Securities Industry Commentator by Bill Singer Esq

August 13, 2020

Dayton woman arrested for impersonating elderly victim and stealing his pension benefits (DOJ Release)

ValueWise CEO Michael Mann Pleads Guilty to $100 Million Fraud / Admits to Massive Scheme That Affected Several Thousand Nationwide (DOJ Release)

FINRA Censures and Fines Morgan Stanley For Failure to Supervise Rep's Short-Term Trading Of Corporate Bonds and Preferred Securities

Customer Sues Over Inability To Execute Trades During Pandemic

[In]Securities Guest Blog: Take it Easy by Aegis Frumento Esq ( Blog) 
In response to civil Complaint filed by the Department of Justice, the United States District Court for the Northern District of Florida issued a Temporary Restraining Order. As alleged in part in the DOJ Release:

As detailed in the civil complaint and accompanying court papers filed on Monday, Aug. 3, 2020, Defendants Thu Phan Dinh, Tran Khanh, and Nguyen Duy Toan, all residents of Vietnam, are alleged to have engaged in a wire fraud scheme seeking to profit from the COVID-19 pandemic.  According to the complaint, defendants operated more than 300 websites that fraudulently purported to sell products that became scarce during the pandemic, including hand sanitizer and disinfectant wipes.  Thousands of victims in all 50 states attempted to purchase these items from defendants' websites.  Victims paid for items supposedly sold through the websites but never received the purchased products.  The complaint alleges that defendants set up hundreds of email accounts and accounts with a U.S.-based payment processor to effectuate the scheme and keep it hidden from law enforcement.  Defendants are also alleged to have listed fraudulent contact addresses and phone numbers on the websites, causing unaffiliated individuals and businesses in the United States to receive numerous complaint calls from victims who had been defrauded by the scheme.  In response to the Department's request for injunctive relief, U.S. District Judge Charlene Edwards Honeywell issued an emergency ex parte temporary restraining order requiring that the registrar and registries of defendants' fraudulent websites take immediate action to disable them.

The United States obtained the restraining order to shutter defendants' websites immediately while an investigation of defendants' scheme continues.  In so doing, the government is employing a federal statute that permits federal courts to issue injunctions to prevent harm to potential victims of fraudulent schemes.  In response to information provided by HSI, Vietnamese authorities have also conducted their own investigation and arrested the Defendants.

Dayton woman arrested for impersonating elderly victim and stealing his pension benefits (DOJ Release)
In an Indictment filed in the United States District Court for theSouthern District of Ohio, Melody Hudson, 38, was charged with one count of bank fraud, one count of aggravated identity theft, and one count of use of another person's Social Security number. As alleged in the DOJ Release, Hudson stole a 72-year-old retired man's identity and redirected his $919 monthly pension to a bank account under her control: 

The alleged crimes took place between April and November 2019. On one occasion, she allegedly called the agency that was paying the pension, identified herself as a relative of the victim, and had someone impersonate the victim on the phone call with the agency.
Michael T. Mann (who operated ValueWise Corporation and subsidiary companies including LLC) pled guilty in the United States District Court for the Northern District of New York to to one count of conspiracy to commit wire fraud, one count of aggravated identity theft, nine counts of bank fraud, and one count of filing a false tax return. Mann agreed to the entry of an Order requiring him to pay $101,038,793.31 in restitution, and to forfeit assets including $14,522,474.90 already seized by the Government, 30,000 common shares of Pioneer Bancorp Inc. already seized by the Government, and a 2020 Jeep Gladiator. On February 6, 2020, Luke E. Steiner pled guilty to conspiring with Mann to defraud two financing companies out of millions of dollars.As alleged in part in the DOJ Release Mann admitted that:

[F]rom 2013 to September 2019, he engaged in a fraudulent scheme to deceive banks and financing companies into loaning his companies tens of millions of dollars. Because Mann could not repay the loans with legitimate business revenues, he expanded the fraud, by stealing and diverting millions of dollars that were entrusted to his payroll companies, and engaging in the daily kiting of millions of dollars among bank accounts he controlled. 

Mann's scheme collapsed in early September 2019, when one of his banks froze his accounts, setting off a chain of events that left his payroll companies unable to make payroll for hundreds of small business customers nationwide.

