Securities Industry Commentator by Bill Singer Esq

July 17, 2020

Americans Tear Up Old Eating Habits, Forcing Farms to Raze Crops (Bloomberg by Nic Querolo and Elizabeth Rembert)

Commissioner Stops Mind Capital From Marketing Fraudulent International Cryptocurrency Pyramid Scheme to Texans (TSSB Release)

Acting U.S. Attorney Announces Consent Decree Resolving Claims That Owner Of Manhattan Condominium Discriminated Against Tenant On The Basis Of Disability / Defendant Agrees to Allow Tenant to Keep Assistance Animal and Implement a Reasonable Accommodation Policy (DOJ Release)

Bridgewater Over Troubled FINRA Waters ( Blog)

Vote for Stephen Kohn for 2020 FINRA Small Firm Governor ( Blog)
As reported in part by CNBC's Fitzgerald:

The major online brokers - Charles Schwab, TD Ameritrade, Etrade and Robinhood - have seen new accounts and trading activity surge this year during the coronavirus recession. The brokerage industry experienced a retail gold rush as small investors saw the market rout and subsequent rebound as an opportunity. 

After adding a record 609,000 new accounts in the first quarter, Schwab continued to add new members, bolstered by zero commissions and fractional trades. Schwab added 1.6 million new accounts in the second quarter, which includes the addition of 1.1 million USAA member accounts obtained from the sale of USAA's brokerage portfolio to Schwab for $1.8 billion in May. 

Excluding the USAA accounts, the broker added 552,000 new accounts in the second quarter.

Bill Singer's Comment: Okay . . . got it, there was a surge in trading activity. But note that we're in a "zero commissions and fractional trades" period. All of which reminds me of the early days before the DotCom Bust when everyone was talking about traffic and revenues but none of that ever translated into profits. Trading volumes may be booming on Wall Street's retail front but I'm not sure that it necessarily is yielding bottom-line profits. The trick is to transition those new accounts into more profitable products and services, all which tends to point to wrap-fees and managed accounts. Of course, those products/services will likely come under pricing pressure too. These are challenging times for Wall Street's traditional broker-dealers. It will be fun to watch the innovation and see if it yields profits.
In a recent SEC Opinion, we are presented with an individual who says that he didn't file a FINRA Arbitration Statement of Claim seeking expungement because FINRA routinely rejects claims such as his as "ineligible." FINRA says he should have filed his claims, and by failing to do so, he failed to exhaust his administrative remedies. The SEC says it has no jurisdiction because the individual wasn't actually denied any services by FINRA because he never went through the motions to elicit them. The individual says going through the motions would be futile because FINRA would have deemed his claims as ineligible for arbitration. And so we go. Round and round and round.
In a Complaint filed in the United States District Court for the Middle District of Florida, the CFTC alleged that The Alista Group, LLC, its owner Marvin W. Courson III, and company employees Christopher A. Kertatos and Luis M. Pineda Palacios a/k/a Luis Pineda, engaged in fraud and in illegal, off-exchange transactions in precious metals. As alleged in part in the CFTC Release:

[F]rom July 2016 through at least January 2018, Alista defrauded customers using illegal, off-exchange retail commodity transactions involving precious metals. Notably, Alista's leveraged precious metals transactions never resulted in the actual delivery of the full amount of metal purchased by its customers. 

Moreover, in connection with this activity, the complaint alleges that Alista, by and through the actions of Courson and Kertatos, defrauded these customers by misappropriating their funds to speculate in precious metals for Alista's own account, paid Alista's business expenses, and made Ponzi-style payments to customers who attempted to cash out some of their purported holdings. In addition, Kertatos and Pineda individually defrauded at least some of Alista's customers by using individual and/or corporate bank accounts under their personal control to accept Alista customer funds. They then misappropriated those funds to pay for personal and other expenses unrelated to leveraged precious metals transactions on behalf of Alista's customers.

Money Mule Reined In / Man Sentenced for Laundering Money Stolen from School District in BEC Scheme (FBI Release)
The FBI reports about yet another Business Email Compromise ("BEC"), this one targeting an employee of a school district that was in the midst of building a new elementary school. After sending nearly $2 million to what the employee thought was a construction company, the FBI managed to seize $600,000 that remained in the money mule's account. A harrowing tale and chilling lesson.

Americans Tear Up Old Eating Habits, Forcing Farms to Raze Crops (Bloomberg by Nic Querolo and Elizabeth Rembert)
Yet another compelling read from Bloomberg. In a fascinating report by Querolo and Rembert, they state inn part:

But those Americans cooking more at home aren't pantry loading the same way they used to. More than a quarter of adults purchased items in bulk more often, according to a survey of 2,200 Americans conducted by Bloomberg News and Morning Consult. Brands have also fallen out of favor, as 23% of respondents said they purchased generic or store brands more often. In fact, 16% of Americans plan to buy private-label or bulk items even more frequently once the pandemic ends than they did before lockdowns

As consumers cook more at home, driving up grocery store sales, they're steering clear of restaurants, which has big implications for how suppliers package and sell their meats and produce -- and for demand. Restaurant portions are bigger, and meat, cheese and butter in particular are consumed in higher quantities at restaurants, but so are vegetables.

