Securities Industry Commentator by Bill Singer Esq

April 17, 2020

It's Not Just the WHO: How China Is Moving on the Whole U.N. / Despite his saber-rattling, Trump's pullback actually helps Beijing in its new, inside-baseball strategy to build influence (Politico by Kristine Lee)

Federal Courts Consider Disturbing FINRA Customer Arbitration Decision
( Blog)

Torrington Financial Advisor Sentenced to Prison for Misappropriating Funds from Elderly Clients (DOJ Release)

Three Canadian Men Sentenced For Sweepstakes Fraud (DOJ Release)

SEC Denies Award to Whistleblower
In the Matter of the Claim for Award in Connection With [REDACTED] (Order Determining Whistleblower Award Claim)

SEC Awards Over $27 Million to Whistleblower (SEC Release)

SEC Wins Summary Judgment Against North Carolina Executive of Microcap Company for Issuing Fraudulent Press Releases (SEC Release)

CFTC Charges Florida Man and His Companies in Fraudulent Forex and Digital Asset Scheme (CFTC Release)

$20 Barrel Oil? West Texas Oilman Promises Profits Even Then (TSSB Release)

Majority of FINRA Arbitration Panel Finds Raymond James Defamed Former Employee
In the Matter of the Arbitration Between Raymond James Financial Services, Inc., Claimant, v. Eric Samuel Wilson, Respondent, v. Michael Carbajal, Lee Ann Jordan, and William Scott Schroth, Third Party Respondents (FINRA Arbitration Decision)

FINRA Fines and Suspends Ameritas Rep Over Falsified Customers' Signatures 
In the Matter of Melissa A. Niederhauser, Respondent (FINRA AWC)

It's Not Just the WHO: How China Is Moving on the Whole U.N. / Despite his saber-rattling, Trump's pullback actually helps Beijing in its new, inside-baseball strategy to build influence (Politico by Kristine Lee)
In a thoughtful yet provocative analysis, Politico's Lee considers the emerging role of China at WHO and the UN. In part, Lee warns that:

Beijing, unchallenged by an alternative vision of moral leadership, could be emboldened to completely co-opt the U.N. and accelerate current trend lines to turn it into a platform for its foreign policy initiatives. The pandemic has shown what such a world would look like: Countries would be largely left to fend for themselves during a cross-border crisis while the Chinese Communist Party churns out propaganda about its global leadership. Without consistent, transparent information collection and clear guidelines issued by an international coordinating body, governments and publics were woefully underprepared for the devastation that Covid-19 has ultimately wrought-and will be again in the future.

( Blog) Blog readers are well aware of Bill Singer's long-standing complaint that FINRA's arbitration forum seems designed to further the interests of its large member firms -- particularly when a given FINRA Arbitration Decision intentionally fails to provide sufficient content and context so as to render it intelligible. Further, FINRA's arbitration rules do not require by default a reasoned decision, and that idiocy perpetuates inexplicable awards and presents appellate courts with a guessing game. In today's featured FINRA Arbitration, we have two federal courts considering the plight of public customers who claimed to have been victimized by fraud; however, as the courts note: The arbitration panel did not make any findings of fact or conclusions of law in its order. Worse, the courts concede that the Panel's final damages award is "disturbing." 

Torrington Financial Advisor Sentenced to Prison for Misappropriating Funds from Elderly Clients (DOJ Release)
After pleading guilty to one count of wire fraud, Lester Burroughs, 61, was sentenced in the United States District Court for the  District of Connecticut to 33 months in prison plus three years of supervised release. As alleged in part in the DOJ Release:

[B]urroughs owned Burroughs Investment Group, a full-service financial consulting firm based in Torrington, and was a registered securities broker with the Financial Industry Regulatory Authority.  Beginning in at least 2012 and continuing through 2019, Burroughs misrepresented to certain clients that their money would be invested in legitimate guaranteed investment contracts.  Instead, he used his clients' money to pay business expenses and other clients' "guaranteed" investment returns.

Burroughs began the scheme after an investment he recommended to a client failed to materialize an expected return and Burroughs feared the possible financial repercussions to his business should that client file a complaint with regulatory agencies.  Burroughs then stole approximately $370,000 from an elderly client in order to pay the nonexistent returns of the failed investment to the first client.  In 2018, after the elderly client's daughter demanded a full accounting of her mother's investments, Burroughs tried to cover up his conduct by providing his client's daughter with fraudulent accounting statements and documents.  When his client's daughter demanded money, Burroughs provided the client with funds he had stolen from three other unsuspecting clients, all of whom were told by Burroughs that he was investing their money in guaranteed investment contracts.

