Securities Industry Commentator by Bill Singer Esq

July 16, 2020

West Hollywood Man Sentenced to Five Years in Federal Prison for Modern Art Fraud Scheme Involving Sale of Bogus Works (DOJ Release)

New Yok [sic] Man Charged With Wire Fraud In Alleged Multi-Million Dollar Cryptocurrency Investment Scheme / Defendant Allegedly Conned His Victims Into Investing More Than $4.5 Million In Assets (DOJ Release)

Lessons from the Awkward Life and Death of the Segway / The "personal transporter" promised to change cities back in 2001. It didn't. But its demise should be a warning for today's urban mobility disrupters. (Bloomberg by Nolan Gray and Katarina Hall)
An absolutely wonderful analysis from Bloomberg's Gray and Hall. A sobering yet balanced retrospective about why the Segway never lived up to its disruptive accolades -- and why investors need to avoid drinking the Kool-aid before investing in the can't-miss-next-big-thing.

Twitter hacking spree alarms experts concerned about the platform's security (Reuters  by Joseph Menn and Raphael Satter)
As reported by Reuters' Menn and Satter:

Twitter said late Wednesday hackers obtained control of employee credentials to hijack accounts including those of Democratic presidential candidate Joe Biden, former president Barack Obama, reality television star Kim Kardashian, and tech billionaire and Tesla founder Elon Musk.
. . .
Posing as celebrities and the wealthy, the hackers asked followers to send the digital currency bitcoin to a series of addresses. By evening, 400 bitcoin transfers were made worth a combined $120,000. Half of the victims had funds in U.S. bitcoin exchanges, a quarter in Europe and a quarter in Asia, according to forensics company Elliptic.

Top EU court ditches transatlantic data transfer deal (Reuters by Foo Yun Chee and Marine Strauss)
As reported in part by Reuters' Chee and Strauss:

EU concerns about data transfers have mounted since former U.S. intelligence contractor Edward Snowden's revelations in 2013 of mass U.S. surveillance.

The court is saying that the surveillance regime in the U.S. does not respect the rights of EU citizens and puts U.S. state interests over the interests of individuals, Jonathan Kewley, co-head of technology at law firm Clifford Chance said.

"What we are seeing here looks suspiciously like a privacy trade war, where Europe is saying their data standards can be trusted, but those in the U.S. cannot," he said.
Philip Righter pled guilty in the United States District Court for the Central District of Californiato wire fraud, aggravated identity theft, and tax fraud; and he was sentenced to 60 months in prison. As alleged in part in the DOJ Release:

Before August 2016, Righter generally conducted these fraudulent transactions in his own name. But after the FBI and the Los Angeles Police Department interviewed him about bogus Keith Haring art he attempted to sell to the Miami art gallery, Righter began using the names of other people to execute his scheme, court documents state.

To make the fake artwork appear to be genuine, Righter ordered and used embossing stamps that appeared similar to the stamps used by the estates of Basquiat and Haring to authenticate works by these artists.

In furtherance of the scheme, Righter obtained and attempted to obtain numerous loans by using the fraudulent art and accompanying fraudulent provenance documents. For example, in October 2016, using another person's name, Righter contacted a victim about a loan in which a purported original drawing by Basquiat would be used as collateral. Righter created a fraudulent certificate of authentication letter that purportedly came from Basquiat's estate. The victim wired a $24,000 loan, on which Righter later defaulted. After Righter's default, the victim attempted to auction the piece, but the auction house determined the piece was fraudulent, and the victim lost $24,000.

Righter also sold or attempted to sell numerous pieces of fake modern art. In August 2017, using another person's name, Righter listed a purported 1983 piece of art by Basquiat with the word "Samo" written on it with an art sale website and he provided fake provenance documents. The website sold the piece for $50,000. In 2018, after the piece was determined to be fraudulent, the website had to refund the purchase price to the buyer.

