The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

August 31, 2020








Elon Musk demonstrates brain-computer tech Neuralink in live pigs (CNBC Release by Lori Ionnou and Christina Farr)
https://www.cnbc.com/2020/08/28/elon-musk-demonstrates-brain-computer-tech-neuralink-in-live-pigs.html
A fascinating but scary story -- like, really, really scary but, still, fascinating. As reported in part by CNBC's Ionnou and Farr:

Along the way, Musk has made some highly ambitious claims about the technology's potential.

Installing a chip to replace a small portion of the human skull, for instance, could restore limb function, improve human movement, resolve issues with eyesight and hearing, and help with diseases like Parkinson's, the company claims. At the Friday presentation, Musk listed a number of different conditions that Neuralink is currently focused on, including memory loss, blindness and paralysis.

He said the process of "getting a Link" will not require general anesthesia and he hopes that a robot will "do the entire surgery" in about an hour. Musk said that people who get the Neuralink device are left with a tiny scar after the electrodes are inserted in the brain -- and if done well, there won't be any blood. He described it as about the size of a large coin. 

Insider Trading Is Rife With No Regulators in Sight / From ADT to Fitbit, intense trading precedes official disclosure of corporate transactions (Bloomberg by Matthew A. Winkler)
https://www.bloomberg.com/opinion/articles/2020-08-31/insider-trading-is-rife-with-no-regulators-in-sight?srnd=premium
It's an old lament voiced by Bloomberg's Winkler: Where are Wall Street's regulators when it comes to policing insider trading? In this most recent iteration of such hand-wringing, Winkler notes in part that:

There's no end to the parade of corporate transactions preceded by trading underlying their selective disclosure. And there's no sign regulators see the possibility of insider trading in at least a dozen of them during the past year, including Google's offer for Fitbit, LVMH's plan to buy Tiffany, Avaya's strategic partnership with RingCentral, and Stryker's taking over Wright Medical. 

That's too bad because financial markets provide the clearest signals of people profiting from confidential information. 

August 2019 was an especially busy month for unexplained, nicely timed trades. They began before Carl Icahn disclosed his stake in Cloudera Inc. Muddy Waters Research acknowledged short-selling Burford Capital, and Philip Morris announced talks to acquire Altria Group. Millions of dollars were pocketed from anomalous trades with the belated disclosure of these deals, according to data compiled by Bloomberg identifying unusual price fluctuations.

Bill Singer's Comment: 

I would commend to Winkler's consideration one of my favorite George Bernard Shaw quotes: The love of fairplay is a spectator's virtue, not a principal's.

Watch a professional soccer game. You ever notice how a player seems crippled for life by a phantom trip and miraculously recovers when the penalty is called?

Watch a professional baseball game. You ever  notice how an outfielder pretends to have cleanly caught the ball when he knows he one-hopped it?

Watch a professional football game. You ever see linebacker intentionally drive his helmet into the quarterback's chin long after the ball was thrown?

Watch a professional basketball game. You ever see one player "accidentally" elbow another in the face when contesting a rebound?

One of the quirks of human nature is that many athletes want to win at all costs, even if it means cheating. What other explanation is there for using corked bats or deflated footballs,  or taking steroids?

To some extent, Wall Street is just another sports venue where professionals play a game from the opening to the closing bell and will do whatever it takes to win.  Just as the famed New York Yankee pitcher Lefty Gomez said that "I'd rather be lucky than good," the maxim on Wall Street seems to be that "I'd rather book a profit than be honest."  The truth, the sad truth, folks, is that there is little integrity in the markets and the only thing on the level on Wall Street is the water in the toilet bowls.

Which is not to say that an honest trader can't make money in a rigged market.  Which is not to say that everyone on Wall Street is a cheat.  But it is to say that those who know better should stop pretending that Wall Street is afflicted with only a handful of crooks and that our markets are paragons of virtue.

The pros in the pits and at the trading desks throw sharp elbows and will stomp on you when you're down.  It's a game played dirty and for keeps. You think that you can go up against the big boys? Hey, good luck with that. This ain't amateur hour.  The motto of Wall Street always has been and always should be "Caveat Emptor."