Additionally, the DOJ Release alleges that Mann's scheme comprised the following frauds:
  • Mann obtained tens of millions of dollars in loans from three financing companies, located in New York, Colorado and California, respectively, by falsifying his companies' revenues and receivables. Mann falsely told the financing companies that Minnesota-based UnitedHealth Group Incorporated ("UHG") and its subsidiary OptumInsight Inc. ("Optum"), owed millions of dollars to his companies.  Mann created fake invoices reflecting the fictitious debt and assigned them to the financing companies as collateral for the loans.

  • Mann fraudulently obtained a line of credit ("LOC") from several Capital Region banks, which had grown to $42 million by 2019.  To obtain the LOC, Mann created companies whose sole purpose was to further the fraud by generating fake invoices, disguising sources of funds, and artificially inflating his assets; falsely represented to the banks that his fake businesses had revenues and receivables based on consulting work for Optum/UHG and other well-known companies, including 3M, Best Buy and T-Mobile; hid the tens of millions of dollars in loans he was receiving from the financing companies, and that he was using the LOC to pay down these loans; and provided false financial statements, and individual and corporate tax returns, to his outside auditor, which in turn made inaccurate reports to the banks.

  • Mann misappropriated payroll monies, entrusted to MyPayrollHR and another company, by changing the instructions for digital Automated Clearing House ("ACH") files that were supposed to transmit payroll from MyPayrollHR's customers (employers) to the employees of the customers.  Although his companies' contracts with Cachet Financial Services specified that ACH transfers would route payroll funds from the employers' accounts to a designated Cachet trust account and then directly to the customers' employees, Mann changed the instructions inside digital ACH files provided to Cachet, in order to divert payroll funds from MyPayrollHR's customers into accounts he controlled at Pioneer Bank. When Pioneer Bank froze Mann's corporate accounts on or about August 30, 2019, it froze the payroll funds in those accounts, and caused several thousand people across the country to not receive a payroll payment. Cachet, as the guarantor of the payroll funds, paid about $7.2 million to the employees of MyPayrollHR's customers.
Canadian National Sentenced for Securities Fraud (DOJ Release)
Morrie Tobin, 57, pled guilty in the United States District Court for the District of Massachusetts to one count of conspiracy to commit securities fraud and one count of securities fraud; and he was sentenced to one year and one day in prison plus two years of supervised release, and ordered to pay a $100,000 fine and a $4 million forfeiture. As alleged in part in the DOJ Release:

From 2013 to 2018, Tobin and co-conspirators Milan Patel, Matthew Ledinva and Roger Knox conspired to commit securities fraud by disguising their ownership and control of various microcap securities, and employing paid promotional campaigns and manipulative trading techniques to artificially inflate the price and trading volume of those stocks so that Tobin and others could secretly sell their shares of those stocks at a substantial profit. 

Tobin and others acquired the majority of the shares of GS Valet, a public shell company with minimal assets and operations, and then renamed it International Metals Streaming Corporation (IMST). Tobin, Patel and Ledinva then distributed the shares of IMST among four offshore entities registered in the names of various parties. From December 2016 to June 2017, Tobin and the co-conspirators orchestrated a reverse merger of IMST into Environmental Packing Technology (EPTI), which became a publically-traded company, and then caused 10.5 million shares held in the offshore entities to be transferred to Knox's asset management firm and a separate brokerage firm. During this time, Tobin and the co-conspirators raised $2.9 million in private placement of shares of EPTI, and used a portion of this money to pay a third-party stock promoter to artificially promote the shares of EPTI. From June 9 to June 27, 2017 - when the Securities and Exchange Commission halted trading in EPTI shares - the co-conspirators directed the sale of EPTI shares held by the offshore entities, thereby generating proceeds of approximately $1,519,182. At sentencing, the Court found that Tobin and his co-conspirators intended to generate $15 million in proceeds based on the number of shares under their control.

Patel pleaded guilty in February 2019 and is scheduled to be sentenced on Thursday, Aug. 13, 2020. Ledinva was sentenced in June 2020 to 30 months of probation and ordered to pay a fine of $50,000. Knox previously pleaded guilty and is currently scheduled to be sentenced on Sept. 30, 2020.

