Securities Industry Commentator by Bill Singer Esq

May 29, 2020

FINRA Sanctions Stifel, Nicolaus & Co., Inc. More Than $3.6 Million for Violations Involving Unit Investment Trusts (FINRA Release)

Lead Defendant in Elder Fraud Scheme Sentenced to 10 Years in Federal Prison, Ordered to Pay $273,849.20 in Restitution / Multi-Defendant Scheme Targeted 80-Year Old Widow in Washington, Utah (DOJ Release)

IT manager sentenced for hacking into and sabotaging his former employer's computer network (DOJ Release)

Unregistered $25.5 Million ICO Issuer to Return Money for Distribution to Investors (SEC Release)

Petition to Nominate Stephen A. Kohn for Small Firm Seat on FINRA Board of Governors arbitration best/
Trailing in the fourth quarter, Claimant Best needs a quick, desperate score, and he opts for the old in-and-out play with seconds left on the clock. As the ball was hiked, the Non-Attorney Rep was in. Then the Non-Attorney was out. Then the admitted Attorney was in. Then the admitted Attorney was out. Then the Non-Attorney was almost in but not quite. Then the admitted Attorney was out but a new admitted Attorney was in. There's more in-and-out in this FINRA arbitration then in a porn film.
Without admitting or denying the charges in a FINRA May 27, 2020 AWC, FINRA member firm Stifel, Nicolaus & Company, Incorporated agreed to pay $1.9 million in restitution plus interest, and was fined $1.75. As asserted in part in the FINRA Release:

From January 2012 through December 2016, Stifel executed approximately $10.9 billion in UIT transactions - $935.2 million of which were early rollovers. However, FINRA found the firm's supervisory system and procedures were not reasonably designed to supervise the suitability of those early rollovers. As a result, Stifel did not identify that its representatives recommended potentially unsuitable early rollovers that, collectively, may have caused customers to incur approximately $1.9 million in sales charges that they would not have incurred had they held the UITs until their maturity dates. In addition, during the same time period, Stifel sent approximately 600 letters to customers that contained inaccurate information or were missing information about the costs incurred by customers in connection with early UIT rollovers or "switches." On average those letters understated the costs to customers by approximately 49 percent.

Bill Singer's Comment: As set forth in part in the FINRA May 27, 2020 AWC, Stifel has been a FINRA member firm since 1936, and is characterized as have 431 branches with 4,968 registered representatives, which qualifies the firm as one of FINRA's Large Member Firms. 
The FINRA May 27, 2020 AWC asserts under "Relevant Disciplinary History" that Stifel:

does not have any relevant disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization.

I mean -- enough already! This assertion by Wall Street's self-regulatory-organization that its Large Member Firms never seem to have any "Relevant Disciplinary History" is going beyond idiotic and raising sincere concerns about just what the hell is motivating this benevolence. We need only do minimal online research to find that as recently as September 16, 2019, the SEC published "Two Broker-Dealers to Pay $4.65 Million in Penalties for Providing Deficient Blue Sheet Data" in which, in pertinent parts, the SEC Release asserted that:

The Securities and Exchange Commission today announced that Stifel, Nicolaus & Co., Inc. has agreed to pay $2.7 million and BMO Capital Markets Corp. has agreed to pay $1.95 million to settle charges for providing incomplete and inaccurate securities trading information to the SEC. Broker-dealers are required to provide the information known as "blue sheet data," which the SEC uses to carry out its enforcement and regulatory obligations, including investigations of insider trading and other fraudulent activity.

According to the SEC's orders, over a period of several years, Stifel and BMO each made numerous deficient blue sheet submissions containing missing or inaccurate data, largely due to undetected coding errors. The SEC found that Stifel failed to report data for approximately 9.8 million transactions and provided inaccurate information for approximately 1.4 million transactions. Separately, the SEC found that BMO submitted missing or incorrect data for approximately 5.4 million transactions. According to the SEC's orders, neither firm had adequate processes designed to validate the accuracy of its submissions and each willfully violated the broker-dealer books and records and reporting provisions of the federal securities laws. . . .

