Securities Industry Commentator by Bill Singer Esq

Court Denies "Alternate Theory of Guilt" Motion for Dismissal

United States of America v. Michael Watts, Defendant (EDNY Memorandum and Order)

Notice of Filing of a Proposed Rule Change to Amend the FINRA Codes of Arbitration Procedure to Increase Arbitrator Chairperson Honoraria and Certain Arbitration Fees (SEC Notice)

Ex-President of Ohio Healthcare Management Company Pleads Guilty in $59 Million Check Kiting Scheme Targeting S&T Bank (DOJ Release)

Six Defendants Charged in Scheme to Defraud Student Loan Programs of More Than $12 Million (DOJ Release)

FINRA Imposes Fine and Suspension on Rep for Pension Stream PSTs.

In the Matter of Troy R. Baily, Respondent (FINRA AWC)

FINRA Imposes Censure and Fine on Member Firm for Misclassifying Personal Expenses

In the Matter of CapFi Financial Partners LLC, Respondent (FINRA AWC)

FINRA Fines Small Firm And its Owner For Misclassification of Expenses (BrokeAndBroker.com Blog)

After a five-day trial, a jury convicted defendant Michael Watts ("Defendant") of conspiracy to commit securities fraud in violation of 18 U.S.C. §§ 371, 3551 et seq., conspiracy to commit wire fraud in violation of 18 U.S.C. §§ 1349, 3351 et seq., securities fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff, 18 U.S.C. §§ 2, 3551 et seq., conspiracy to commit money laundering in violation of 18 U.S.C. §§ 1956(h), 3551 et seq., and three counts of money laundering in violation of 18 U.S.C. §§ 1957(a), 1957(b), 2, and 3551 et seq., arising out of is participation in a stock manipulation scheme. Currently before the Court is Defendant's motion for a new trial pursuant to Federal Rule of Criminal Procedure 33. (Def. Mot., D.E. 812; Def. Br., D.E. 812-1; Gov't Opp., D.E. 822; Def. Reply, D.E. 828.) For the reasons that follow, Defendant's motion is DENIED.

HECC was a publicly traded "petroleum exploration and production" company that owned "21,000 square kilometers that borders Angola," Libya. (Superseding Indictment ¶ 5; Tr. 736.) Defendant's brother, who testified in his defense at trial, formed HECC around September 2009. (Tr. 734.) Galveston Bay Energy ("Galveston Bay") was a subsidiary of HECC and operated 18,000 acres of oil producing fields in Texas. (Tr. 735.) Defendant invested $15 million in HECC and served as a consultant who sought financing from investors or public and investor relations firms. (Tr. 769; 771-72.) Gleckman also invested in HECC and was a large shareholder. (Tr. 436:14-21.) By the end of 2014, oil prices started to decline and affected the oil and gas industry, including Galveston Bay's cash flow. (Tr. 409:22-410:15; 740-42; 752-53.) To raise capital at this time, HECC entered into a consulting agreement with Defendant, dated June 27, 2015, "to create awareness and hire investor relation firms and public relation firms." (Tr. 755; 760; DX E.) On April 13, 2016, HECC filed for bankruptcy. (GX 94.)

Around the end of July 2014, Isen introduced Defendant and Matz via conference call.3 (Tr. 72:24-73:12; 78:5-16; 778.) Matz testified that Defendant inquired as to how the Boiler Room operated and Matz provided examples of two companies he "previously promoted" and explained that he "increased volume, [ ] increased share price, and [ ] g[ave] support when it was needed." (Tr. 80:17-20; 86:6-14.) Matz expressed interest in promoting HECC but required "cash and possibly stock in the company" and that any agreement with the Boiler Room would reflect Keith Miller's signature4 because Matz was "kicked out of the stock industry." (Tr. 86:23-87:9.) Matz further explained to Defendant that the Boiler Room "supports" the stocks it promotes (Tr. 87:25-88:5), meaning that if a stock price dropped, the Boiler Room would buy the stock "back up, [and] bring it back to exactly where the price was, if exactly not where it was, as close as where we can get it so it looked like it never happened and then later on, we would cross those shares out to an investor" (Tr. 88:12-17, 89:14-24.) By "crossing shares with an investor," Matz elaborated that as a stock price dropped, the Boiler Room used trading accounts to "buy the stock back up" while it aggressively pushed the stock to investors to purchase. (Tr. 89:11-24.) As unknowing investors purchased the stock, the Boiler Room sold, or "cross[ed] out," the recently purchased stock. (Tr. 89:11-24.) 