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, Morgan Stanley Smith Barney LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that "Morgan Stanley has been a FINRA member firm since May 2009."  The AWC alleges that "Respondent does not have any relevant 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 "Morgan Stanley" had violated NASD Rule 3010 (for conduct before December 1, 2014), FINRA Rule 3110 (for conduct on or after December 1, 2014), and FINRA Rule 2010.; and the self regulator imposed upon Respondent a Censure, $175,000 fine and $774,574.08 in restitution. As alleged in part in the AWC: 

Morgan Stanley failed to reasonably supervise a registered representative, KG, because the Firm failed to take reasonable steps to review KG's recommended short-term trades of corporate bonds and preferred securities in the accounts of ten customers.1 Specifically, on hundreds of occasions during the Relevant Period, KG recommended that the customers buy, and then promptly sell, corporate bonds or preferred securities, which due to their upfront sales charges, were typically only suitable for customers if held long-term. 

For example, on or around September 18, 2013, KG recommended that a customer (the "Customer") purchase $65,000 in corporate bonds issued by an insurance company. Fewer than two months later, on or about November 11, 2013, KG recommended that the Customer sell the bonds, at a loss, and use the proceeds to purchase $63,800 in bonds issued by a bank. Approximately four months later, KG recommended that the Customer sell those bonds, also at a loss, and use the proceeds to purchase $61,200 in bonds issued by a telecommunications company. KG recommended that the Customer sell a portion of those bonds on or about June 9, 2014, at a loss and after holding them for fewer than three months. Collectively, those recommended securities transactions required the Customer to pay more than $5,500 in sales charges and resulted in more than $2,500 in net losses, which were inclusive of sales charges paid by the Customer, minus any interest payments received by the Customer.

During the Relevant Period, Morgan Stanley used a number of automated alerts to identify trading activity and accounts that warranted further review by a supervisor, including alerts that identified accounts in which the trading exceeded certain turnover and cost-to-equity ratios. From January 2012 to December 2014, KG's trading in the accounts of the ten affected customers generated nearly 100 alerts reflecting that the trading in these accounts exceeded the Firm's thresholds for potentially excessive turnover and cost-to-equity ratios. 

In response to the alerts, Morgan Stanley failed to take reasonable steps to review red flags and understand the potential risks and rewards associated with KG's recommendations or to determine whether those recommendations were suitable. Instead, from January 2012 through September 2014, Morgan Stanley discussed the alerts with KG and contacted the affected customers to confirm whether they were satisfied with KG and his recommendations. 

In September 2014, Morgan Stanley's central compliance department conducted a review of KG's securities recommendations, which concluded that his recommendations were "generating high costs/commissions and the products/investment strategies were costing the clients more money than they are making the client." In spite of these findings, the Firm did not take sufficient action to address KG's trading in his customers' accounts. Indeed, the ten affected customer accounts continued to generate alerts for potentially excessive turnover and cost-to-equity ratios. For instance, in February 2015, the Customer's account generated another alert for its cost-to-equity ratio over the preceding 12 months. As a result of that alert, the branch manager and KG called the Customer together to discuss her account, but after the Customer confirmed that she was satisfied with the management of her account generally, KG continued to recommend short-term trades of corporate bonds and Morgan Stanley did not take reasonable steps to review whether such recommended trades were suitable. 

Ultimately, in January 2016, the Firm instructed KG to stop short-term trading in corporate bonds and preferred securities in all of his customer accounts. Nonetheless, KG recommended a small number of short-term trades in some of his customers' accounts between June 2016 and December 2017. 

Collectively, KG's trading in the accounts of the ten affected customers caused the customers to suffer losses of more than $900,000.2

= = = = =
Footnote 1:  FINRA has barred KG from associating with any FINRA member firm for failing to appear for on-the-record testimony requested pursuant to FINRA Rule 8210 in connection with FINRA's investigation into those recommendations.  