When you step onto the playing field that's Wall Street, watch your back, put your mouthpiece in, and don't expect the refs to protect you.

https://www.justice.gov/usao-ndil/pr/federal-criminal-probe-failure-chicago-bank-adds-new-charges-and-four-former-employees
A Superseding Indictment filed in the United States District Court for the Northern District of Illinois
https://www.justice.gov/usao-ndil/press-release/file/1311166/download charges Robert Kowalski with conspiracy to commit embezzlement and falsify bank records; and also charges former Washington Federal Bank for Savings Chief Financial Officer and Treasure Rosalie C. Corvite, former Corporate Secretary Jane V. Iriondo, former loan servicer Alicia Mandujano, and former loan officer Cathy M. Torres with falsifying bank records.  Additionally, the Superseding Indictment renews bankruptcy fraud charges against Robert Kowalski and Jan Kowalski, and adds several tax counts against Robert Kowalski for allegedly failing to file income tax returns and filing false personal and corporate returns for various years. As alleged in part in the DOJ Release:

Washington Federal Bank for Savings was shut down in December 2017 after the Office of the Comptroller of the Currency determined that the bank was insolvent and had at least $66 million in nonperforming loans.  Last year, two Illinois attorneys - bank customer ROBERT M. KOWALSKI and his sister, JAN R. KOWALSKI - were indicted for allegedly defrauding Robert Kowalski's creditors and the trustee in his bankruptcy case by concealing cash and property belonging to Robert Kowalski's bankruptcy estate.  A second superseding indictment returned Thursday renewed the bankruptcy fraud charges against the Kowalskis and added four former Washington Federal employees to the case.  The new indictment also identified the primary creditor victim of the bankruptcy fraud as the Federal Deposit Insurance Corporation.  The employees allegedly conspired with Robert Kowalski and higher-ranking bank officials to embezzle at least $29 million in bank funds in the years preceding the closure.  The employees and the higher-ranking officials allegedly transferred the money to Robert Kowalski and others, often without any documentation, and falsified bank records to conceal the embezzlement from the OCC and the FDIC, the latter having become the receiver of the bank and provider of approximately $90 million to make account holders whole.

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https://www.sec.gov/news/press-release/2020-198
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In an Indictment filed in the United States District Court for the District of Maryland, Dennis Mbongeni Jali, John Erasmus Frimpong, and Arley Ray Johnson were charged with conspiracy, wire fraud, securities fraud, and money laundering. As alleged in part in the DOJ Release:

According to the indictment, Jali was the sole owner of The Smart Partners LLC ("Smart Partners"), which Jali organized in Delaware on January 12, 2017.  From at least August 2017 until May 2019, Smart Partners was doing business as "1st Million Dollars," or "1st Million," which Jali caused to be registered as a limited liability company with the Maryland Department of Assessments and Taxation on January 17, 2019.  1st Million's offices were headquartered in Largo, Maryland, but had satellite offices elsewhere, including Florida.  Jali served as 1st Million's Chief Executive Officer and Frimpong served as Chief Marketing Officer.  From May 2018 until May 2019, Johnson served as 1st Million's Chief Operating Officer.

As alleged in the indictment, 1st Million presented itself as a wealth management and financial literacy company, with its core business offering being a 12-month guaranteed investment contract.  These investment contracts, entitled "Corporate Guarantees," allegedly guaranteed individuals who invested money with 1st Million monthly returns ranging from 6% to 35% of the initial investment.  At the end of the investment period, the contract allegedly promised that the investor would receive the return of all of the principal invested.  The indictment alleges that the contract represented that the client's principal would be invested in foreign currency or cryptocurrency.  Cryptocurrency is digital or virtual currency that does not exist in any physical form and is not issued by any government or centralized entity.  Cryptocurrency is designed to work as a secure medium of exchange and can be bought, sold, and exchanged on various online platforms and exchanges.

The indictment alleges that Jali, Frimpong, and Johnson recruited victims to invest in 1st Million by holding promotional events at upscale hotels and event spaces, attending church-sponsored events intended to target investments from churchgoers, and representing themselves as religious men more interested in the philanthropic financial freedom of others than personal financial gain.  The defendants allegedly presented themselves as "pastors," and told prospective investors that 1st Million's work was in furtherance of God's mission as it helped churches and their members achieve personal wealth and financial freedom.

To encourage individuals to invest with 1st Million, Jali, Frimpong, and Johnson allegedly falsely stated that: investors' principal would be held in a trust account protected from any financial instability of 1st Million or market volatility; that 1st Million and its traders, including Jali and Frimpong were fully licensed and qualified to pursue their investment activities by all relevant federal regulators, including the Securities and Exchange Commission (SEC), and had extensive experience trading on Wall Street; that the financial condition of the company was healthy and earning astronomical profits; and that the investors' money would be used to invest in foreign currency and cryptocurrency markets, when in fact, investors' money was used to pay earlier investors and diverted for the personal use of Jali, Frimpong, and Johnson.  To increase the amount of money obtained from investors, the defendants allegedly promised higher guaranteed rates of return to 1st Million investors who invested greater amounts of money in the investment contracts.