Commissioner Stops Mind Capital From Marketing Fraudulent International Cryptocurrency Pyramid Scheme to Texans (TSSB Release)
The Texas State Securities Board issued an Emergency Order against against Mind Capital OÜ a/k/a Mind Capital Tech SLm its President and CEO Gonzalo Garcia-Pelayo, Vice President Oscar Garcia-Pelayo, Network Construction Consultant Rubén Arcas, Expansion Manager Manuel Arniz, Social Media Director Cristina Kelly Lopez and Brand and Creative Director Alejandro Mejía. Allegedly investors are buying a persistently-valued $1 MCcoin in response to claims that they will be participating in a crypto-fiat arbitrage trading program driven by algorithms analyzing the cryptocurrency market and identifying the appropriate time to buy and sell digital assets for a profit. Purportedly, the program will generate between 0.5 and 1.5 percent returns on a daily basis. As alleged in part in the TSSB Release:

[M]ind Capital also implemented a ten-level "pyramid scheme" to encourage sales of its investments.  The order named Georgetown resident Craig Kintzel as an agent and accused him of illegally promoting the scheme in Texas.  Kintzel and other agents supposedly receive eight percent of the profits earned by recruited investors, as well as between two and eight percent of the profits earned by recruited investors at various levels of the pyramid.
. . .

The order alleges the Respondents are intentionally concealing key information from investors, such as the significant risks associated with the securities offering.  They are also not providing investors with critical information about the principals of the Mind Capital and its ability to actually generate represented returns, according to the order.

Acting U.S. Attorney Announces Consent Decree Resolving Claims That Owner Of Manhattan Condominium Discriminated Against Tenant On The Basis Of Disability / Defendant Agrees to Allow Tenant to Keep Assistance Animal and Implement a Reasonable Accommodation Policy (DOJ Release)

About the last thing that you would expect the United States Department of Justice to be involved with would be a dispute between a tenant and a landlord over whether the tenant can have a dog. Well, think again!
In a Consent Decree entered into in the United States District Court for the Southern District of New York, 111 East 88th Street Partners ("111 Partners") must:
  • Adopt a reasonable accommodation policy regarding requests for assistance animals;
  • Comply with certain notice, training, and recordkeeping requirements to ensure that its employees are knowledgeable about and comply with the requirements of the Fair Housing Act;
  • Allow the United States to monitor compliance with the consent decree;
  • Dismiss all pending state court litigation against the Tenant, including the eviction proceedings commenced in 2006 regarding his request to keep an emotional support animal and termination proceedings commenced in 2019 regarding apartment conditions, and waive all claims to attorney's fees and costs;
  • Grant the Tenant a reasonable accommodation for the remainder of his tenancy, such that he can adopt and reside with a dog for as long as the Tenant lives in the apartment, without submitting any further reasonable accommodation requests.
As you might be wondering -- ummm, Bill, you sort of have this upside down. You're telling us what 111 Partners has to do in order to make things right but you didn't yet tell us what they did to make things wrong. You're absolutely correct! Now consider the horrific facts leading up to the Consent Order:

11 Partners is the owner of certain units in a 61-unit condominium located in New York, New York, and the landlord of the rent-controlled apartment that the Tenant occupies in the building.  The Tenant, now 58 years old, has resided in that apartment his entire life and has a long history of depression.  In 2006, the Tenant adopted a dog to help alleviate his depression and requested a reasonable accommodation to defendant's "no pets" policy to allow him to reside with his dog in the apartment.  Defendant not only denied the request, but also initiated eviction proceedings against him.  While those proceedings were underway, in spring 2015, the Tenant was diagnosed with End Stage Renal Disease, and his depression worsened.  The Tenant promptly sought another reasonable accommodation to 111 Partners' "no pets" policy to allow him to keep his dog in the apartment given the substantial emotional assistance the dog provided and the Tenant's changed circumstances.  111 Partners constructively denied the request by requiring the onerous disclosure of detailed medical records and other information, despite the Tenant's already well-substantiated request and defendant's familiarity with his condition.  In June 2017, after his dog died and during the pendency of this litigation, the Tenant again requested a reasonable accommodation to 111 Partners' "no pets" policy to permit him to adopt another dog for emotional support, and once again, 111 Partners constructively denied the request - requiring extensive documentation despite the fact that the Tenant had continued to provide documents, expert opinions, medical records, and sworn testimony in support of his request. 

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.