Righter also admitted that he knowingly and willfully included a false W-2 and documentation of a donation of fraudulent art to a charity on his 2015 federal income tax return, which resulted in him fraudulently receiving a refund of $54,858. Righter then signed and filed a false 2015 amended tax return, which claimed a false casualty and theft loss of $2,575,000 related to artwork he claimed had been stolen. In truth, the artwork was fraudulent and had no value. This bogus amended tax return resulted in false carryback loss refunds for 2012, 2013 and 2014 totaling $52,485, according to court documents.

New Yok [sic] Man Charged With Wire Fraud In Alleged Multi-Million Dollar Cryptocurrency Investment Scheme / Defendant Allegedly Conned His Victims Into Investing More Than $4.5 Million In Assets (DOJ Release)
In a criminal Complaint filed in the United States District Court for the Northern District of California, Douglas Jae Woo Kim, 27, was charged with one count of wire fraud. As alleged in part in the DOJ Release:

According to the complaint and affidavit, Kim represented to friends and acquaintances that he was a cryptocurrency trader and requested loans for business purposes or to trade cryptocurrency.  The complaint describes how Kim used cryptocurrencies, including Bitcoin (BTC) and Ether (ETH) to finance transactions as part of the scheme and how, on multiple occasions, he transferred some or all of the assets he received from his victims to online gambling sites operating outside the United States. 

According to the affidavit, in October 2017, Kim contacted a victim by text message and said he was looking for investors interested in making what he called a short-term loan for a "fairly modest operation."  According to Kim, he was investing in a cryptocurrency operation in which he would make profit from fees charged to a peer-to-peer network and from exchange transactions. Kim represented to the victim that he already had $300,000 to $400,000 in financial holdings and that the operation "isn't very risky to me." Kim later emailed the victim details of the investment.  Shortly after receiving cryptocurrency from the victim to finance the investment, Kim transferred about half of it to a bitcoin sportsbook and casino located outside the United States.

In an agreement dated January 1, 2018, Kim set out the terms of similar investment with a second victim.   The agreement called for the victim to provide ETH valued at approximately $200,000.  The same day, Kim converted more than half of the funds to BTC and, in the following days, transferred substantially all the converted cryptocurrency to his account with an offshore casino. 

In the ensuing weeks and months, Kim convinced his victims to provide funds, all or part of which were transferred to cryptocurrency gambling sites.  In sum, Kim convinced his victims to provide to him over $4.5 million.  According to the affidavit, Kim's victims all stated they would not have loaned money to Kim if they had known he was using the proceeds for gambling purposes.

In the Matter of Laurie Bebo and John Buono, CPA (Order Regarding Supplemental Briefing, Admin. Proc. Rul. Rel. No. 6775, Admin. Proc. File No. 3-16293)
In Liu v. SEC the United States Supreme Court recently held that a disgorgement award that does not exceed a wrongdoer's net profits and is awarded for victims is permissible equitable relief. See, "Supreme Court Says Disgorgement Not Exceeding Wrongful Net Profits Is Permissible Relief" ( Blog / June 23, 2020) As the Supreme Court's Liu Opinion percolates through ongoing matters, we come across one of the first impacts upon the SEC's docket during supplemental briefing of the case against Laurie Bebo and John Buono. As ordered by SEC Administrative Law Judge Jason S. Patil: 

At my request, the parties submitted supplemental authority letters on the impact of Liu v. SEC, 140 S. Ct. 1936 (2020), on the possible disgorgement of Respondent Laurie Bebo's bonuses. To provide Bebo with an opportunity to respond to the change in the Division of Enforcement's position, I request supplemental letter briefs on the following issues:

(1) In light of the Division's waiver of its request for disgorgement of Bebo's bonuses, address the Division's submission that I consider the bonuses to instead be unjust enrichment for the purpose of determining the public interest in assessing civil money penalties. See 15 U.S.C. § 78u-2(c)(3).

(2) Address whether I should reduce the weight, if any, given to the impact of Bebo's bonuses on any sanctions analysis to reflect the share of the revenues or profits of Assisted Living Concepts, Inc., generated by the Ventas properties. See, e.g., Resp't Ltr. Br. at 3 (July 8, 2020). Or, whether the weight should be reduced by some other metric.

