Securities Industry Commentator by Bill Singer Esq

August 28, 2020

California Mother And Son Arrested For Operating A $5 Million Mortgage Modification Fraud (DOJ Release)

SEC Charges Former Broker with Fraud (SEC Release)
I remember all too well the 2008 near-panic when the Reserve Primary Fund did the unthinkable and broke the buck in the aftermath of the Lehman Brothers implosion. Pointedly, the losses sustained by the Reserve Primary Fund as a result of its ownership of $785 million in Lehman Brothers debt overwhelmed the sponsor's ability to maintain the buck - all the more exacerbated when the once $62 billion fund was swamped with nearly $40 billion in redemption demands during a two-day period. Having breached the walls at Reserve, the money market panic spread to the withdrawal of some $300 billion during the week of September 15, 2008, or nearly 14% of the market's assets.  As a result of defensive measures taken to preserve assets and cull out threatened performers, by the last two weeks of September 2008, money market funds had reduced their holdings of commercial paper by $200.3 billion, or 29% - which then presented the credit markets with additional pressure, and some would say effectively froze them and shut them down. Perhaps fueled in part by that memory of 2008, CNBC's Darla Mercado reports in part that:

Late next month, Vanguard will transition its $125.3 billion Prime Money Market Fund to a government money market fund, investing "almost exclusively" in U.S. government securities, cash and repurchase agreements backed by government securities or cash.
CityWire's Rosenberg explores the SEC's recent case against California-based investment adviser Mark J. Boucher and his company Strategic Wealth Advisor Group Services Inc., charged with misappropriating over $2.2 million from advisory clients. Among the lurid details reported by Rosenberg:

In one instance, Boucher allegedly misappropriated funds from a client to purchase a Chevrolet Camaro, and then, over a year later, sold the car to the client. According to the complaint, Boucher also attempted to conceal his misappropriations, including forging a letter, purportedly from a client from whom Boucher misappropriated over $1.5 million in trust funds, in an attempt to convince SEC staff that the client had gifted him the funds a few days before she died.
Suleman Alhassan, 38, pled guilty in the United States District Court for the Western District of North Carolina to wire and mail fraud conspiracy, and he was sentenced to 51 months in prison plus one year of supervised release, and he was ordered to pay $1,127,989 as restitution, and to be deported upon completion of his prison term. As alleged in part in the DOJ Release:

[B]eginning in or about March 2016, Alhassan conspired with other individuals in the United States and in Ghana to execute romance and precious metals scams that defrauded more than 20 older victims of over $1 million. According to court records, Alhassan and his co-conspirators operated the romance scheme by creating fake profiles and using fake identities on internet dating websites and other methods to target potential fraud victims, who were frequently elderly, with false promises of a romantic relationship. 

According to court records, as part of the scheme, and in addition to developing fake romantic relationships with the victims, Alhassan and others falsely claimed to own large quantities of gold located in Ghana. The victims were induced to send money to Alhassan and others, purportedly to pay for expenses to ship the gold from Ghana to the United States and other countries, where it could be sold.  As Alhassan previously admitted in court documents, he and his co-conspirators falsely told the victims that they would receive a share of the profits when the gold was brought and sold in the United States.

According to court records, Alhassan and his co-conspirators further induced victims to send funds under the guise of securing travel documents for the person with whom the victims believed to be in a romantic relationship. To convince victims to continue to send money, Alhassan and his co-conspirators invented fictitious obstacles, including problems with travel visas and customs related issues. The co-conspirators continued to call, text, and e-mail the victims and insist that more money was needed. Alhassan and his co-conspirators employed these tactics until the victims either ran out of money or discovered the fraudulent nature of the scheme.  

Court records show that, in August 2017, Alhassan was stopped at the Charlotte airport with more than $130,000 in proceeds derived from the fraud. Alhassan continued to be involved in the scams even after law enforcement seized the funds, until he was arrested and charged federally for his role in the fraudulent scheme.
In a Civil Forfeiture Complaint filed in the United States District Court for the District of Columbia North Korean actors are charged with two hacks of virtual currency exchanges whereby they allegedly stole millions of dollars' worth of cryptocurrency, which was laundered through Chinese over-the-counter cryptocurrency traders.  Related criminal and civil actions were announced in March 2020. As alleged in part in the DOJ Release:

[I]n July 2019, a virtual currency exchange was hacked by an actor tied to North Korea.  The hacker allegedly stole over $272,000 worth of alternative cryptocurrencies and tokens, including Proton Tokens, PlayGame tokens, and IHT Real Estate Protocol tokens.  Over the subsequent months, the funds were laundered through several intermediary addresses and other virtual currency exchanges.  In many instances, the actor converted the cryptocurrency into BTC, Tether, or other forms of cryptocurrency - a process known as "chain hopping" - in order to obfuscate the transaction path.  As detailed in the pleadings, law enforcement was nonetheless able to trace the funds, despite the sophisticated laundering techniques used.