As detailed in the indictment, Jali, Frimpong, and Johnson promised investors that they could increase the returns on their investments, typically by 0.5% per month, for every new investor they successfully recruited to 1st Million.  The defendants allegedly hired "agents" of 1st Million to organize recruiting events to attract more investors, in exchange for a higher return on the agents' investments.  Jali further recruited investors by allegedly misrepresenting his own personal wealth and exhibiting a lavish lifestyle purportedly paid from his successful currency trading on his personal accounts when, in fact, his lavish lifestyle was allegedly paid for with diverted investor funds.  For example, the indictment alleges that Jali spent at least $47,000 of investor money on luxury vehicles and approximately $78,000 on private jets that he used to fly on personal or semi-personal trips, including a flight from Charlotte, North Carolina to Washington, D.C. on January 9, 2019, with Jali, his wife, and his three children as the only passengers.

Over the course of the conspiracy, the indictment alleges that the defendants persuaded or attempted to persuade investors to provide them with wire transfers, checks, and cash totaling more than $28 million, from numerous victims, under the fraudulent pretense of investing in the foreign exchange and cryptocurrency markets.  The indictment seeks a money judgment of at least $28,021,868.01, including $2,481,994.57 seized from 10 bank accounts associated with the defendants, and a 2016 Porsche SUV.

https://www.sec.gov/litigation/complaints/2020/comp-pr2020-198.pdf, the SEC alleges that the Defendants violated the antifraud provisions of the federal securities laws; additionally, Access2Assets was named as a Relief Defendant. In part the SEC Release alleges that:

[D]ennis Jali, John Frimpong, and Arley Johnson, directly and through their companies 1st Million LLC and The Smart Partners LLC, falsely told investors that their funds would be used by a team of skilled and licensed traders for foreign exchange and cryptocurrency trading, promising risk-free returns of between 6% and 42%. The complaint alleges that the defendants often targeted vulnerable African immigrants and exploited their common ancestry and religious affiliations. The complaint further alleges that Jali, who claimed to be a pastor and falsely held himself out as a self-made millionaire and expert trader, rented office space to conduct in-person meetings and give the appearance of a legitimate company. According to the complaint, the defendants diverted investor funds for personal use and to make Ponzi payments to prior investors. 

https://www.cftc.gov/media/4446/enfdenniscomplaint082820/download, the CFTC charged Dennis Jali, a South African citizen who previously resided in Maryland, with orchestrating a $28 million Ponzi scheme; and further charged Arley Ray Johnson and John Frimpong with fraudulently soliciting funds from members of the public for the "1st Million Pool" through and on behalf of 1st Million LLC, Smart Partners LLC, and Access to Assets LLC. As alleged in part in the CFTC Release:

The defendants allegedly targeted members of church communities by portraying the 1st Million Pool as a means to obtain financial freedom and support charitable religious causes. According to the complaint, the defendants lied about their backgrounds and trading experience, as well as the likelihood of profit and risk of loss. For example, the defendants promised pool participants they would receive rates of return on trading of up to 30% per month and falsely represented that Jali had a proven track record of positive returns. The complaint further alleges that Jali told certain participants that he had achieved positive returns of over 1700%. Jali also allegedly proclaimed in an online promotional video that his trading had generated returns of "400% in six weeks, all live trading in real markets" and that he was so successful a "forex trader" that "my wife has never worked a day in her life."

The complaint alleges that instead of generating trading profits as promised, defendants used at least $18 million of participants' funds to make Ponzi scheme-like payments for the purpose of creating the illusion of profitability. The complaint also charges all defendants with failing to register with the CFTC as required.  


https://www.justice.gov/opa/pr/herbalife-nutrition-ltd-agrees-pay-over-122-million-resolve-fcpa-case
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Herbalife Nutrition Ltd. entered into a deferred prosecution agreement ("DPA") with DOJ's Criminal Division's Fraud Section and the U.S. Attorney's Office for the Southern District of New York in connection with a criminal Information filed charging Herbalife with one count of conspiracy to violate the books and records provision of the FCPA. In settling the charges, Herbalife agreed to pay total penalties of more than $122 million to resolve the government's investigation into violations of the Foreign Corrupt Practices Act ("FCPA"), which comprises a criminal penalty of over $55 million and approximately $67 million to be paid to the SEC.    As alleged in part in the DOJ Relese:

[B]etween 2007 and 2016, Herbalife knowingly and willfully conspired with others in a scheme to falsify its books and records and provide corrupt payments and benefits to Chinese government officials.  Herbalife carried out the scheme for the purpose of obtaining, retaining, and increasing Herbalife's business in China by, among other things, (1) obtaining and retaining certain direct selling licenses for its wholly-owned subsidiaries in China (Herbalife China); (2) improperly influencing certain Chinese governmental investigations into Herbalife China's compliance with Chinese laws; and (3) improperly influencing certain Chinese state-owned and state-controlled media for the purpose of removing negative media reports about Herbalife China. 