Through this scheme, Burroughs defrauded clients of a total of approximately $575,000.  Burroughs is required to pay full restitution.

Three Canadian Men Sentenced For Sweepstakes Fraud (DOJ Release)
Konstantine FIlippas, 74, Michael Dissos, 68, and Michael Pare, 55, pled guilty in the United States District Court for the Middle District of Pennsylvania to conspiracy to commit mail and wire fraud charges. Dissos and Pare were sentenced to about nine months of tine served, and Filippas was sentenced to 18 months in prison. Additionally, Dissos was ordered to pay $34,080, Pare to pay $90,745, and Filippas to pay $177,220 in restitution. Finally, Dissos and Pare were ordered to self-deport back to Canada within seven days of their release from custody. As alleged in part in the DOJ Release:

[A]ll three defendants were indicted in 2014, along with four other alleged co-conspirators.  The seven defendants allegedly defrauded approximately 65 victims, most of whom were elderly, for losses exceeding $1.2 million.  Filippas, Dissos and Pare were eventually extradited from Canada to the Middle District of Pennsylvania last summer. The defendants admitted during their guilty plea proceedings to allowing their Canadian bank accounts to be used to receive monies sent by victims who were lead to believe they had won substantial winnings in a fictitious sweepstakes contest.  The defendants also admitted to cashing out Western Union and MoneyGram money transfers sent by some victims.
In the Matter of the Claim for Award in Connection With [REDACTED] (Order Determining Whistleblower Award Claim, '34 Act Rel. No. 8867; Whistleblower Award Proc. File No. 2020-14 / April 16, 2020)
The SEC's Claim Review Staff ("CRS") issued a Preliminary Determination recommending the denial of Whistleblower's claim, which the Commission affirmed. As asserted in the SEC Order, Claimant purportedly sent in tips alleging that a "Firm" :

was involved in "rampant illegal activity and FINRA and SEC rule violations and possible tax evasion." Claimant's tips were not routed to the[REDACTED] office.

As more fully explained in the SEC Order:
[C]laimant's information did not lead to the successful enforcement of the Covered Action within the meaning of Section 21F(b)(1) of the Exchange Act and Rules 21F-3(a)(3) and 21F-4(c) thereunder. Claimant's information did not cause the Commission staff to open the investigation. Nor did Claimant's information significantly contribute to the success of the Covered Action, as Enforcement staff responsible for the Covered Action never received Claimant's tips, did not communicate with Claimant, and did not know who Claimant was.
The SEC awarded over $27 million to a whistleblower. As set forth in part in the Whistleblower Order

[(i)] Claimant's information was significant as it allowed Commission staff to uncover hidden conduct occurring, in part, overseas; (ii) Claimant provided a substantial amount of ongoing assistance and cooperation by meeting with staff numerous times and providing relevant documents and critical investigative leads that advanced the investigation and saved the Commission a significant amount of time and resources; (iii) Claimant's information helped the Commission further significant law enforcement interests by enabling the Commission to bring an action addressing a particular form of misconduct [Redacted]; and (iv) Claimant repeatedly and strenuously raised Claimant's concerns internally. In determining the appropriate award percentage, we also considered whether Claimant unreasonably delayed in reporting the information to the Commission. We are mindful of the importance of whistleblowers reporting their information to the Commission promptly, and will continue to make appropriate reductions to award percentages in cases where we find, under all of the facts and circumstances, that the whistleblower unreasonably delayed in doing so. However, we determined that no reduction for unreasonable reporting delay was warranted under the specific facts and circumstances of this case due to the strength of the positive factors and the fact that Claimant repeatedly and tenaciously objected to and escalated Claimant's concerns about misconduct within Claimant's organization. 

In a Complaint filed in the United States District Court for the Northern District of Georgia, the SEC alleged that 
Solomon RC Ali (a/k/a Richard M. Carter), while a Senior Vice President at Revolutionary Concepts, Inc. ("REVO"), arranged for that company to enter into sham transactions with companies that he portrayed as independent; and, thereafter,  Ali touted the sham transactions as being lucrative for REVO, which he said had acquired valuable assets from the deals. The Complaint alleged that, in fact, Ali had close ties to the other companies, the assets REVO acquired were essentially worthless, and Ali's claim that REVO could earn millions of dollars from the deals was baseless. The Court granted the SEC's Motion for Partial Summary Judgment against Ali on its fraud claims. As set forth in part in the SEC Release:

