-controlled companies to form Pagasa. 
The scheme continued from 2004 to mid-2016 during which period, Ganos and others used those certifications to obtain over $260 million in federal, state, and local contract payments.  These included federal construction contracts that were set aside for small businesses controlled by service-disabled veterans or disadvantaged individuals.

At trial, the government introduced evidence that Spindler participated in the conspiracy in several ways, including:
  • Spindler wrote multiple letters to certifying agencies that contained false information and enabled the front companies to retain their certifications.  For example, Spindler wrote a letter for the Department of Veterans Administration ("VA") that claimed T.A. was the highest-compensated employee of C3T, when in fact, multiple C3T employees were earning more than Telemachos Agoudemos, the purported President of C3T.  
  • Spindler provided accounting advice to help Ganos and others conceal the profits they were moving out of the front companies.  For example, Spindler provided accounting entries that charged "services" from Ganos's Sonag Company to the front companies, even though no services had been rendered, in order to justify millions of dollars that Ganos was taking from the front companies.
  • Spindler lied to criminal investigators from the FBI and VA during an interview in June 2012.  Spindler falsely stated that Ganos had no influence over C3T and that the front companies had no affiliation with each other or Ganos's Sonag Company.  Partly as a result of Spindler's false statements, the criminal investigation was closed and the scheme continued for four more years.  Only after new information came to light several years later was a new investigation started, which eventually ended the scheme.
Jill Thompson Arrington, 42, was indicted in the United States District Court for the Eastern District of North Carolina on one count of heft of government property, one count of financial aid fraud, and seven counts of wire fraud. As alleged in part in the DOJ Release:

[A]RRINGTON unlawfully obtained Pell grants and federally insured loans by claiming to pursue a post-secondary education when she had no intent of doing so.  Specifically, to receive the financial aid, ARRINGTON falsely certified on Free Applications for Federal Student Aid and indicated on various post-secondary institutions' admissions application forms that she intended to pursue degrees, often online, at the institutions.  After the aid was disbursed to the post-secondary institutions and ARRINGTON received her funds, she often stopped participating in the courses.  During her scheme, ARRINGTON applied to thirteen post-secondary institutions and received approximately $34,471.73 in student aid refunds. 
The SEC's Office of Compliance Inspections and Examinations ("OCIE") issued "Cybersecurity and
Resiliency Observations," , which highlights cybersecurity and operational resiliency practices taken by market participants in the areas of governance and risk management, access rights and controls, data loss prevention, mobile security, incident response and resiliency, vendor management, and training and awareness.