Securities Industry Commentator by Bill Singer Esq

July 27, 2020

SEC Charges Trustify Inc. and Founder in $18.5 Million Offering Fraud (SEC Release)

Quebec trio charged with running fraudulent cryptocurrency / Investors defrauded of $8M worth of phony cryptocurrencyy (DOJ Release)

SEC Obtains Final Judgment Against Massachusetts Defendant in Insider Trading Case (SEC Release)

SDNY Confirms FINRA Arbitration Award Against Defaulting Associated Person

Hedge fund Bridgewater Associates sued by former co-CEO Murray (Reuters by Bhargav Acharya and Kanishka Singh)
Former Bridgewater Associates Co-Chief Executive Officer Eileen Murray sued her former employer alleging that the hedge fund had withheld between $20 million to $100 million in deferred compensation after she purportedly publicly disclosed her gender discrimination dispute with the firm. In part, the Reuters story reports that:

Murray had informed the Financial Industry Regulatory Authority (FINRA), a self-regulatory agency that she now chairs, of the dispute with Bridgewater, which is the world's largest hedge fund. In response, Bridgewater told Murray on July 14 in writing that her public disclosures of her dispute with the firm would result in a forfeiture of her deferred compensation, according to the complaint.

. . .

In the suit, Murray, who was one of the highest-ranking female executives in the industry as co-CEO of the hedge fund, called Bridgewater's attempt to withhold the deferred pay an "improper gambit to silence her voice" and "part of a cynical plan to intimidate and silence her."

READ the full-text Complaint in Eileen Murray v. Bridgewater Associates LP, Bridgewater Associates ,LP Phantom Equity Incentive Award Plan, Defendants (Complaint, United States District Court for the District of Connecticut, 20-CV-01052 / July 24, 2020)

Bill Singer's Comment: As recently reported in part in "Bridgewater Associates found to have 'manufactured' false evidence against ex-employees" (Reuters) :

The hedge fund, founded by billionaire Ray Dalio, was found to have "filed its claims in reckless disregard of its own internal records, and in order to support its allegations of access to trade secrets, manufactured false evidence," court documents made public on Monday showed.

"We conclude that Claimant [Bridgewater] did not have a reasonable basis for filing its claims of misappropriation of trade secrets or disclosure of confidential information as to Squire or Minicone," according to the documents, which quoted the findings of a panel of three arbitrators of the American Arbitration Association.

In a story that was largely broken in "Bridgewater Over Troubled FINRA Waters" ( /  July 15, 2020), the blog raised questions about Murray's role as Co-CEO, if any, in Bridgewater's 2017 lawsuit against former employees Lawrence Minicone and Zachary Squire, who were purportedly awarded $1,991,411.49 by an American Arbitration Association panel. Although there are now press reports indicting that Murray had disclosed to FINRA her her gender discrimination lawusit against former her employer, there is still no indication as to what, if anything, had or had not been disclosed to FINRA about her role, if any, in the lawsuit against Minicone and Squire. As noted in part in Murray's Complaint against Bridgewater:

17. While her dispute with Bridgewater has become protracted, Plaintiff has continued to gain professional recognition since her departure from Bridgewater. 

18. Plaintiff was recently named Chairperson of the Financial Industry Regulatory Authority, known as FINRA. 

19. Plaintiff was also recently named to the Board of Directors of the international bank, HSBC, and the Guardian Life Insurance Company. 

20. Plaintiff has also been approached with opportunities to join other Boards and to consider various investment initiatives which necessarily require disclosure about material matters impacting, or potentially impacting, her participation. 

21. Based on Plaintiff's present and potential roles and duties, including without limitation her judgment about what is appropriate and necessary to disclose to current and prospective business partners, Plaintiff has informed Bridgewater that she has disclosed, and plans to disclose, to various third parties the existence of her dispute with Bridgewater. 

22. Consistent with the foregoing, Plaintiff specifically informed Bridgewater that she disclosed to FINRA that she was involved in a dispute with Bridgewater which involves unequal treatment by Bridgewater and significant unpaid compensation due her. 

