Securities Industry Commentator by Bill Singer Esq

August 12, 2020

SEC Charges Former Principal of Investment Adviser with Data Manipulation and Valuation Fraud (SEC Release)

Convicted Impersonator Arrested for Defrauding Elderly Victims, Impersonating Federal and Territorial Officials, and Obstruction of Justice (DOJ Release)

Former Aequitas CEO and Senior Executives Indicted in Fraud and Money Laundering Conspiracy (DOJ Release)

SEC Sues Three Arizona Residents for Defrauding Broker-Dealers in a Free-Riding Scheme (SEC Release)
The United States District Court for the District of New Jersey held that FINRA is entitled to absolute immunity for its regulatory conduct and that there is no private right of action to assert claims related to FINRA's regulatory conduct. No . . . not a shocking ruling or one that is inconsistent with prevailing jurisprudence. Notwithstanding, the better and sounder path is to afford "qualified" immunity to FINRA. Perhaps a better case with better facts will upend this unfair and counter-productive judicial line of reasoning. My hopes aside -- it ain't happening today.
SEC Charges Former Principal of Investment Adviser with Data Manipulation and Valuation Fraud (SEC Release)

In an Indictment filed in the United States District Court for the Central District of California, ("CDCA") Brendan Ross was charged with 10 counts of wire fraud. The SEC filed a civil Complaint against Ross. As alleged in part in the DOJ Release:

By the summer of 2017, only five years after Ross founded DLI, the firm had over $1 billion in assets under management. According to the indictment, Ross allegedly directed DLI to invest the funds' assets in, among other things, a company that loaned money to small businesses and retailers. The DLI funds made money when the loans performed, meaning that the borrowers made timely payments. The indictment alleges that, rather than disclose some of the loans were not performing, Ross falsified monthly reports to make it appear borrowers were making payments. The "payments" actually came from fee rebates given by the company originating the loans.

By lying about the true status of the loans, Ross caused DLI to overstate the value of these loans on the funds' books and fraudulently inflate the funds' value, according to the indictment. Specifically, Ross allegedly caused the monthly asset values of the funds to be cumulatively inflated by over $300 million over the course of about four years. By fraudulently inflating the value of the funds, Ross was able to collect millions of dollars in fees he otherwise would not have been able to charge to clients, according to the indictment.

To further his scheme and help conceal it, Ross allegedly arranged for the sale of approximately $55 million of the loans to a third-party buyer in the summer of 2017. Ross once again inflated the value of these loans by lying about their status, falsely telling the buyer that borrowers had been making payments on many of these loans, according to the indictment.

In a Complaint filed in CDCA, the SEC charged charges Ross with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, and Sections 206(1), 206(2), and 207 of the Investment Advisers Act of 1940. As alleged in part in the SEC Release:

[F]rom early 2014 through late 2017, Ross manipulated payment data for the funds' investment in loans made by QuarterSpot, Inc., an online small business lender. Ross allegedly directed QuarterSpot to make payments to the funds, which gave the false impression that underlying borrowers were making principal payments on what were actually delinquent loans. As alleged, under DLI's valuation policy, many of these non-performing loans should have been fully marked down but were not because of the payments Ross engineered. According to the complaint, as a result of the scheme, DLI's monthly returns reported to investors were materially inflated. DLI allegedly collected at least $5-6 million in extra management and performance fees from the funds, and Ross personally received millions of dollars from DLI. The SEC previously charged DLI in 2019, which resulted in DLI and its affiliates being placed in receivership.
A Complaint filed in the United States District Court for the District of Virgin Islands charged Yamini Potter with eighty counts of wire fraud, two counts of impersonating a federal judge, obstruction of justice in violation of federal law, two counts of acting in assumed character, and one count of grand larceny in violation of Virgin Islands law. It's possible that the Feds might have charged Potter with more counts but, word is, they pretty much cited every criminal charge in the criminal code and ran out of paper after printing the first draft out, so, you know, "80" seemed like a nice number, so, hey, why push it beyond that. In any event, as alleged in part in the DOJ Release:

[B]etween May 2019 and July 2020, Potter received over $100,000 from the victims, at least one of whom is elderly, for purported legal fees associated with a lawsuit filed against the United States. Potter claimed he could assist the victims with a lawsuit to obtain a money judgment and return of one of the victim's medical licenses. Investigators located no such lawsuit anywhere in the United States. Potter is not a licensed attorney in any jurisdiction in the United States.