How is it -- pray tell -- that according to the FINRA May 27, 2020 AWC that Stifel has no relevant SEC disciplinary history when less than a year ago, the SEC disciplined Stifel via a $2.7 million fine for undermining the federal regulator's efforts to detect industry wrongdoing? Note that according to the SEC's September 16, 2019 Order, Stifel's underlying misconduct took place from "at least January 1, 2015 through September 20, 2018 . . ." According to the FINRA May 27, 2020 AWC, Stifel's underlying misconduct in the self-regulatory-organization's matter took place from January 2012 through December 2016. Not only is there overlap of dates pertaining to both the SEC's and FINRA's settlement but the 2019 SEC Order cited Stifel for its failure to supervise the creation, archiving, and production of trade data via EBS; and FINRA would have us believe that the SEC's findings were  not a "relevant" disciplinary event per the FINRA May 27, 2020 AWC, which cites Stifel for having: 

failed to establish and maintain a supervisory system, and failed to  establish, maintain, and enforce written supervisory procedures ("WSPs"), that were reasonably designed to achieve compliance with FINRA's suitability rule as it pertains to early rollovers of Unit Investment Trusts. . . .

Also see:
Frank Powell, 51, pled guilty in the United States District Court for the District of Utah to conspiracy to commit wire fraud, money laundering, two counts of destruction of records in a federal investigation, concealment of a document or object in an attempt to impair the object's integrity or availability for use in an official proceeding, and tampering with a witness. As bad as that all sounds, prepare yourself for this: At the time of the cited crimes, Powell was on state parole after being sentenced to 30 years for murder -- and while in prison, he sexually assaulted an inmate for which an additional 1 to 15 year sentence was added. One year? One year to 15 years? Don't ask me how that worked out because I don't know. In any event, in 2020 the District Court sentenced Powell to 10 years in federal prison plus three years of supervised release, and ordered him to pay $273,849.20 in restitution, and ordered him to forfeit two vehicles. Typically, at this juncture, I would offer a bit of a synopsis of the DOJ Release and present some of the more pithy allegations but not this time. There's just too much to synopsize and I don't want to run the risk of minimizing the outrageous conduct at issue. Accordingly, in large part, the DOJ Release alleges that:

[P]owell  admitted that from around March 2019 and continuing until about Feb. 6, 2020, he conspired with others to devise a fraud scheme with the specific intent to obtain money or property by means of fraudulent representations or promises.  He agreed with his codefendants to engage in a scheme to defraud the victim by soliciting money and assets in exchange for false promises to perform work for the victim. He also admitted he engaged in a fake romantic relationship with the victim as a part of his scheme to defraud her.

He admitted that he purchased a 2019 GMC Sierra using money he received as a part of his scheme to defraud the victim.  Using money derived from criminal conduct is money laundering.  Several of the counts he pleaded guilty to relate to efforts he took to impede and obstruct the investigation of the case, including concealing cellular phones and money.

Powell also pleaded guilty to witness tampering admitting that in November 2019, he attempted to stop the victim from communicating with law enforcement officers investigating the case. Through written correspondence and phone calls, Powell and his codefendant, Faye Renteria, age 42, of Hurricane, made misleading statements and attempted to get the victim to assist them in avoiding prosecution.

. . .

Eight defendants were charged in a 10-count superseding indictment returned by a federal grand jury in January. The indictment alleged the defendants, who have family relationships, conspired to obtain money and assets from the victim in exchange for false promises to perform work on her property.

The indictment alleges that starting around March 2019 through October 2019, several of the defendants began soliciting payments from the victim by offering to perform routine repairs and odd jobs on her property. The victim created a list of requested repairs, such as painting the exterior of the house, resurfacing the driveway, doing yard work, hammering protruding nails on the roof, fixing a door handle on a car, removing grease spots on the driveway, and installing carpet on an outdoor deck.  To further advance the scheme, Frank Powell engaged in romance fraud by enticing the victim to enter into a romantic relationship. He used the romantic relationship to manipulate the victim into giving him money and assets.