As also alleged in the pleadings, in September 2019, a U.S.-based company was hacked in a related incident.  The North Korea-associated hacker gained access to the company's virtual currency wallets, funds held by the company on other platforms, and funds held by the company's partners.  The hacker stole nearly $2.5 million and laundered it through over 100 accounts at another virtual currency exchange.

The funds from both of the above hacks, as well as hacks previously detailed in a March 2020 forfeiture action (1:20-cv-00606-TJK), were all allegedly laundered by the same group of Chinese OTC actors.  The infrastructure and communication accounts used to further the intrusions and fund transfers were also tied to North Korea.
In a criminal Complaint filed in the United States District Court for the Southern District of New York Eva Christine Rodriguez and Sergio Lorenzo Rodriguez were each charged with one count of conspiracy to commit wire fraud and one count of wire fraud.  As alleged in part in the DOJ Release:

From approximately March 2014 through April 2018, EVA CHRISTINE RODRIGUEZ and SERGIO LORENZO RODRIGUEZ (the "Defendants") owned and/or managed a series of mortgage modification companies through which they perpetrated a scheme to defraud and attempt to defraud financially distressed consumers who were facing or were at imminent risk of foreclosure through deceptive marketing practices.  Those companies were National Servicing Center, American Home Servicing Center, National Advocacy Center, National Advocacy Group, and Capital Home Advocacy Center (collectively, the "Companies").  Among other ways, the Defendants charged desperate homeowners thousands of dollars in prohibited advance fees by tricking them into believing that they had been pre-approved by their lender or servicer for a mortgage modification; falsely represented prohibited advance fees to be closing costs or other non-prohibited costs; fraudulently claimed that the Companies achieved success rates of 95 percent or higher for mortgage modifications; and made empty promises of a no-risk money back guarantee.  As a result of their intentional misrepresentations, and misrepresentations that they encouraged their subordinates to make, the Defendants induced thousands of homeowners to pay an aggregate of more than $5 million in prohibited advance fees to the Companies, including a large number of consumers who were ultimately denied mortgage modifications or who received modification offers that were less favorable than they had been led to expect at the time they paid advance fees.

In February 2018, the Federal Trade Commission brought a civil lawsuit against EVA CHRISTINE RODRIGUEZ and SERGIO LORENZO RODRIGUEZ, among others, in federal court in Santa Ana, California.  That civil action resulted first in a temporary restraining order and then a permanent injunction barring EVA CHRISTINE RODRIGUEZ and SERGIO LORENZO RODRIGUEZ from marketing and selling all debt relief products and services.  As alleged in the Complaint, the Defendants flouted those judicial orders by having a relative create another mortgage modification company named 1st Premier Asset Solutions, which the Defendants operated using aliases and some of the same deceptive practices., the SEC charged Dominic A. Tropiano with having violated the antifraud provisions Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Without admitting or denying the allegations in the Complaint, Tropiano agreed to the entry of a judgment that permanently enjoins him from violating the charged provisions of the federal securities laws, and provides that the amount of disgorgement, prejudgment interest, and civil penalties will be determined by the court at a future date. As alleged in part in the SEC Release:

[T]ropiano placed more than 500 trades of complex, high-risk securities called leveraged exchange traded funds (ETFs) for at least 40 retail customer accounts. According to the complaint, the leveraged ETFs Tropiano purchased were high-risk securities intended to be traded by sophisticated investors and not held for periods longer than one day. As alleged, however, Tropiano recommended and purchased leveraged ETFs for the accounts of retail investors who had only moderate risk profiles and long-term investment objectives. The complaint alleges that Tropiano held the leveraged ETFs in those accounts for weeks and, in some cases, months. The complaint also alleges that Tropiano fraudulently traded leveraged ETFs for certain customers without their authorization. According to the complaint, as a result of Tropiano's fraudulent trading in leveraged ETFs, his customers sustained combined losses of more than $1 million.