The letters should be no longer than two pages and should be filed by July 21, 2020.

In a FINRA Arbitration Statement of Claim filed in October 2019, public customer Claimant Rossman alleged suitability; breach of fiduciary duty; material misrepresentation and omissions in violation of federal law, California Blue Sky Laws and FINRA Rule 2020; violation of FINRA Rule 2210; violation of California Business & Professions Code; violation of IM-2310-2 (fair dealing with customers); and failure to supervise under FINRA Rule 3010. Claimant Rossman sought about $1.1 million in compensatory damages, punitive damages, interest, and fees. As further explained in the FINRA Arbitration Award:

[T]he causes of action relate to a tenant-in-common investment, Hanford Mall 12, LLC ("Hanford TIC") which was recommended to Claimant's father 1 by one of Respondent's registered representative.
= = = = =
Footnote 1: As stated in the Statement of Claim, Claimant's father passed away in November 2013 and Claimant brought this action on behalf of his estate. 

Respondent Investment Architects generally denied the allegations and asserted various affirmative defenses. Respondent filed a Motion to Dismiss pursuant to FINRA Rules 12504 and 12206, which Claimant opposed. The FINRA Arbitration Panel granted the Motion to Dismiss and published at thorough, compelling rationale:

The Panel concluded the "occurrence or event giving rise to the claim" to be the sale of the Hanford TIC to Claimant's father in 2003, thereby making the claim ineligible under Rule 12206. Notwithstanding, the Panel did not consider the date of sale to be the only deciding factor, and considered facts, beyond the date of sale, in applying Rule 12206. 

The Panel looked for evidence of any ongoing communications or instructions by Respondent to Claimant's father or Claimant between 2003 (the date of the sale) and 2019 (the date of the claim) with respect to the Hanford TIC investment and there were none. Claimant did not dispute this. The Panel considered Howsam v. Dean Witter Reynolds, 537 U.S. 79 (2002). While Howsam alleged that Dean Witter Reynolds continued to provide investment advice after the dates of purchase, that is simply not the case here. There was no further communication between Claimant's father or Claimant and Respondent beyond the initial sale in 2003. 

The Panel also considered the following example, cited in the FINRA Dispute Resolution Arbitrator Training - Motions to Dismiss (Training Module Release Date August 2010), relating to Rule 12206(b) Eligibility Motions: "The arbitrators may find that there is a continuing occurrence or event giving rise to the dispute. For example, although a customer purchased stock 10 years ago, there are allegations of ongoing fraud starting with the purchase, but continuing to a date within six years of the date the claim was filed." Again, the Panel found no ongoing or continuous relationship between Respondent and Claimant or her father since the date of the initial sale of Hanford TIC in 2003. 

The Panel considered Claimant's argument that damages were the event that triggered the six-year eligibility period of Rule 12206. Analyzing this argument, the Panel considered two factors:

First, the Panel considered when Claimant "knew or should have known of damages". The Panel concluded Claimant should have known of potential damages as early as 2008 or as late as 2012. The Panel considered: 
    • The property was to be sold (turned over within 7 - 10 years) but this did not happen; 
    • Hanford TIC had difficulty refinancing the property when the note matured; 
    • No distributions were made since 2009; 
    • The real estate market crash in 2008/2009; 
    • The roll-up of the investment in 2011; and 
    • The Form K-1 losses reported in 2011 and 2012. 
No single one of these factors alone would have been enough to put Claimant on notice of damages, however the cumulative factors as a whole should have alerted Claimant of potential losses from the investment. 

Second, the Panel considered Kidder, Peabody & Co. v. Brandt, 131 F.3d 1001 (11th Cir. 1997) ("Kidder"). The Panel found that for Kidder to be dispositive, Respondent would have had to commit an affirmative act that caused Claimant's damages within six years of the date the claim was filed. Claimant asserted that November 1, 2018 2 is the date of the "occurrence or event giving rise to the claim". Claimant filed her Statement of Claim on October 3, 2019. Following Kidder, Respondent would have had to commit acts resulting in Claimant's damages sometime between 2012 and 2019. This simply did not happen. Here, it is uncontroverted that after the initial sale of Hanford TIC to Claimant in 2003, Respondent had no further contact with Claimant making it impossible for Respondent to cause damages to Claimant within the six-year eligibility period of Rule 12206. 