For example, in late 2006 through early 2007, during the time period that Herbalife China's application for its first direct selling license was pending, Herbalife China provided corrupt payments and benefits to Chinese government officials, including government officials responsible for awarding that direct selling license, and falsely recorded and booked those corrupt expenses.  Around the same time period, an officer and high-level executive of Herbalife suggested to a high-level executive of Herbalife China that Herbalife China personnel falsify expense reimbursement documents in connection with entertainment of Chinese government officials.

Thereafter, Herbalife continued to provide improper payments and benefits to Chinese government officials.  Herbalife also continued to falsely record certain improper payments and benefits as "travel and entertainment expenses" and to maintain false Sarbanes-Oxley sub-certification letters in Herbalife's books, records, and accounts.

As part of the agreement, Herbalife agreed to continue to cooperate with the U.S. government in any ongoing or future criminal investigations concerning Herbalife, its executives, employees, or agents.  In addition, under the agreement, Herbalife agreed to enhance its compliance program and to report to the government on the implementation of its enhanced compliance program. 

The government reached this resolution with Herbalife based on a number of factors, including the failure to timely disclose the conduct that triggered the investigation; the nature and seriousness of the offense, which spanned approximately a decade and involved high level employees; the lack of an effective compliance program at the time of the misconduct; and credit for the company's cooperation.  Herbalife also engaged in remedial measures, including terminating and disciplining individuals who orchestrated the misconduct, adopting heightened controls and anti-corruption protocols, and significantly increasing the resources devoted to compliance.

The criminal monetary penalty for Herbalife reflects a 25 percent reduction off the bottom of the U.S. Sentencing Guidelines fine range because of Herbalife's full cooperation with the government's investigation.

Separately, as set forth in an SEC Order  https://www.sec.gov/litigation/admin/2020/34-89704.pdf, Herbalife agreed to cease and desist from committing violations of the books and records and internal accounting controls provisions of the FCPA; and the company agreed to pay over $58.6 million in disgorgement and prejudgment interest of more than $8.6 million, and to report on the status of its remediation and compliance measures for a three-year period.  As alleged in part in the SEC Release:

Herbalife's Chinese subsidiaries made payments and provided meals, gifts, and other benefits to Chinese officials in connection with obtaining sales licenses, curtailing government investigations of Herbalife China, and removing negative coverage of Herbalife China in state-owned media.  As set forth in the order, Herbalife China managers asked employees to falsify expense documents in an effort to conceal the improper payments.  The order finds that Herbalife executives received reports of high travel and entertainment spending in China and violations of Herbalife's internal FCPA policies, but failed to detect and prevent improper payments and benefits and the falsified expense reports.  The order further finds that the improper payments and benefits were recorded inaccurately in Herbalife's books and records and that Herbalife failed to devise and maintain a sufficient system of internal accounting controls.  

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, James Michael Rapisarda submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that James Michael Rapisarda entered the industry in 1988 with FINRA member firm LPL Financial LLC. The AWC alleges that James Michael Rapisarda " 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 Rapisarda had violated FINRA Rules 3280 and 2010; and the self regulator imposed upon him a $5,000 fine and a 15-business-day suspension from association with any FINRA member in all capacities. The AWC alleges in part that:

Between February and March 2018, while registered through LPL, Rapisarda participated in private securities transactions involving a company in which he was a minority shareholder (the "Company"). Specifically, Rapisarda recommended that four individuals, including one LPL customer, invest in the Company. Three of those individuals subsequently paid a total of more than $10,000 to purchase shares in the Company. In addition, Rapisarda assisted each of the individuals with executing their purchases of the Company's shares.1 Rapisarda's participation in those securities transactions was outside the regular course and scope of his employment with LPL, and Rapisarda failed to provide prior written notice to LPL of the transactions or of his role in the transactions.
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Footnote 1: 1 Rapisarda did not receive any selling compensation associated with any of these transactions. 

ALSO SEE:

Visit the BrokeAndBroker.com PST Cases Archive
http://www.brokeandbroker.com/index.php?a=topic&topic=pst

http://brokeandbroker.com/PDF/Rule3280PSTAnalysis.pdf

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