According to the indictment, most of the jobs they promised to do were never completed or the quality of work was extremely poor and fell well below any expectation of professionally done work. The victim paid the defendants at least $273,849.20, both indirectly and directly, for this work.

The indictment included one count of wire fraud conspiracy, five counts of money laundering conspiracy - spending, two counts of destruction or concealment of records and tangible objects in a federal investigation, one count of concealment of a document or object, and one count of tampering with a witness or victim.

Frank Powell's mother and codefendant, Gloria Jean Powell, age 74, of St. George, was sentenced to time served on May 1, 2020, after pleading guilty to one count of concealment of a document or object, admitting she concealed or attempted to conceal U.S. currency with the intent to impair an FBI investigation.  She admitted she aided and abetted her son, Frank Powell, and her daughter, Angela McDuffie, age 53, of Lehi, in the conduct.  She also agreed to forfeit a 2010 Toyota Venza as a part of the resolution of her case.

Sentencing is set for July 15, 2020, for Renteria, who pleaded guilty May 7, 2020, to conspiracy to commit wire fraud, wire fraud, two counts of money laundering, two counts of destruction of records or tangible objects designed to impede the FBI's investigation in the case, and witness tampering.   Among other things, she admitted she engaged in misleading conduct involving the victim in the case in an attempt to prevent or delay her from communicating with law enforcement regarding the commission of a federal crime.

Renteria faces sentences of up to 20 years for conspiracy to commit wire fraud, up to 10 years for each count of money laundering, up to 20 years for each count of destruction of records or tangible objects in a federal investigation, and up to 10 years for the witness tampering conviction.  Renteria is in custody.

Bubby Mern Shepherd, age 58, of Lodi, California, and Rocky James Powell Mott, age 40, of Hurricane, also have entered guilty pleas.  Shepherd pleaded guilty last week to one count of conspiracy to commit wire fraud.  Mott pleaded guilty Wednesday to the same count.  Plea agreements for Shepherd and Mott, who are both in custody, include a stipulated sentence of 21 months in prison for the conviction.  The sentence is subject to the approval of the court.

Cases are pending against McDuffie, Terrence Quincy Powell, age 24, of St. George, and Martell Taz Powell, age 25, of Cedar City.  A Sept. 22, 2020, trial date is set in the case.

IT manager sentenced for hacking into and sabotaging his former employer's computer network (DOJ Release)
Charles E. Taylor, 60, pled guilty in the United States District Court for the Northern District of Georgia to computer fraud and was sentenced to one year and six months in prison plus three years of supervised release (one year of which will be served on home detention), and he was ordered to pay $834,510 in restitution. As alleged in part in the DOJ Release:

[I]n 2013, Taylor, a resident of Jacksonville, Arkansas, was hired as a systems administrator for a lumber and building materials wholesaler. In early 2018, a large Atlanta-based building products distributor acquired the company. Taylor kept his job as a senior systems engineer after the merger, but he was unhappy with the newly combined company and resigned in July 2018.

A month after his departure, Taylor conducted a multi-stage sabotage campaign targeting the company's network. Using information he gained in his employment, Taylor logged into the network remotely without authorization and used encryption methods to hide his network connections. In mid-August 2018, Taylor changed passwords for network routers located at dozens of company warehouses. Company employees were unable to access the routers, and the company replaced them shortly thereafter at a cost of roughly $100,000.

Days later, Taylor issued a shutdown command for a central command server on the company's network, crippling internal communications at the company. As the company worked to restore its network over a two-day period, employees at several of its branches were forced to take customer orders by hand and field incoming orders using their personal cell phones. In total, the server sabotage cost the company over $700,000 dollars in lost profits and remediation costs.

