Securities Industry Commentator by Bill Singer Esq

May 5, 2020

SEC Awards Almost $2 Million to Whistleblower (SEC Release)

TD Ameritrade interim CEO Steve-Boyle delivers sparkling results, underscores quick 100% work-at-home transition-- and calls Schwab merger efforts 'critical' and on-schedule (RIABiz by Lisa Shidler)
In a fairly common version of  Wall Street hardball, a veteran rep finds himself on the ropes. The firm seems to think it's time for the old boy to go out to pasture. First they ask for his resignation. Then, you know, there's a bit of pressure. Then the young stud enters the picture. Then the pressure is less subtle. At some point, it's either you leave or we'll fire you. In today's featured variation on the theme, we're largely at the "He Said" stage of things, so it might be best to sort of suspend judgment, for now. At issue in today's case is Investacorp's termination of a rep who was the subject of two FINRA investigations. Perhaps the rep invited the firm to throw high and tight? Be that as it may, after hitting the dirt and dusting himself off, the broker filed a TRO against his former firm. That doesn't usually pan out. This time, however, it did!
Even as the world is locked down amid the COVID-19 pandemic, the American entrepreneurial spirit shines in all its glory! Rhonda Denise Zorka, and Leia Kay Barnett each pled guilty in the United States District Court for the Central District of California to one count of bank fraud and one count of aggravated identity theft. As alleged in part in the DOJ Release:

[Z]orka admitted that she and Barnett obtained stolen identities of Bank of America accountholders living in Florida. Zorka admitted that she and Barnett then separately went to Bank of America branches in Southern California and Illinois, where they presented fraudulent identification to obtain temporary debit cards and PINs, and withdrew funds from victims' accounts.

"[Zorka] and Barnett wore braces over their right wrists and forearms in order to explain any differences between their signatures at the time of the withdrawal and the actual accountholder's signature on file with [Bank of America]," according to the plea agreement.

Zorka specifically admitted to making a fraudulent withdrawal of approximately $6,500 at a Bank of America branch in Burbank.

She also admitted that the scheme caused Bank of America to suffer losses of $121,949 through more than 50 withdrawals on more than 30 accounts at over 20 branches in California and Illinois.

When Barnett pleaded guilty, she specifically admitted making a fraudulent withdrawal of approximately $5,500 from a Bank of America branch in Irvine.
Meticulous reporting by Bloomberg's Yap -- truly impressive effort! Yap presents a brief summary of the each of the major Emerging Markets with a focus on their lockdown (or lack thereof) and the pace by which they are experiencing a pick-up in economic activity. 

The SEC announced temporary releif for smaller companies impacted by COVID-19 in the form of a revised Rule Crowdfunding As set forth in part in the SEC Release:

The temporary rules are intended to expedite the offering process for smaller, previously established companies directly or indirectly affected by COVID-19 that are seeking to meet their funding needs through the offer and sale of securities pursuant to Regulation Crowdfunding. 

The temporary rules provide flexibility for issuers that meet certain eligibility criteria to assess interest in a Regulation Crowdfunding offering prior to preparation of full offering materials, and then once launched, to close such an offering and have access to funds sooner than would be possible in the absence of the temporary relief.  The temporary rules also provide an exemption from certain financial statement review requirements for issuers offering more than $107,000 but not more than $250,000 in securities in reliance on Regulation Crowdfunding within a 12-month period.
Remember when there were professional journalists who reported about events in order to inform us rather than victimize us as clickbait? If you've forgotten about those days, read this superb analysis by Bloomberg's Nasiripour. Absolutely beautiful journalism. In part, Nasiripour explains that:

"The Fed came in trying to help, but they overshot," said Phil Rasori, chief operating officer of Mortgage Capital Trading Inc., which says it handles hedging for about 20% of the mortgage market. He estimates margin calls initially drained as much as $5 billion from lenders before the Fed eased off, posing "an existential threat" to some nonbanks that operate on thin cash cushions, selling off loans as soon as they're made.

Mortgage lenders promise to lock in interest rates for borrowers weeks before loans are finalized, then hedge that risk by shorting mortgage-related securities. But the Fed's buying drove up prices for those assets, turning the safeguards into sudden demands for cash. Quicken, among the largest U.S. mortgage lenders, met its obligations during the period, spokesperson John Perich said.
Elm Tree Investment Advisors LLC ("ETIA") Chief Operating Officer Ahmad Naqci pled guilty in the United States District Court for the District of New York to one count of securities fraud conspiracy involving Fred Elm a/k/a "Frederic Elmaleh." As alleged in part in the DOJ Release:

From at least June 2013 through December 2014, Elm and NAQVI engaged in a scheme to defraud investors in funds that Elm and NAQVI created and controlled at ETIA, where Elm was the founder and manager, and NAQVI was the chief operating officer.  Elm and NAQVI raised more than $18 million from over 50 investors in four limited partnerships for which ETIA acted as the fund manager:  Elm Tree Investment Fund, LP; Elm Tree Emerging Growth Fund, LP; Elm Tree 'e'Conomy Fund, LP; and Elm Tree Motion Opportunity, LP (collectively the "Elm Tree Funds"). 