In granting Respondent's Motion to Dismiss under Rule 12206, the Panel did not rule on Respondent's Motion to Dismiss related to Rule 12504, pursuant to Rule 12206(b)(7) of the Code. . . .
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, Zahir H. Kanji submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Zahir H. Kanji was first registered in 1996, and from October 2005 to May 2019, he was registered with FINRA member firm Cetera Financial Specialists LLC. The AWC alleges that Zahir H. Kanji "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 Kanji had violated Article V, Section 2(c) of the FINRA By-Laws and FINRA Rules 1122 and 2010 by willfully failing to amend his Uniform Application for Securities Industry Registration or Transfer ("Form U4") to timely report that a judgment had been entered against him between February 2018 and March 2019; and the self regulator imposed upon him a $5,000 fine and an three-month suspension from association with any FINRA member in all capacities. 

The Kanji AWC includes this paragraph:

Respondent understands that this settlement includes a finding that he willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this omission makes him subject to a statutory disqualification with respect to association with a member.

Download a PDF copy of the Blog's "Willfulness and Statutory Disqualification" Analysis by Bill Singer, Esq.

Visit the Blog "Willfulness" Archive

As alleged in part in the Kanji AWC:

While associated with Cetera Financial, a judgment in the amount of $217,041 was entered against Kanji by the Superior Court of Cobb County, Georgia on November 1, 2015. Kanji admitted first learning of the judgment on February 20, 2018. 

During all times relevant to this matter, Form U4 Disclosure Question 14M, asked "Do you have any unsatisfied judgments or liens against you?" If an affirmative answer is given to Question 14M, the associated person is required to provide details about the judgment. Despite having received notice of the above-referenced judgement on February 20, 2018, Kanji willfully failed to timely amend and willfully failed to correct his Form U4 to disclose the judgment within 30 days of receiving notice of the entry of the judgment. 

Kanji did not disclose the judgment by amending his Form U4 until March 26, 2019, following an inquiry from Cetera Financial's internal supervision team.
Guest Blogger Aegis Frumento, Esq. has been musing about the recent Supreme Court Decisions in Trump v. Vance and Trump v. Mazurs USA LLP. Aegis has been musing about the history behind those dramatic opinions. About Aaron Burr. About Alexander Hamilton. About Thomas Jefferson. About the ever-evolving politics of our nation. And Aegis muses about the proper context of all that history and Donald Trump. Ultimately, Aegis thinks that he discerns an American archetype.

Bridgewater Over Troubled FINRA Waters ( Blog)
I must ask -- indeed, all Wall Street reform advocates must wonder -- whether FINRA's Nominating Committee knew about an American Arbitration Association hearing panel's finding of fabrication of evidence by Bridgewater Associates that occurred during the newly-elected FINRA Board Chair Eileen Murray's term as CEO of Bridgewater. If the Nominating Committee knew of the allegations/findings about fabricated evidence, was that disclosed to all FINRA Board members before they voted to approve Murray's nomination? If the Nominating Committee did not know about the fabricated evidence issue, shouldn't Murray have disclosed such facts during the vetting process given that FINRA is Wall Street's leading self-regulatory-organization?
As a 38-year Wall Street veteran and a founder of the NASD and FINRA Dissident Movement, I have tired of far too many candidates for FINRA elective office who talk the talk but won't walk the walk. Following his election as the 2017 FINRA Small Firm Governor, Stephen Kohn pressed for a number of meaningful reforms. Too often it was Stephen and only Stephen who fought for the small firms. Despite his lonely advocacy, Stephen persisted. If re-elected in 2020, Stephen will remain a passionate voice in raising the legitimate grievances of the small firm community. I urge all FINRA Small Firm Executive Representatives to cast a proxy in support of Stephen Kohn's candidacy for the 2020 FINRA Small Firm Governor.