In light of the new FINRA Chair's high-profile personal lawsuit against Bridgewater, I renew my call upon FINRA to retain an independent outside counsel to investigate what FINRA's Nominating Committee knew about Murray's role, if any, in Bridgewater's discredited lawsuit against Minicone and Squire, and determine whether the Committee properly and fully disclosed its findings to the FINRA Board prior to seeking confirmation of Murray as the new Chair. This issue is all the more critical given allegations that the AAA arbitration filed by Bridgewater against Minicone and Squire involved bad faith and fabricated evidence. 

Although Murray alleges in Paragraph 22 of her Complaint that she "specifically informed Bridgewater that she disclosed to FINRA that she was involved in a dispute with Bridgewater . . ." there is no allegation as to whether said purported disclosure to FINRA pre-dated the FINRA Nominating Committee's submission of Murray's name to the Board for confirmation as Chair; and there is no disclosure (nor would one be expected given the context of the Complaint) as to when and/or whether Murray disclosed to FINRA her role, if any, in her former firm's lawsuit against Minicone and Squire. 

Finally, is the regulatory mission of FINRA not sufficiently complex and extensive as to require the full-time attention of the Chair of its Board? How is Murray able to discharge her role as FINRA Chair while also juggling roles on the Boards of HSBC and the Guardian Life Insurance Company (see Complaint, Paragraph 19 above)? Similarly, how does FINRA countenance Murray's disclosure that in addition to her role as FINRA Chair that she will also be prosecuting her civil claims against Bridgewater in federal court and serving on the Board of HSBC and serving on the Board of Guardian Life and as noted in Paragraph 21 of her Complaint: "Plaintiff has also been approached with opportunities to join other Boards and to consider various investment initiatives which necessarily require disclosure about material matters impacting, or potentially impacting, her participation." Given these dire times for Wall Street and particularly FINRA's Small Firm community, don't we have the right to expect a full-time FINRA Chair with no outside distractions or potential conflicts?

In an Indictment filed in the United States District Court for the Eastern District of Virginia, Daniel Boice, the co-founder/Chief Executive Officer of Trustify Inc. (Trustify) was charged with five counts of wire fraud, one count of securities fraud, and two counts of money laundering. As alleged in part in the DOJ Release:

[B]eginning in 2015, Boice fraudulently solicited investments in Trustify, a privately-held technology start-up company that connected customers with private investigators.  Boice allegedly raised approximately $18.5 million from over 90 investors by, among other things, falsely overstating Trustify's financial performance.  The indictment also alleges that Boice made false statements to investors about the amount of investor funds that he would personally receive, while diverting a substantial amount of the investor money to his own benefit., the SEC charged Trustify Inc. and it founder/Chief Executive Officer Daniel Boice with violating the antifraud provisions of the federal securities laws and seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties. Also, the Complaint named as Relief Defendants are GoLean DC LLC and former Trustify executive Jennifer Mellon. In a parallel criminal action, Daniel Boice was charged with wire fraud, securities fraud, and money laundering. As alleged in part in the SEC Release:

[B]etween 2015 and 2018, Trustify and Boice falsely held Trustify out as a successful startup with lucrative corporate clients, thousands of investigators in its network, and growing revenues.  According to the complaint, however, Trustify's number of investigators and revenue were far lower than represented and the company was unable to pay its employees and vendors and effectively ceased operations.  Boice allegedly misappropriated at least $8 million of investor funds to pay for personal expenses for himself and his then-wife, also a Trustify executive, including private jet charters, vacations, a luxury car, jewelry, and mortgage payments.  Boice also allegedly diverted hundreds of thousands of dollars to his purported consulting company GoLean DC LLC.
In an Indictment filed in the United States District Court for the Northern District of Ohio, Dominic Lacroix, Yan Ouellet, and Sabrina Paradis-Royer were charged with conspiracy to commit securities fraud and wire fraud, wire fraud, and conspiracy to commit money laundering. As alleged in part in the DOJ Release:

[F]rom May 2017 to December 2017, the defendants conspired together to induce investors to purchase PlexCoin, a cryptocurrency offered through an entity known as PlexCorps. The cryptocurrency would become available to investors during an ICO or Initial Coin Offering. The defendants intended to use the ICO as a way to defraud investors and enrich themselves.

