Securities Industry Commentator by Bill Singer Esq

Justice Department Acts To Shut Down Fraudulent Websites Exploiting The Covid-19 Pandemic / Federal Court Issues Temporary Restraining Order Against Three Defendants and Over 300 Fraudulent Websites Purporting to Sell Scarce Health and Safety Items (DOJ Release)

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)

Canadian National Sentenced for Securities Fraud (DOJ Release)

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

In the Matter of Morgan Stanley Smith Barney LLC, Respondent (FINRA AWC)

FINRA Imposes Fine and Suspension on Rep for 101 Discretionary Trades

In the Matter of Yvonne M. Nirelli, Respondent (FINRA AWC)

Customer Sues Over Inability To Execute Trades During Pandemic

In the Matter of the Arbitration Between Theodore C. Ritota, Claimant, v. Micha Tyer Inman and James Robert Viets, Respondents (FINRA Arbitration Award)

[In]Securities Guest Blog: Take it Easy by Aegis Frumento Esq (BrokeAndBroker.com Blog)

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.

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.

[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.

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.

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.

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.

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. 

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.

• Securities Industry Commentator
• Bill Singer