[S]pecifically, the court concluded that Ali was, at a minimum, reckless when he made the false statements about the deals, and when he failed to inform investors that the deals were not arms-length transactions. In addition, the court found that the SEC was entitled to summary judgment on its claim that Ali failed to report his beneficial ownership of more than 18 million shares of REVO stock.
In a Complaint filed in the United States District Court for the Middle District of Florida, the CFTC charged Alan Friedland oand his companies, Fintech Investment Group, Inc. ("Fintech") and Compcoin LLC, with fraudulently soliciting over $1.6 million from their customers in connection with a leveraged or margined off-exchange foreign currency ("forex") scheme. Separately, the National Futures Association filed a member responsibility action against Fintech and an associated responsibility action against Friedland based on their failure to cooperate with the NFA in providing information related to some of the same activities that are alleged in the CFTC's complaint. The NFA action summarily suspended Fintech and Friedland from NFA membership and prohibits them from soliciting and accepting any customer funds related to forex trading, among other things. As alleged in part in the CFTC Release:

[S]tarting in at least 2016 and proceeding through 2018, Friedland and his companies fraudulently solicited customers and prospective customers to purchase a digital asset known as Compcoin. The defendants falsely promised, among other things, that Compcoin would allow customers to gain access to Fintech's proprietary forex trading algorithm known as ART, and falsely advertised that ART would deliver high rates of return. 

According to the complaint, in marketing Compcoin, the defendants also falsely represented, among other things, the use and function of Compcoin and that ART "was ready for release on the open market." In fact, as alleged in the complaint, the defendants knew that no customer could lawfully utilize ART until Fintech obtained approval from the National Futures Association (NFA), which never occurred. Thus, according to the complaint, the purchasers of Compcoin never gained access to ART as promised, and were left with a valueless asset.
The Texas State Securities Board entered an Emergency Cease and Desist Order against Texas Shallow Oil & Gas LLC and its owner/operator Kenneth Wayne Wooldridge. As alleged in part in the TSSB Release:

Wooldridge is claiming that investors in Texas Shallow projects will "set [themselves] up for retirement," according to the order.

Wooldridge is touting his decades of experience in the oil and gas business and relationships with oil giants like Schlumberger Ltd. and Halliburton Co. But he is omitting a pending lawsuit by an investor and Orders against Texas Shallow entered by the Texas Railroad Commission. Neither Wooldridge nor Texas Shallow are registered to deal in securities in Texas.

In 2019, a company sued Wooldridge to recover the $20,500 it paid to Texas Shallow to buy a 16% working interest in a well field project in Young County. The suit is pending in the 90th District Court of Young County.

The Railroad Commission in 2018 entered a consolidated Order against Wooldridge's company that require him to pay penalties totaling $50,000. Wooldridge has not resolved the debt, according to the emergency order.

Besides not disclosing the lawsuit and Railroad Commission sanction, Wooldridge, according to the order, is committing fraud by not disclosing risks of investing in oil and gas wells. Chief among them: changes in the price of oil or declines in demand can affect the profitability of investments in oil and gas wells.

Wooldridge is publicly soliciting investments in oil and gas wells on and through two worldwide platforms, LinkedIn and Dealstream.

Dealstream is an online marketplace with more than 500,000 members in 100 countries. The platform facilitates the purchase and sale of businesses, real estate, oil and gas assets, and private investments.

Wooldridge is representing that he has expertise in the exploration of leases in northern Young County and the Gun Sight Oil Sands Formation, which runs through Young County. Texas Shallow and Wooldridge are promoting "silent investment programs" in the Gun Sight formation.

Texas Shallow and Wooldridge, however, aren't disclosing any geological or geophysical information that can be used to independently evaluate oil wells in Young County and the Gun Sight Oil Sands Formation.

Texas Shallow and Wooldridge have been promoting their unregistered investments in Texas wells over the course of sharp decline in oil prices over the past year. The price of West Texas Intermediate crude hit $21 per barrel on April 1, a decline of 65% in the past 12 months. 

In the Gun Sight formation, Texas Shallow is offering a 1% working interest in wells for $1,000. Wooldridge is telling investors the wells have the potential to produce up to seven barrels of oil a day, according to the order, but production could rise to 55 to 110 barrels a day.

Wooldridge and Texas Shallow are also promoting investments in other Young County exploration projects.