Elm and NAQVI falsely represented that the Elm Tree Funds used investor capital to purchase shares in privately held technology companies before their IPOs.  These companies included Twitter, Inc., Alibaba Group Holding Limited, Uber Technologies, Inc., Square, Inc., Pinterest, Inc., and GoDaddy Group, Inc.  Moreover, Elm and NAQVI falsely represented that they had access to these pre-IPO shares because of their relationships with leading venture capital firms, such as Kleiner Perkins Caufield & Byers, Benchmark Capital, and Silver Lake Management, L.L.C.  In truth and in fact, Elm and NAQVI did not invest in the pre-IPO shares of these companies and did not have relationships with these venture capital firms.

Elm and NAQVI comingled the approximately $18 million that was invested in the Elm Tree Funds in a single investment account and then invested only a portion of the money, approximately $7.1 million.  At no point did any of the Elm Tree Funds return a profit.  Instead, for example, between January 2014 and November 2014, the Elm Tree Funds lost approximately $3.9 million in trading.

Moreover, of the investor funds that Elm and NAQVI did not lose in securities trading, Elm routinely converted investor funds to his own use in the form of cash withdrawals and to pay personal expenses, including to purchase a multimillion-dollar home, high-end furnishings, and other personal items, such as jewelry, daily living expenses, and luxury automobiles, including a Bentley, a Maserati, and a Range Rover.

The conversion of investors' funds was contrary to the representations that Elm and NAQVI made to investors concerning their and ETIA's fees.  Elm and NAQVI falsely represented that they and ETIA would take a two percent annual management fee plus a performance fee of 20 percent of any profits that the Elm Tree Funds earned.  In truth and in fact, Elm converted investor money that far exceeded the two percent management fee.  Moreover, because the Elm Tree Funds never returned a profit, Elm, NAQVI, and ETIA were not entitled to a percentage of any profits.

Elm and NAQVI also used approximately $5.2 million of new investor funds to make payments to earlier investors in a Ponzi-like fashion.  To prevent or forestall redemptions, and continue to raise money to fund their scheme, Elm and NAQVI also generated fictitious account statements and made oral and written misrepresentations that their trading strategies were generating consistently positive returns.
Former Pension Benefit Guaranty Corporation ("PBGC") employee Jeffrey B. Donahue and Nadeem Ansari each pled guilty in the United States District Court for the District of Virginia to one count of conspiracy to bribe a public official. As alleged in part in the DOJ Release:

[D]onahue served as a Supervisory Contract Administrator with PBGC and then as Director of the Procurement Department from March 2014 to February 2020. From at least 2015 through August 2017, Donahue solicited and received cash payments and other things of value, including the promise of a job valued at $1 million, from Ansari and Ansari's company. In exchange, Donahue agreed to steer PBGC contracts to Ansari's company.   

In 2015, Donahue approached Ansari and offered to help Ansari's new company win a PBGC contract, worth approximately $55 million, in exchange for a future job with the company. Among other things, Donahue provided Ansari with sample bid proposals; helped draft, review, and edit the company's bid proposal; and disclosed labor pricing estimates. When the company did not win the contract, Donahue helped Ansari draft the company's bid protest. Ansari admitted that his business partners were aware of his arrangement with Donahue.

In 2016, Donahue proposed a second arrangement with Ansari in which Donahue would receive up to $125,000 from Ansari and his company in exchange for steering a contract to Ansari's company. PBGC awarded the contract to Ansari's company, which resulted in payments to the company totaling approximately $3.29 million. Donahue steered the contract by, among other things, providing sensitive, non-public information and work product to Ansari; providing guidance for contract pricing; and adjusting the terms of the contract to align with the qualifications of the company's personnel. Donahue received at least $48,000 in cash, plus additional gifts.  Donahue and Ansari also took steps to conceal the scheme and their communications with each other, including using separate, dedicated cellular telephones and e-mail accounts and communicating through encrypted software.
The CFTC issued a Whistleblower Award in which over $2 was apportioned among four whistleblowers -- a fifth claimant was denied an award. The CFTC Award covered both a CFTC action and related actions brought by another regulator. 