Unregistered $25.5 Million ICO Issuer to Return Money for Distribution to Investors (SEC Release)
Without admitting or denying the findings in an SEC Order, blockchain services company BitClave PTE Ltd agreed to pay a $25,500,000 disgorgement plus prejudgment interest of $3,444,197, and a $400,000 penalty of $400,000. Further, BitClave agreed to transfer all remaining Consumer Activity Tokens ("CAT") in its control to the Fair Fund administrator for permanent disabling, publish notice of the SEC Order, and request removal of CAT from all digital asset trading platforms. As alleged in part in the SEC Release:

[F]rom June to November 2017, BitClave raised over $25 million by selling its Consumer Activity Tokens (CAT) to approximately 9,500 investors, including investors in the U.S.  The order finds that, as explained in its offering materials, BitClave planned to use the ICO proceeds to develop, administer, and market a blockchain-based search platform for targeted consumer advertising.  BitClave emphasized its expectation that the tokens would increase in value, and took steps to make the tokens available for trading on third-party digital asset trading platforms after the ICO.  The order finds that BitClave failed to register their offers and sales of CAT, which constituted securities.  CAT has since been removed from many of the third-party trading platforms, and BitClave is currently winding down its operations and does not plan to continue developing or supporting the platform. 

A personal note from Bill Singer, Blog:

Stephen A. Kohn is running as a candidate for the 2020 Financial Industry Regulatory Authority ("FINRA") Small Firm Governor seat on the self-regulatory organization's Board. Stephen has demonstrated a persistent and consistent record as an unabashed advocate for industry reform and effective regulation. He is not running for office in order to burnish his resume. Without question, Stephen seeks a Board seat in order to shake things up, to force consideration of reforms that are long overdue, and to make sure that someone fights for the legitimate needs of FINRA's besieged small firms.  

I supported Stephen's successful candidacy for the 2017 FINRA Small Firm Governor seat and support his bid for a second term in 2020. I urge all Securities Industry Commentator and Blog readers to press their FINRA member firm's Executive Representative to support Stephen's candidacy for the Board.

As set forth in part "Upcoming FINRA Board of Governors Election / Petitions for Candidacy Due: June 22, 2020" (FINRA Election Notice / May 8, 2020)

Petition Process for Additional Candidates

A person who has not been nominated by the Nominating Committee for election to the FINRA Board may be included on the ballot for the election of governors if:

a. within 45 days after the date of this Election Notice (Monday, June 22, 2020), such person presents to FINRA's Corporate Secretary petitions in support of his or her nomination, duly executed by at least 3 percent of FINRA member firms entitled to vote for such nominee's election. If, however, a candidate's name appears on a petition in support of more than one nominee, the petition must be endorsed by 10 percent of FINRA member firms entitled to vote for such nominees' election; and

b. the Corporate Secretary certifies that such petitions have been duly executed by the executive representatives of the requisite number of FINRA member firms entitled to vote for such person's election, and the person being nominated satisfies the classification of the governorship to be filled.

As of the close of business on Thursday, May 7, 2020, the number of FINRA large firms was 166, and the number of small firms was 3,165. Therefore, the requisite number of petitions for a large firm petitioner is 5, and the requisite number of petitions for a small firm petitioner is 95.

Firms may only endorse one petitioner for the same firm size seat as their own. No firm may endorse more than one such petitioner.

Petitioners must submit sufficient information to determine the person's status with respect to the category for which he or she is petitioning to be nominated. Individuals seeking nomination for election as a Large Firm Governor or a Small Firm Governor have an obligation to satisfy the firm-size classification on the date the petition is circulated, the date the petitions are certified by FINRA's Corporate Secretary, and the date of the annual meeting. Individuals who fail to meet this requirement will be disqualified from election. 

Petitioners must also provide information sufficient for the Corporate Secretary to determine that the petitions are duly executed by the executive representatives of the requisite number of applicable size firm members. In addition, to assist in the process of verifying petitions, FINRA requests that all petitions submitted be dated by their signatory.

Petitions must be submitted no later than Monday, June 22, 2020.

The names of persons obtaining the requisite number of valid petitions will be included on the appropriate proxy mailed to eligible firms in advance of the annual meeting. . .