Initially, Potter claimed to be the son of former Lt. Governor Osbert Potter. According to court documents, Yamini Potter is not Osbert Potter's son. The affidavit alleges that Potter used this supposed familial connection to influence his victims to pay money for the alleged lawsuit and claimed that the victims could expect to recover millions of dollars. The affidavit further alleges that, Potter also impersonated Osbert Potter, former federal District Judge Curtis Gomez, federal Magistrate Judge Ruth Miller, and Virgin Islands Attorney General Denise George for fraudulent purposes. According to the affidavit, Potter telephoned his victims pretending to be various people, including himself, while he was detained in the Virgin Islands Bureau of Corrections, pending charges in the Virgin Islands Superior Court. All of his calls were recorded. Potter also allegedly sent text messages to the victims as part of his fraudulent scheme, and in at least one case, tried to persuade the victims to destroy text messages he sent to them.

According to court documents, Potter pled guilty in 2015 to impersonating an FBI agent in violation of federal law. He was sentenced to one year in prison.
In a 32-count Indictment filed in the United States District Court for the District of Oregon, Aequitas Management, LLC's former Chief Executive Officer, Robert J. Jesenik, was charged with conspiracy to commit mail and wire fraud, wire fraud, bank fraud, and money laundering. Also charged are Nelson Scott Gillis, Brian K. Rice, and Andrew N. MacRitchie. As alleged in part in the DOJ Release, the Defendants:

and others used the Lake Oswego company to solicit investments in a variety of notes and funds, many of which were purportedly backed by trade receivables in education, health care, transportation, and other consumer credit areas.

From June 2014 through February 2016, the former executives solicited investors by misrepresenting the company's use of investor money, the financial health and strength of Aequitas and its related companies, and the risks associated with its investments and investment strategies. Collectively, the defendants also failed to disclose other critical facts about the company, including its near-constant liquidity and cash-flow crises, the use of investor money to repay other investors and to defray operating expenses, and the lack of collateral to secure funds.

Jesenik founded the Aequitas group of companies, and, as chief executive officer, controlled the organization's structure and had ultimate decision-making authority over company activities.      

Gillis, who was previously indicted for conspiring to submit false statements to a federally insured creditor, was the company's chief operating officer and chief financial officer. In these roles, he was responsible for directing Aequitas's overall financial policies and accounting functions. He established and maintained the company's accounting principles, practices, procedures and initiatives, prepared financial reports and presented findings and recommendations to the executive teams, and oversaw all financial functions.

MacRitchie was the company's executive vice president and chief compliance officer. As such, he was responsible for the development and implementation of risk management and compliance processes and procedures. MacRitchie oversaw all Aequitas accounting, legal, and audit functions, and participated in fundraising. He also established Aequitas's New York Office and directed Aequitas's "Lux Fund," a Luxembourg-based fund used to solicit international investors.

Rice served as Aequitas's executive vice president and president of wealth management. Among his responsibilities, Rice oversaw the solicitation of investments through registered investment advisors (RIA) and managed Aequitas's affiliated RIAs.

If convicted on all charges, each of the defendants could face decades in prison and millions of dollars in fines and restitution, as well as five years' supervised release following their prison terms.