Footnote 2: This AWC requires Morgan Stanley to pay restitution to eight of the ten affected customers, as the other two affected customers previously settled with Morgan Stanley separately.
Bill Singer's Comment: I'm a bit puzzled by the recitation of Morgan Stanley Smith Barney LLC's status as set forth in the AWC's "Background." Last I heard, there was no "Morgan Stanley Smith Barney LLC," as the name had been retired into the now extant Morgan Stanley brand. The AWC should have clarified that change of status in the AWC. Beyond that quibble, FINRA did a nice job of presenting the underyling misconduct. The AWC does not present a flattering picture of Morgan Stanley's Compliance Department or supervisory protocols. It is a fairly pathetic litany of alarms being disregarded and far too much sleep-walking through oversight. As with many large FINRA member firms, they have implemented all sorts of policies and have hired many in-house investigators; but if you smell smoke and see flames but no one rolls out the firetrucks, what the hell is the point? This is NOT a case of alerts NOT being triggered but of those alerts tripping the alarms, which were, indeed, disregarded. 

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, Yvonne M. Nirelli submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Yvonne M. Nirelli was first registered in 1985 with FINRA member firm Cadaret, Grant & Co., Inc. The AWC alleges that Yvonne M. Nirelli "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 Nirelli had violated NASD Rule 2510(b) and and 2010; and the self regulator imposed upon her a $5,000 fine and an 15 business-day suspension from association with any FINRA member in all capacities. As alleged in part in the AWC: 

FINRA conducted an examination of Cadaret Grant covering the period between August 2017 and August 2018. During that period, Nirelli effected at least 101 discretionary trades in 64 customer accounts. Although the customers knew that Nirelli was exercising discretion in their accounts, Nirelli did not have prior written authorization to do so from any of the customers. Additionally, Cadaret Grant had not approved any of the accounts for discretionary trading.
Bill Singer's Comment: Compliments to FINRA on a very, very fair recitation of the underlying allegations and the imposition of sanctions that strike me a perfectly tailored to the nature of the conduct. Although Nirelli lacked "written" authorization, her customers clearly "knew" that she was exercising discretion. Moreover, as an industry veteran since 1985, Nirelli is likely a throw-back to the days when stockbrokers truly cared about their customers, provided long-since vanished levels of customer service, and, as such, often exercised some form of discretion in those days when "oral" approval by the customer sufficed. Yes, Wall Street has changed, as has the world. I am also mindful, very mindful, that Nirelli is likely one of very few women in the industry who were first registered in 1985. She has likely earned some consideration from FINRA for her veteran industry status, and it appears that the self-regulator recognized some aspect of her status.

In a FINRA Arbitration Statement of Claim filed in March 2020, public customer Claimant Ritota, representing himself pro se, sought $50,000 in compensatory damages and asserted:

the causes of action of misinformation, failure to supervise and negligence. The causes of action relate to Claimant's inability to perform trades at the outset of the Coronavirus pandemic outbreak after he deposited a 3000 share stock certificate into his account. 

Respondents generally denied the allegations and asserted various affirmative defenses. Without any presentation of the substance of Claimant's allegations and without any rationale for his decision, the sole FINRA Arbitrator denied the claims. 
Bill Singer's Comment: I can't even begin to tell you how disappointing the lack of content and context is for this FINRA Arbitration Award.-- but for the fact that, okay, sure, you're right, I apparently am beginning to tell how how disappointed I am. During this pandemic times, Claimant Ritota raised an interesting claim about something to do with the Respondents' alleged "inability to perform trades at the outset" of COVID. Claimant's claim was filed on or about March 17, 2020, so the lawsuit was truly filed as the pandemic was picking up steam. Frankly, I would have appreciated some recitation in the Award, even if only brief, as to what constituted the alleged inability to "perform trades" during the pandemic. Similarly, it's a bit of a dubious proposition that the only mention of the "unnamed" broker-dealer where the trades were supposedly not performed is found buried under the heading "FEES":

Pursuant to the Code, unnamed member firm TD Ameritrade, Inc. has paid to FINRA Dispute Resolution Services the $750.00 Member Surcharge and $1,750.00 Member Process Fee previously invoiced.
Esteemed Wall Street legal eagle Aegis Frumento pens his 100th Guest Blog for Broke And Broker. As if his name didn't give it away, he's Italian. Surprisingly, it only took Aegis 100 blogs to start talking about zucchini. What the hell is with Italians and their fascination for zucchini? In any event, in addition to Aegis' musings about how he's going to farm zucchini in his backyard during what's left of this fabulous pandemic summer, he's also sitting on his porch and waiting for the semen salesman to stop by. Ummm . . . any suggestions as to how I can politely tell Aegis that I'm really not going to eat any of his homemade zucchini bread?