To carry out their alleged scheme, the defendants and their co-conspirators marketed and promoted PlexCorps and the PlexCoin ICO to the public, including investors within the Northern District of Ohio, via social media and publicly accessible Internet websites.

The indictment states that the defendants made numerous false claims about PlexCorps and PlexCoin in order to obtain digital and fiat currency from investors, including that PlexCorps' management consisted of a global "team" of financial, managerial and other subject-matter experts headquartered in Singapore; the proceeds of the PlexCoin ICO would be used to develop other PlexCorps products; and that investors would receive significant returns for their initial investment. The defendants are also alleged to have omitted certain materials facts about the ownership and operations of PlexCorps to conceal their true intent.

According to the indictment, around June 2017, PlexCorps began promoting PlexCoin to the public as a new digital cryptocurrency that would be available through an upcoming ICO. Around August 2017, PlexCorps published a whitepaper for PlexCoin entitled "PlexCoin: The Next Cryptocurrency" ("Whitepaper"), which was available for review on the internet by potential investors. This Whitepaper contained numerous false claims, including that some investments in PlexCoin could result in a 1,354% return.

This Whitepaper explained that funds raised through the PlexCoin ICO and pre-sale would be used to further the maintenance and development of PlexCoin and, later on, allow for PlexCorps to offer additional products and services for sale.

Investors were permitted to begin investing in PlexCoin in August of 2017. During the ICO, investors purchased PlexCoin using a variety of methods, including digital currency, such as Bitcoin, Ether and Litecoin, to wallet addresses on a blockchain.  Investors also tendered fiat currency, including USD and Canadian dollars (CAD), and provided credit card information through payment portals available on the PlexCoin website or through U.S.-based online payment processors such as PayPal, Square, or Stripe.

The indictment states that the first transfer of PlexCoin occurred in August of 2017, and the PlexCoin ICO continued through October of 2017.  Court documents show that the defendants and their co-conspirators regularly transferred investor funds from the PlexCoin ICO into fiat currency accounts, and cryptocurrency addresses belonging to themselves for the purpose of daily living expenses and home renovation products. Investors purchased approximately $8,000,000 USD worth of PlexCoin throughout the ICO.
TIn a Complaint filed in 2017 in the United States District Court for the District of Massachusetts, the SEC alleged that on three occasions between October 2013 and January 2014, Harold Altvater traded in Ariad Pharmaceutical, Inc's stock on the basis of non-public information. The Complaint alleged that Altvater learned the information from his wife, an Ariad employee. By purchasing shares ahead of a positive announcement, and selling shares ahead of negative announcements, Altvater allegedly avoided losses and obtained illegal profits totaling over $100,000. Further, the Complaint alleged that Altvater tipped a friend, who also profited by trading Ariad stock of Altvater's wife's inside information. In a parallel action in 2017, criminal charges against Altvater for which he was convicted in October 2018 on three counts of securities fraud and sentenced to 18 months in prison plus one year of supervised release, and ordered $115,657 in forfeiture. On July 23, 2020, the Court entered a final consent judgment against Harold Altvater whereby he was permanently enjoined him from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; and he was ordered to pay disgorgement of $112,569 (offset by the order of forfeiture imposed in the related criminal case).