Former Aequitas executives and co-conspirators Brian A. Oliver and Olaf Janke previously pleaded guilty to conspiring to commit mail and wire fraud and money laundering on April 19, 2019, and June 10, 2019, respectively. As part of their plea agreements, they have both agreed to pay restitution in full to their victims as determined and ordered by the court.
In a Complaint filed in the United States District Court for the District of Arizona,
the SEC charged Vu Anh Nguyen Nguyen with violating, and Adam Michael Reed and Anthony Xavier Moya with aiding and abetting Nguyen's violations of, the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunde. Without admitting or denying the allegations in the Complaint, Nguyen and Moya consented to the entry of judgments enjoining them from future violations of the charged provisions, and prohibiting them from opening brokerage accounts without first providing the broker-dealer with a copy of the Complaint and Judgment. Additionally, Nguyen agreed to be enjoined from trading in securities in any brokerage account that does not have settled cash to pay for the trade. As alleged in part in the SEC Release:

[I]n 2018 and 2019, Nguyen opened brokerage accounts and requested electronic fund transfers from bank accounts, knowing that the accounts had insufficient funds to cover the transfers. The complaint alleges that Nguyen immediately began trading securities in the accounts. According to the complaint, Nguyen was able to transfer $61,888 out of the accounts before the accounts were frozen by the brokerage firms, reaping the benefits of profits earned due to trading, while leaving the brokerage firms to settle the trades at a significant loss. The complaint further alleges that Reed and Moya provided Nguyen access to brokerage accounts they opened, knowing that Nguyen was going to use the accounts to further this fraudulent scheme. In total, Nguyen allegedly engaged in free-riding in 26 accounts at eight brokerage firms, making $4.7 million in bogus transfers and purchasing over $16 million in securities.

FINRA Imposes Fine and Suspension for Rep's Impersonation of Two Customers and Supervisor.
In the Matter of Michael Edward Feeley, Respondent (FINRA AWC 2019063293701)

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, Michael Edward Feeley submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Michael Edward Feeley entered the industry in 2000, and, thereafter, re-entered the industry in 2014, and by February 2017, he was registered with FINRA member firm Northwestern Mutual Investment Services. The AWC alleges that Michael Edward Feeley "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 Feeley had violated FINRA Rules 2010; and the self regulator imposed upon him a $7,500 fine and an 45-day suspension from association with any FINRA member in all capacities. As alleged in part in the AWC:

From March to May 2019, Feeley impersonated two customers of the firm's insurance affiliate on 10 telephone calls with the Carrier. Feeley posed as the customers on calls to the Carrier's customer service department in order to obtain information about the customers' insurance contracts. Although the policy information was requested, neither of the customers authorized Feeley to impersonate them. 

During the same period, Feeley impersonated his firm supervisor during 20 telephone calls with the Carrier. Feeley posed as his firm supervisor when the supervisor was the only servicing representative of record with the Carrier and Feeley had an urgent need for information about the terms or status of a customer's policy. Feeley's firm supervisor did not authorize Feeley to impersonate him. 

Six Things You're Doing Wrong When Buying Stocks on Your Own / Avoid these amateur mistakes before you sink all your money into the market (Bloomberg by Edward Robinson
Okay . . . I'm gonna confess. When I first saw this Bloomberg headline my eyes rolled. Oh for godsakes, really -- another bull-shit primer on the do's and don'ts of newbie investing? Then, to Edward Robinson's credit, I started reading through his article and -- wow -- damn if he didn't hit virtually every bullet-point on my list. I've been on the Street since 1982 and during those four decades, I've seen new investors continue to make the same mistakes over and over and over again. Worse, every few years the next-big-thing hits -- now it's Robinhood -- and we're told that it's a a game charger (or the ever-popular "disrupter"), and, all the "old" investing rules are out the door. This ain't your grandpa's stock market anymore, we're told. Except, as it always turns out, there are certain tried and true approaches to investing. Not all work all the time. Some of the old rules stop working and need to be retired. Overall, however, there are certain bedrock principles by which almost all Stock Market newbies should abide by -- or at least understand and violate at their peril. Compliments to Bloomberg's Robinson on a very fine job!

Robinhood to Add Hundreds of Representatives After Trading Surge (Bloomberg by Sophie Alexander)
As reported in part by Bloomberg's Alexander:

Robinhood Financial, the online brokerage that has attracted millions of novice investors since the pandemic began, said it plans to hire hundreds of registered representatives this year for new offices in Texas and Arizona.

"We've more than doubled our support team since January and we'll continue to grow our teams to provide timely, helpful responses to our customers," Alex Mesa, Robinhood's head of customer experience, said Tuesday in a blog post.