SEC Awards Almost $2 Million to Whistleblower (SEC Release)
The SEC issued a Whistleblower Award in which nearly $2 million was awarded to a whistleblower. As noted in part in the SEC's Award:

[I]n reaching that determination, we positively assessed the following facts: (i) although Claimant did not submit the tip that led to opening the investigation, Claimant did provide new information regarding an ongoing fraud that the Commission was not aware of at the time; (ii) Claimant's information about the ongoing fraudulent scheme informed the staff's need to expeditiously seek a temporary restraining order and asset freeze to prevent further investor losses; (iii) Claimant provided Commission staff with specific, timely and credible information, significant ongoing assistance and supporting documents, including answering detailed follow-up inquiries from the staff; (iv) in major part due to Claimant's information and assistance, investors recovered much of their investments; and (v) Claimant suffered hardship.

As noted in Footnote 2 of the SEC Award, the Claims Review Staff ("CRS"):

[P]reliminarily determined to recommend that the Commission deny a related-action award to Claimant with respect to certain actions of another agency. Claimant has not contested that Preliminary Determination. As a result, the CRS's Preliminary Determination of Claimant's related action award claims became the final determination of the Commission pursuant to Exchange Act Rule 21F-11(f). See Order Determining Whistleblower Award Claim, Release No. 34-82996, at 3 n.3 (Apr. 5, 2018).
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, Western International Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Western International Securities, Inc. has been a FINRA member firm since 1995 with about 175 branches and 475 registered representatives.  In accordance with the terms of the AWC, FINRA found that the firm had violated FINRA Rules 3270, 3040, and 2010; and the self regulator imposed upon Western International Securities a Censure and a $325,000 fine; and the firm undertakes in part to retain an independent consultant to conduct a comprehensive review of the issues cited. As set forth in part in the AWC's "Overview":

From October 2011 through June 2018 (the Relevant Period), Western failed to timely amend the Uniform Application for Securities Industry Registration or Transfer (Form U4) for 52 registered representatives to disclose 163 liens, judgments and/or bankruptcies (financial events) that totaled more than $5.6 million, in violation of Article V, Section 2(c) of FINRA's By-Laws and FINRA Rule 2010. Additionally, Western failed to reasonably respond to red flags it received though its own reviews and FINRA inquiries that its representatives were not timely disclosing reportable financial events. The Firm also failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to ensure the timely reporting of disclosable events, in violation of NASD Rule 3010 (for conduct prior to December 1, 2014) and FINRA Rules 3110 and 2010 (for conduct on or after December 1, 2014). . .

Coronavirus will shrink US home prices by 2-3% nationally, Zillow forecasts, but deeper dive could be in store (CNBC by Diana Olick)
How bad is "bad?" As CNBC's Olick reports in part:

Home prices have only fallen nationally once since the Great Depression, and that was following the subprime mortgage crisis and the Great Recession. Now, barely eight years after hitting bottom, and after a mighty recovery, prices are predicted to fall nationally again, down 2-3% this year, according to Zillow.
CNBC's Repko reports in part that:

FreshDirect co-founder and former CEO Jason Ackerman said customers' growing interest in online grocery shopping during the coronavirus pandemic has whet venture capital firms' appetites.

Bill Singer's Comment: Although I have no doubt that Ackerman says what he believes and that Repko correctly reports same, notwithstanding, this strikes me as"wishful thinking." First and foremost, venture capital is either very, very sick or moribund. Frankly, only a moron would be foolish enough to invest cash into any online grocery business at this moment in time. For starters, you have to confront the prospect of an even bigger and more powerful Amazon and Walmart. Further, you will need to figure out how to affordably and timely deliver perishables while folks are wearing masks, using gloves, and still dying. Factor into that the battered food-supply chain, and, sure, there's a . . . what did he call it? . . . oh, yeah . . . there's a "surge" of venture capital flooding into online groceries. Sorry but I just can't and won't buy that thesis. If I did believe the commentary, then I would also suggest that there will be a surge in venture capital flooding into online beauty parlors and barber shops -- provided, you know, they can figure out how to cut your hair over the Internet. And let's not all miss out on the venture capital bonanza of online bars that will mix and deliver cocktails. Yeah, we all hear about the entrerpreneur who builds a website and tries something local. That ain't a venture capital prospect. That ain't gonna attract a surge of savvy cash.
In part, RIABiz's Shidler reports that in response to the COVID-19 crisis, TD purportedly has nearly 100% of its employees working from home with what the firm asserts was accomplished "without any disruption to client service and fully compliant with regulatory expectations," Shidler further notes, in contrast, that:

Fidelity is at about 90% working at home, while Pershing is well below 100%. Others, such as Bank of America have 72% working remotely. Morgan Stanley and JP Morgan Chase both have about 90% of staff working remotely. 

After some initial technology challenges, Charles Schwab now has 95% of its staff at home, CEO Walter Bettinger told analysts on an earnings call.