In DealStream advertisements in March and April, Wooldridge solicited investors to fund new oil wells, one injection well and one water supply well for $17,500 per well. According to the order, Wooldridge is telling investors the project has potential to produce 25 to 60 barrels per day to start and production could rise as high as 125 to 300 barrels of oil a day. . . .

In a FINRA Arbitration Statement of Claim filed in January 2018, FINRA member firm Raymond James asserted breach of contract. Claimant Raymond James sought $1,214,070.90 plus interest, fees, and costs. Respondent Wilson generally denied the allegations, asserted various affirmative defenses, and he filed a Counterclaim and Third-Party-Claim asserting contractual indemnity; fraud; negligent representation; negligence; breach of contract; violation of FINRA Rule 2010 and 3110; expungement, and libel/slander. Third Party Respondents Carbajal, Jordan, and Schroth generally denied the allegations and asserted various affirmative defenses; and Schroth filed a Counterclaim asserting breach of contract and unjust enrichment. The FINRA Arbitration Panel rendered the a Majority Award per the Presiding Chair/Public Arbitrator and Non-Public Arbitrator. The second Public Arbitrator noted her Dissent in Part because she did "not agree with the calculation for Wilson's Counterclaim; the alteration of Termination Explanation and changing of 7F(1) and 14J(1) from 'yes' to 'no.'" Accordingly, by majority decision, the Panel issue the following Award in pertinent part:

1. Respondent Wilson is liable for and shall pay to Claimant the sum of $1,207,150.00 in compensatory damages 

2. Claimant is liable for and shall pay to Respondent Wilson the sum of $717,150.00 in compensatory damages. 

3. Respondent Wilson's award of $717,150.00 stated in #2 above is an offset to Claimant's award in #1 above. As such, Respondent Wilson is liable and shall pay to Claimant $1,207,150.00 minus $717,150.00 awarded in number 2, above, for a net amount due to Claimant of $490,000.00. Claimant's obligations are extinguished by the offset.

4. Respondent Wilson is liable for and shall pay to Claimant interest on the above-stated sum of $490,000.00 at the legal rate for judgments in Florida from 30 days after the date of the award until the award is paid in full. 

5. Respondent Wilson's Third Party Claim is denied in its entirety. 

6. Third Party Respondent Schroth's Counterclaim against Respondent Wilson is denied in its entirety. 

7. The majority of the Panel recommends the expungement of the Reason for Termination and Termination Explanation in Section 3 of the Forms U5 filed by Raymond James Financial Services, Inc. and Raymond James Financial Services Advisors, Inc. on September 18, 2017 from registration records for Claimant Eric Samuel Wilson (CRD #2609064) maintained by the Central Registration Depository ("CRD"). The Reason for Termination shall be changed to "other" and the Termination Explanation shall be changed to "The broker's employment was terminated due to differences between the parties." 

In addition, the majority of the Panel recommends the expungement of the "Yes" answer to Question 7F(1) on the foregoing Forms U5. The answer should be changed to "No" and the accompanying Disclosure Reporting Pages deleted in their entirety. 

The majority of the Panel further recommends the expungement of the "Yes" answer to Question 14J(1) on Claimant Eric Samuel Wilson's Amended Form U4 filed by Advisory Services Network on September 21, 2017 and maintained by the CRD. The answer should be changed to "No" and the accompanying Disclosure Reporting Page deleted in its entirety. 

These recommendations apply to all subsequent disclosures concerning this event, including, but not limited to the Amended Form U4 filed by Calton & Associates, Inc. on September 25, 2017. 

The majority of the Panel recommends these changes based on the defamatory nature of the information. . . .

FINRA Fines and Suspends Ameritas Rep Over Falsified Customers' Signatures
In the Matter of Melissa A. Niederhauser, Respondent (FINRA AWC 2018060749801)

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, Joseph John Mauro submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Mauro was first registered in 1991 with FINRA member firm Ameritas Investment Corp. The AWC alleges that Joseph John Mauro "does not have any 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 Joseph John Mauro had violated FINRA Rule 2010; and the self regulator imposed upon him a $5,000 fine and a one-month suspension in all capacities. As set forth in part in the AWC, during the relevant period between July 2013 and July 2018, Ameritas:

prohibited registered representatives from signing a customer's name on any document, even if the customer authorized the false signature. Despite this, to expedite transactions, Respondent falsified three customers' signatures on a total of six variable annuity withdrawal forms, after the customers requested those withdrawals. Each of the withdrawal forms resulted in the movement of customer funds from the customer's variable annuity to the customer's personal bank account. Two of the customers authorized Mauro to sign their names to the forms. . . .