Rep Suspended by FINRA for Role in Introducing a Customer To Another Customer In Need of a Business Loan
In the Matter of Jesse T. Kovacs, Respondent (FINRA AWC 2019062253101)

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, Jesse T. Kovacs submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Jesse T. Kovacs was first registered in 2006 and by 2019, he was registered with FINRA member firm O.N. Equity Sales Company ("ONESCO"). The AWC alleges that Jesse T. Kovacs "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 Kovacs had violated FINRA Rules 3280 and 2010; and the self regulator imposed upon him a three-month suspension from association with any FINRA member in all capacities. In light of Kovacs' financial status, FINRA did not impose a fine. As alleged in part in the AWC: 

In early 2018, Kovacs introduced two of his customers at ONESCO for the purpose of negotiating a loan from Customer A to a business owned by Customer B. The introductory meeting was held at Kovacs' office and he was present. Kovacs also was present at a second meeting between his two customers while the terms of the loan were being negotiated. On March 28, 2018, Customer A made a $150,000 loan to Customer B's business pursuant to a promissory note, in which Customer B and his business promised to repay Customer A $150,000, plus 15% annual interest, in 18 monthly installments beginning in May 2018. Customer A sold securities in her ONESCO account in order to fund the loan. The promissory note was a security. 

Additionally, throughout 2018 and 2019, Kovacs periodically relayed communications between Customer A and Customer B about the securities transaction. Kovacs communciated [sic] Customer A's concerns about late and missed payments, and provided advice to Customer B about potential amendments to the terms of the promissory note. 1

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Footnote 1: Ultimately, Customer A was not repaid in full and filed an arbitration against Kovacs and ONESCO.

In a recent FINRA regulatory settlement, we come across a rep who was sucked into the fascinating, fabulous, and perplexing world of cryptocurrency. As an assistant to the head of a so-called prospective crypto trading exchange, the rep showed impressive enthusiasm in taking on all sorts of tasks in furtherance of the business. On top of that, he invested his own money into the venture and purportedly secured funds from others. In some lines of work, you can get involved in outside business activities and securities transactions without giving your employer prior notice. Not so on Wall Street. 

Markets, Morality, and Mobsters: Remarks at the 18th Annual Corporate Governance Conference (Speech by SEC Commissioner Hester Peirce)
In the latest of her provocative commentaries on the dynamic in the regulation of markets and the markets that are regulated, SEC Commissioner Peirce enters the ring sans gloves and with the intent of engaging in a bare-knuckle brawl. You may not like what she has to say. Frankly, I don't think she cares whether you fully embrace her views. I think that she wants to shake you up and force you to reexamine all that you hold dear about corporate regulation, and then she wants you to be open to the prospect of abandoning what you once thought right and accepting the opposite with equal zeal. I admire someone who brings such passion to work. That being said, I don't find myself in wholesale agreement with Commissioner Peirce on many of her forays into consciousness raising, but I do believe that everyone benefits from the exercise. You may emerge willing to accept some modification of you view. You may cling even tighter to the prior rectitude of your position. Whatever the end result, at least give Peirce credit for her passion and the integrity of what she thinks. In her most recent exposition, Peirce emerges as a defender of the faith of the Business Roundtable's "Statement on the Purpose of a Corporation." I urge you to read her full speech, however, in pertinent part Peirce asserts [Ed: footnotes omitted] that in:

[e]xplicitly rejecting shareholder primacy, the statement committed the CEOs to lead their companies for the benefit of all stakeholders, specifically identifying customers, employees, suppliers, communities, and notably last: shareholders, who merely "provide the capital."  

Some have argued that this statement is nothing but a public-relations move and does not reflect a fundamental shift in the way these businesses will operate.  For example, a forthcoming study reaches this conclusion by finding that the corporate guidelines for the signatory companies continue to demonstrate a commitment to shareholder primacy and that only one company whose CEO signed the statement received board approval to do so. If this is the accurate interpretation, then the deceitfulness displayed by C-suites across the nation reveals a deep moral failure that will only further damage the reputation of capitalism and corporate America. 

Let's take a more generous view and assume that the CEOs actually believe in a stakeholder model of capitalism and are actively working to implement such a vision.  There is evidence that suggests such a model does not benefit investors or stakeholders.  Despite the commitment to deliver value to all of these stakeholders, research demonstrates that the signatory companies have not historically delivered on those promises for any of the identified constituencies. As Matt Levine caustically summarized the findings: "[c]ompanies that signed on to the Business Roundtable's statement do worse for shareholders, sure, but they also do worse for employees and the environment.  They pay their CEOs more, though, which is perhaps the real point." 

Moreover, the statement's dilution of the role of shareholders in corporate governance reduces management's accountability for their actions.  Success is no longer measured solely by shareholder value, but instead is defined, at least in part, by the good intentions of management with respect to favored stakeholders.  Indeed, Business Roundtable President and CEO Joshua Bolten recently defended his thesis that this has been "a good year for stakeholder capitalism," by noting that CEOs advocated for policy makers to increase the federal minimum wage, paid family medical leave, and pandemic relief.  Measuring the value of companies by the loudness with which they call for government mandates portends a bleak future for American capitalism.  Companies add value to society by seeking to be profitable for their shareholders.  To do so, they make things people need.  In the process, they enrich their workers, business partners, and communities.