C. Consulting Agreements between Defendant and the Boiler Room 

After the initial call, the Boiler Room entered into a consulting agreement, by Keith Miller, with Geoserve Marketing LLP,5 by Defendant, effective August 1, 2014. (GX 101A at 2.) The consulting agreement required that Geoserve issue the Boiler Room 75,000 restricted HECC shares and pay $25,000 a month in six biweekly installments of $12,500. (Tr. 156:7-21; GX 101A.) The Boiler Room and Defendant entered into three similar consulting agreements: (1) effective November 1, 2014, for 50,000 restricted HECC shares and $25,000 a month to be paid in bi-weekly installments of $12,500 (GX 161A); (2) effective February 1, 2015, for 125,000 restricted HECC shares (GX 155A); and (3) effective July 17, 2015 for 400,000 restricted HECC shares (GX 144A). Although the consulting agreements state that the Boiler Room was an "independent consultant and has knowledge and experience to provide marketing as the Client believes can assist it in furthering execution of its public awareness" (see, e.g., GX 101A at 1), Matz testified that the Boiler Room did not actually perform any of those services but was "promoting, pushing penny stocks, increasing volume, and giving support when needed" (Tr. 168:2- 172:12).6 Matz also explained that the consulting agreements were required to clear the restricted HECC shares received as compensation with a brokerage firm. (Tr. 172:13-21; 246:15-21; see GX 113; GX 113A.)

D. The HECC Stock Manipulation Scheme 

The Boiler Room pushed HECC stock to potential investors--victims--from approximately August 2014 through April 2016. (Tr. 90:12-15.) Matz described the Boiler Room's promotional activity in two phases. Initially, the Boiler Room increased HECC trade volume to keep the price "stable" and provided support where needed. (Tr. 90:16-23.) Eventually, the Boiler Room's operations "morphed into a different kind of animal" where the Boiler Room, with Defendant, Isen, among others, purchased free trading HECC shares and pushed a large volume of shares at a "fast and heavy pace." (Tr. 90:24-91:5; 91:13-92:5.) 

Side Bar: Federal Rule of Criminal Procedure: Rule 33. New Trial

(a) Defendant's Motion. Upon the defendant's motion, the court may vacate any judgment and grant a new trial if the interest of justice so requires. If the case was tried without a jury, the court may take additional testimony and enter a new judgment.

(b) Time to File.

(1) Newly Discovered Evidence. Any motion for a new trial grounded on newly discovered evidence must be filed within 3 years after the verdict or finding of guilty. If an appeal is pending, the court may not grant a motion for a new trial until the appellate court remands the case.

(2) Other Grounds. Any motion for a new trial grounded on any reason other than newly discovered evidence must be filed within 14 days after the verdict or finding of guilty.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change 

FINRA is proposing to amend the Code of Arbitration Procedure for Customer Disputes ("Customer Code") and the Code of Arbitration Procedure for Industry Disputes ("Industry Code") (together, "Codes") to increase arbitrator chairperson ("Chair") honoraria. Specifically, the proposed rule change would: (1) increase the additional hearing-day honorarium Chairs receive for each hearing on the merits from $125 to $250 and (2) create a new $125 Chair honorarium for each prehearing conference in which the Chair participates. Under the proposed rule change, these increases would be funded primarily by minimal increases to the member surcharge and process fees for claims of more than $250,000 or claims for non-monetary or unspecified damages. The proposed rule change would also increase filing fees and hearing session fees for customers, associated persons and members bringing claims of more than $500,000 or claims for non-monetary or unspecified damage. The text of the proposed rule change is available on FINRA's website at http://www.finra.org, at the principal office of FINRA and at the Commission's Public Reference Room.

. . .

In all, on average the fees for an arbitration case would increase by $252, or 2.65 percent. FINRA believes that the cost of arbitration should be borne by the users of the forum, without imposing a significant barrier to public customers who bring arbitration claims to the forum. Thus, the fees are designed to be borne 85 percent by member firms and 15 percent by claimants. . . . 

[S]osna engaged in what is commonly known as "check kiting" scheme. The term "check kiting" refers to a form of check fraud which involves taking advantage of the float - the time between presentment of a check and the actual receipt of funds - to make use of non-existent funds in a checking or other bank account. The purpose of check kiting is to falsely inflate the balance of a checking account in order to allow written checks that would otherwise bounce to clear.

The court was advised that during the time of the check kite, Sosna was the president of Premier Healthcare Management (Premier), located in Blue Ash, Ohio. It owned and operated nine nursing care facilities in southern and central Ohio. Premiere provided in-facility, post-acute, and long-term care for individuals recovering from medical procedures, as well as assisted living services through various corporate entities. Each entity had a subsidiary relationship with Premier and operated individual bank accounts at various banks to include S&T Bank, headquartered in Indiana Pennsylvania, and First Financial Bank, headquartered in Cincinnati, Ohio.