In a FINRA Arbitration Statement of Claim filed in March 2018 and as amended, public customer Claimant Gelman asserted violations of FINRA Rules, NYSE Rules and NASD Rules; violation of SEC Rules 10b-5 and 15c1-7 (A); violation of the Florida Securities Act; common law fraud, failure to supervise, breach of contract, breach of fiduciary duty, and negligent misrepresentation. The causes of action allegedly related to various securities including SunEdison stock. Claimant sought over $550,000 in compensatory damages, punitive damages of $5 million, fees, and costs. In the Matter of the Arbitration Between Clifford L. Gelman, Claimant, v. LPL Financial LLC, Thomas Joseph Borruso, Scott B. Zuckerman, and Wexford Financial Strategies, Respondents (FINRA Arbitration Award 18-01157 / April 16, 2019)
Respondents Borruso, Zuckerman, and Wexford Financial did not submit  Answers or Submission Agreement. Respondent Wexford was not a FINRA member firm and no subject to FINRA's arbitration jurisdiction, and, accordingly, the sole FINRA Arbitrator made no determination as to Claimant's claims against the firm. Respondent LPL generally denied the allegations and asserted various affirmative defenses. Claimant Gelman settled his claims as against Respondents LPL and Wexford and dismissed them with prejudice. The FINRA Arbitrator found Respondent Borruso liable and ordered him to pay to Claimant Gelman $250,000 in compensatory damages plus interest and $10,000 in attorneys fees. 

On November 18, 2019, Gelman filed a Motion to Confirm the FINRA Arbitration Award in the United States District Court for the Southern District of New York ("SDNY") against Borruso. Despite notice of the Petition, Respondent Borruso failed to file any opposition. Clifford L. Gelman, M.D., Petitioner, v. Thomas Joseph Borruso, Respondent (Memorandum Opinion & Order, SDNY, 19-CV-10649  / July 23, 2020) As to the underlying issues, which were not fully debriefed in the FINRA Arbitration Award, SDNY offers this background:

This action arises from an arbitration proceeding between Petitioner, a surgeon residing in Pismo Beach, California, and Respondent, a financial advisor working out of Woodbury, New York. Am. Pet., Dkt 11, ¶¶ 1-3 & Ex. 3 ("Statement of Claim") ¶¶ 7, 12. Respondent was an employee and registered representative of LPL Financial LLC ("LPL"), a FINRA member. Am.Pet. ¶ 3 & Ex. 2.

Sometime prior to March 11, 2015, Respondent solicited an investment from Petitioner
and recommended that he move his retirement savings to LPL to maximize his returns. Id. ¶ 11.In June 2015, Respondent opened an investment account for Petitioner's retirement funds with the objectives of growth and income. Id. ¶ 12. Without seeking the permission of Petitioner, Respondent invested "in speculative stocks that were unsuitable to [Petitioner's] goals" and made "excessive trades that lost money for [Petitioner], while generating large commissions for Respondent and his employer." Id. Respondent invested virtually all of Petitioner's retirement funds in SunEdison, a solar energy company that went bankrupt on April 21, 2016, causing Petitioner "out-of-pocket losses" of $391,647.01 and leaving him with only $12,734 of his initial investment of $404,382. Id. ¶ 13 & Statement of Claim ¶ 39. Although Respondent's trades left Petitioner with only a fraction of his initial investment, Respondent charged Petitioner over $32,000 in commissions. Am. Pet. ¶¶ 12-13; Statement of Claim ¶¶ 3, 20. 

After these events, the dispute resolution arm of FINRA took regulatory action against Respondent and barred him from association with any FINRA member in any capacity. Am. Pet. ¶ 15. Respondent's registration with FINRA was suspended on June 26, 2017, and he was permanently barred from association with any FINRA member on September 5, 2017. Id. ¶ 20 & Ex. 2 at 9-10. 

at Pages 1 - 2 of the SDNY Opinion

Many laypersons would think that given Borruso's default during both the FINRA arbitration and the SDNY motion that the case is open-and-shut for the Court. In contrast, most lawyers know that even in the context of a default proceeding, you still may have some burdens of proof to overcome. As SDNY admonished:

[T]hus, even though Respondent has "cho[sen] the perilous path of failing to submit a response to a summary judgment motion, the district court may not grant the motion without first examining the moving party's submission to determine if it has met its burden of demonstrating that no material issue of fact remains for trial." Amaker v. Foley, 274 F.3d 677, 681 (2d Cir. 2001). 

