Securities Industry Commentator by Bill Singer Esq

August 25, 2020

SEC Obtains Summary Judgment Against Municipal Bond "Flippers" (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC alleged that Minish "Joe" Hede and Kevin Graetz violated the broker registration provisions of Section 15(a) the Securities Exchange Act of 1934. As alleged in part in the SEC Release:

[H]ede and Graetz sold approximately $9.6 million worth of Belize Fund notes to their customers at the brokerage firm where they were then employed, even though the firm had already declined to approve the Belize Fund's notes for offer and sale to its customers. As alleged, by selling a security that was not approved by the firm, Hede and Graetz engaged in a prohibited practice called "selling away." The complaint alleges that Hede and Graetz profited through the commissions from the sales, while the firm's customers suffered significant losses. The SEC charged Belize Fund and its owner, Brent Borland, in 2018, alleging that Borland misappropriated more than $5.98 million of funds obtained from investors in Belize Fund notes and used the stolen principal to fund his family's lavish lifestyle.
In response to a Complaint filed in the United States District Court for the Southern District of California, the SEC alleged that  the defendants had purchased new issue municipal bonds on behalf of RMR Asset Management Company so that the defendants and RMR could flip the bonds at a pre-arranged markup. The Court granted the SEC's motion for summary judgment against former associates of RMR Asset Management Company Jocelyn M. Murphy, Michael Sean Murphy, and Richard C. Gounaud. As alleged in part in the SEC Release:

In granting the SEC's motion for summary judgment, the court ruled that the defendants operated as unregistered brokers by regularly engaging in securities transactions on behalf of RMR in exchange for transaction-based compensation, in violation of Section 15(a) of the Securities Exchange Act of 1934. The court also ruled that Jocelyn Murphy committed fraud by submitting false zip codes with her orders to secure the higher priority reserved for local retail investors, in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The court will determine remedies at a later time.

Federal Court Tells Interactive Brokers to Comply With FINRA Panel's $1M Ruling: Right or Wrong (FINOPS Report by Chris Kentouris)
FINOPS Report's Chris Kentouris reports about the recent federal appellate court opinion involving a hotly contested FINRA arbitration award:

At the core of the battle between Interactive Brokers and its former customers is whether investors have their right to sue their brokerages for damages based on violating FINRA's rules. The regulation in question is FINRA's Rule 4210 which explicitly prohibits trades of high-risk securities in portfolio margin accounts. FINRA's arbitration panel which initially awarded damages apparently thought investors could sue for damages related to violations of FINRA rules, but the Virginia district court disagreed. The majority opinion of the Fourth Circuit Court of Appeals in favor of Interactive Brokers never addressed the issue, but made it clear that federal courts shouldn't dispute FINRA arbitration decisions. The fact that the Saroops and Sofis signed an agreement with Interactive Brokers that the firm would not be held liable for financial losses in the event of a market downturn didn't matter. Nor did the fact that as sophisticated investors, they agreed to high-risk trading strategies and must have acknowledged Interactive Brokers' auto-liquidation terms for portfolio margin accounts when they created their accounts. The Saroops and Sofis could have sued their investment adviser Vikas Brar for their losses, but his firm was reportedly out of cash and their only alternative was to sue Interactive Brokers, the firm with deep pockets.

ALSO READ: Perplexing, Baffling FINRA Arbitration Award Affirmed In 4Cir Majority Opinion ( / August 17, 2020)
After a jury trial in the United States District Court for the Eastern District of Pennsylvania Nvahbulai "Kosh" Quisiah was found guilty of preparing false tax returns, aggravated identity theft, wire fraud and engaging in a conspiracy to defraud the United States; and he was sentenced to five years in prison plus three years of supervised release and ordered to pay $215,941 in restitution. As alleged in part in the DOJ Release:

[Q]uisiah was the owner and operator of First Premier Tax Service (also d/b/a Kosh & Associates), a Philadelphia-based tax preparation business on Woodland Avenue. From 2010 through 2017, the defendant prepared tax returns for clients that fraudulently inflated itemized deductions, claimed fictitious Schedule C businesses, and claimed false dependents for tax years 2009 through 2016. This resulted in inflated tax refunds for his clients to which the clients were not entitled. Quisiah also bought and sold the personal identifying information of children in order to falsely claim the children as dependents on tax returns.

Jennifer Yang and Daniel Wu were indicted in 2017 in the United States District Court for the Northern District of California each on one count of conspiracy to defraud the United States and to commit visa fraud, mail fraud, and aggravated identity theft; three counts of visa fraud; two counts of mail fraud; and two counts of aggravated identity theft. Also, Yang was charged with two counts of money laundering. A jury convicted Yang and Wu of mail fraud, visa fraud, and conspiracy to commit these and other offenses. Wang was sentenced to 46 months in prison and Wu to 24 months in prison, and both were sentenced to three years of supervised release and ordered to pay $5,951,813.00 in restitution. As alleged in part in the DOJ Release:

[Y]ang, a lawyer and licensed member of Bar of the District of Columbia, held herself out as a legal specialist for persons interested in applying for EB-5 visa benefits.  Yang and Wu solicited six- and seven-figure investments from foreign individuals interested in lawful permanent residency in the United States, promising those individuals that their investments would be used to create jobs and qualify them for EB-5 visas.  Nevertheless, instead of using the investors' money to create jobs as promised, the evidence at trial showed that the defendants diverted the money for other purposes including personal expenditures such as the purchase of cars, stays in luxury hotels, college tuition for a family member, and the cash purchase of a $2.5 million house for Yang and her family.  When it came time to submit visa applications on behalf of the investor victims, Yang and Wu falsely represented that the money had been used properly and the jobs had been created.  In some cases, the false information about bogus job positions was created using the personal identifying information of third parties without those individuals' knowledge or consent.  Between 2007 and 2016, the defendants filed fraudulent EB-5 visa petitions for at least seven foreign investors who supplied Yang and Wu with approximately six million dollars intended for use as EB-5 investments.

In a FINRA Arbitration Statement of Claim filed in October 2018, public customer Claimant Wildrick asserted suitability and negligence, securities fraud, breach of fiduciary duty, violation of Michigan Uniform Securities Act, and negligent supervision. Claimant Wildrick sought $93,841 in compensatory damages plus punitive damages, interest, fees, and costs. As alleged in the FINRA Arbitration Award: 

[T]he causes of action relate to Claimant's allegations that Respondents invested his funds in high risk, poor performing positions in the energy sector, although Claimant had wanted his funds to be invested in a conservative manner.

Respondents Wells Fargo and Lyons generally denied the allegations, asserted various affirmative defenses, and sought the expungement of the matter from Respondent Lyons' Central Registration Depository record. The FINRA Arbitration Panel found Respondents jointly and severally liable and ordered them to pay to Claimant Wildrick $54,532 in compensatory damages. The Panel denied expungement.
Another day. Another FINRA Arbitration Award comes under court scrutiny. We have an exchange between an expert for Claimant Charles Schwab and an arbitrator. In retrospect, not such a big deal. In retrospect, however, the exchange injected an issue into the bona fides of the arbitration. Then we have a shared ride to the airport between an arbitrator and one of Claimant's expert witnesses. In retrospect, that's a bigger deal. In retrospect, you have to shake your head and ask what everyone was thinking (or not). Then there's the other issue about the third arbitrator needing to participate from home via telephone. In retrospect, omigod, what the hell is going on here? No wonder the public customer Respondent wanted a mulligan.