According to information provided during the plea hearing, Sosna wrote checks between various S&T Bank and First Financial Bank accounts under his control and associated with Premier, in increasing dollar amounts. This was done to manipulate the numerical balance in the accounts and thereby create the false and fraudulent appearance that the defendant had sufficient legitimate available funds in various accounts, and to trick the banks into honoring checks drawn against accounts with insufficient funds. Between May 15, 2020, and May 18, 2020, by writing and negotiating checks, Sosna, sent more than $118,000,000.00 through S&T Bank and First Financial Bank, which were unfunded amounts and were the equivalent of obtaining money from the banks without actual properly secured loans. A total of 203 checks were negotiated in execution of his scheme. S&T Bank incurred a loss of $59,240,000.00.

The indictment alleges that the defendants engaged in a scheme to operate an off-site learning center in Columbus, Georgia, on behalf of Apex, a now-defunct school offering programs in theology and other subjects.  As part of the scheme, the defendants allegedly recruited individuals with offers of "free money" to act as fake "students" and fraudulently apply for federal financial aid.  The indictment alleges that these "students" were told that they did not have to do any work or attend classes, but they would have to split their financial aid with the defendants, who used federal financial aid funds to personally enrich themselves.

The indictment further alleges that the defendants submitted plagiarized work for the "students," took their tests, and logged on to the school's web site as if they were the "students" to deceive the DOE into believing they were real students making adequate academic progress.  The defendants falsified admission packets and applied for federal financial aid in the names of the students, falsely certifying that they were the student and that the financial aid would be used for educational purposes.  Instead, the financial aid was used to enrich the recruited "students" and the defendants.  The indictment alleges that the defendants defrauded the DOE of at least $12,000,000 in taxpayer funds.

Between February and May 2017, Baily solicited investors to purchase securities in Future Income Payments, LLC. FIP represented itself as a structured cash flow investment, claiming to purchase pensions at a discount from pensioners and then selling a portion of those pensions as a "pension stream" to investors. FIP generally promised investors a 7% to 8% rate of return on their investment. During the Relevant Period, Respondent sold $210,000 in FIP purchase agreements to four investors, including three who were customers of Respondent's employer member firm. Respondent received a total of $8,900 in commissions in connection with these transactions. 

At all times during the stated period, Respondent's employer member firm prohibited its registered representatives from participating in private securities transactions without prior written approval from the firm. Respondent did not provide written notice to his firm prior to participating in the transactions involving FIP, nor did he obtain written approval from the firm. 

In April 2018, FIP ceased business, owing nearly $300 million in unpaid investor payments. In a March 12, 2019 indictment, the United States charged FIP and its owner, Scott A. Kohn, with conspiracy to engage in mail and wire fraud related to FIP's operations.

Bill Singer's Comment: Okay, so, someone, anyone, please read "FINRA Fines and Suspends Rep For Alleged Pension Stream PSTs" / In the Matter of Lonna R. Dehn Ristvedt, Respondent (FINRA AWC)
http://www.rrbdlaw.com/5480/securities-industry-commentator/#ristvedt, and explain to me why Respondent Ristvedt got hit with a $5,000 fine and a four-month suspension but Respondent Baily got hit with a $5,000 fine  and a six-month suspension. What exactly did Baily do (or not do) that earned him two more months of suspension than Ristvedt? Ristvedt "participated in the sale of $163,320 in FIP purchase agreements to two investors in four separate transactions. Respondent received at least $5,457.66 in commissions in connection with these transactions;" versus Bailey "sold $210,000 in FIP purchase agreements to four investors, including three who were customers of Respondent's employer member firm. Respondent received a total of $8,900 in commissions in connection with these transactions." 

From February 2016 to February 2018, MK -- CapFi's owner, CEO, and CCO -- used the firm's credit card and bank account to pay for approximately $265,000 of his personal expenses. MK's personal expenses included plane tickets and lodging accommodations for family members, as well as purchases for goods or services with no business nexus. 

CapFi subsequently misclassified MK's personal expenses as business expenses of the firm, rather than as compensation to MK, on the firm's general ledger, causing the firm's books and records and its FOCUS reports to be inaccurate. For example, for the fourth quarter of 2016, CapFi reported business expenses of approximately $100,000 on its general ledger and in its quarterly FOCUS report, of which approximately $75,000 were personal expenses of MK. As a result, CapFi's books and records, as well as its FOCUS report, understated the amount of compensation paid to MK and overstated the firm's expenses. 

• Securities Industry Commentator
• Bill Singer