at Page 5 of the SDNY Opinion

In granting Petitioner Gelman's Motion to Confirm, SDNY found that he demonstrated that there was no material issue of fact in dispute to preclude enforcement of his FINRA Award. Preliminarily, SDNY found that per FINRA Code of Arbitration Procedure for Customer Disputes Rule 12200 that as an "associated person" Borruso was bound to arbitrate the customer's dispute. SDNY noted that:

[T]he fact that Respondent was suspended on June 26, 2017 and barred from association with FINRA on September 5, 2017, see Am. Pet. ¶ 20 & Exs. 2, 5, does not defeat his status as an "associated person of a member." The FINRA Code defines an "associated person of a member" to include a "sole proprietor, partner, officer, director, or branch manager of a member, or other natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or securities business who is Case 1:19-cv-10649-RA Document 28 Filed 07/23/20 Page 6 of 10 7 directly or indirectly controlling or controlled by a member, whether or not . . . [a]ny such person's registration is revoked, cancelled, or suspended, [or] the person has been expelled or barred from FINRA." FINRA Rule 12100(w)(2) (emphasis added). Moreover, FINRA Rule 12801(a) provides that a "claimant may request default proceedings against any respondent" who "fails to file an answer within the time provided by the Code" if that respondent was "[a]n associated person whose registration is revoked, cancelled, or suspended, who has been expelled or barred from FINRA, or whose registration has been terminated." FINRA Rule 12801(a)(4). . . .

at Pages 6 - 7 of the SDNY Opinion

In sustaining the FINRA Arbitrator's award of attorneys' fees, SDNY offers this guidance:

[H]ere, Respondent has not complied with the award. And by not opposing this petition, he has offered no justification for his failure to do so. The Court thus grants Petitioner's request for attorneys' fees in bringing this action to confirm the award. See First Nat'l Supermarkets, 118 F.3d at 896. The Court directs Petitioner to submit an affidavit with an accounting of costs and fees within fourteen days of this Order. . . .

at Page 9 of the SDNY Opinion

Bill Singer's Comment: All in all, a  well-reasoned and patiently explained Opinion from SDNY. Certainly, the Court's Opinion stands in stark contrast to the somewhat short-order nature of the FINRA Award. If for nothing else, we learned virtually nothing about the underlying dispute between Gelman and Borruso form FINRA's paltry offering, whereas the SDNY Opinion provides the necessary content and context so as to render its ruling intelligible. If I have one quibble with the SDNY Opinion it would be about this assertion:

After these events, the dispute resolution arm of FINRA took regulatory action against Respondent and barred him from association with any FINRA member in any capacity. Am. Pet. ¶

That can't possibly be accurate because the FINRA Office of Dispute Resolutionis not FINRA the self-regulatory-organization, which technically "operates the largest securities dispute resolution forum in the United States" in the form of FINRA ODR. Consequently, I dispute the accuracy of the Court's assertion that "the dispute resolution arm of FINRA" took any "regulatory action." Pointedly, FINRA has an "Arbitrator Disciplinary Referral Form," which begins with the following guidance:

This form is to be used by arbitrators who want to refer potential disciplinary violations to FINRA Member Regulation for investigation. Please submit the form to the attention of Todd Saltzman, Vice President of Dispute Resolution . . .
Among the mysteries of litigation is when a Plaintiff or Claimant initiates a lawsuit but then seems to disappear or run out of gas. As kids often say as the after-school fistfight begins: "You started it." If you're going to start something, you sort of need to show up for the inevitable settlin' of scores -- be that fistfight, court, or an arbitration hearing room. There are times, however, when one of the combatants can't make it to high noon at the playground. You're grabbed by a teacher for detention. Your mother won't let you go. Your algebra tutoring is at the same time as the fight. You're six inches shorter than the kid who's waitin' for ya. You need to rush home so that the dog can eat your homework. There's an afternoon Mets game on television and you want to get home to watch the Mets' reliever surrender the winning run with two outs and two strikes in the ninth.