Securities Industry Commentator by Bill Singer Esq

November 16, 2020

SEC Charges Investment Advisory Firms and Broker-Dealers in Connection with Sales of Complex Exchange-Traded Products / More than $3 Million to be Returned to Harmed Retail Investors as Part of Ongoing Risk-Based Initiative (SEC Release)

SEC Charges Atlanta Investment Adviser with Fraudulent Securities Offering and Misappropriating Investor Funds and Obtains Temporary Restraining Order (SEC Release)

SEC Awards Over $1.1 Million to Whistleblower for Independent Analysis (SEC Release)

Jay Clayton, Chairman of the Securities and Exchange Commission, confirmed today that after serving for more than three and a half years, he will conclude his tenure at the end of this year. 

Chairman Clayton was sworn in on May 4, 2017, and will leave the SEC as one of its longest serving Chairs. . . .
In October 2020, the SEC published both a press release and an Order disclosing the settlement In the Matter of Andeavor LLC. It seemed like the SEC's Chair and four Commissioners had reached a unanimous decision. They hadn't. The belated disclosure of a Dissent, however, rendered two dissenting commissioners as mere disembodied voices whispering to us from the shadows. Not the best way to enunciate policy or pursue regulation.
Without admitting or denying the findings, American Portfolios Financial Services/American Portfolios Advisors Inc., Benjamin F. Edwards & Company Inc., Royal Alliance Associates Inc., Securities America Advisors Inc., and Summit Financial Group Inc. each agreed to cease and desist from future violations of the charged provisions, a censure, and to pay disgorgement and prejudgment interest. Additionally, the order against:

 American Portfolios further finds that the firm failed reasonably to supervise certain brokerage representatives who recommended their customers buy and hold a volatility-linked product; and
Benjamin Edwards further finds that the firm failed reasonably to supervise certain brokerage and advisory representatives who recommended their clients buy and hold two volatility-linked products. 

American Portfolios and Benjamin Edwards each agreed to pay a civil penalty of $650,000, Securities America and Summit each agreed to pay a civil penalty of $600,000 and Royal Alliance agreed to pay a civil penalty of $500,000. READ the SEC Orders:

As alleged in part in the SEC Release:

The five actions concern sales of volatility-linked exchange-traded products. As set forth in the orders, the value of the products attempted to track short-term volatility expectations in the market, typically measured against derivatives of the CBOE volatility index. According to the orders, the offering documents for the products made clear that the short-term nature of these products made investments in the products more likely to experience a decline in value when held over a longer period. The orders find that, contrary to these warnings, and without understanding the products, representatives of the firms recommended their customers and clients buy and hold the products for longer periods, including in some circumstances, for months and years. The orders further find that the firms failed to adopt or implement policies and procedures regarding suitability and volatility-linked exchange-traded products.
In a Complaint filed in the United States District Court for the Northern District of Georgia
("NDGA"), the SEC charged Christopher W. Burns, Investus Advisers LLC d/b/a Dynamic Money LLC, Investus Financial LLC, and Peer Connect LLC with violations of the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940; and, additionally, the Complaint named as a Relief Defendant Meredith Burns (Christopher Burn's ex-wife). NDGA entered an Order temporarily restraining the defendants from violating the charged provisions of the federal securities laws, instituting an asset freeze, and ordering other relief. As alleged in part in the SEC Release:

[B]urns, through his investment adviser firm Investus Advisers LLC d/b/a Dynamic Money LLC, sold more than $10 million in promissory notes issued by two of his other companies-Investus Financial LLC and Peer Connect LLC-to investors. The complaint alleges that Burns falsely told investors that he would use investor funds for a peer-to-peer lending program for businesses in need of capital. Burns allegedly claimed that the notes were backed by collateral and that they presented little or no risk. According to the complaint, the peer-to-peer lending program was a sham, and Burns spent the money he raised to repay earlier investors, fund his lifestyle, and elevate his status as an investment adviser by purchasing tens of thousands of dollars of airtime for his local radio show. The complaint further alleges that Burns increased his promissory note sales in recent months, then disappeared with investor proceeds in late September 2020.

SEC Awards Over $1.1 Million to Whistleblower for Independent Analysis (SEC Release)
The SEC awarded over $1.1 million to a whistleblower whose independent analysis led the staff to look at new conduct during an ongoing investigation. The SEC Release asserts that the "whistleblower's information and exemplary assistance helped the agency bring an emergency action preventing further investor harm.  This whistleblower examined publicly available materials and conducted an analysis that revealed important new insights into the securities law violations, which helped the SEC protect investor assets from dissipation by the wrongdoer." In adopting the recommendation of the Claims Review Staff, the SEC noted that SEC Order Determining Whistleblower Award Claim ('34 Act Rel. No. 90412, Whistleblower Award Proc.. File No. 2021-7 / November 13, 2020) it had:

positively assessed the following facts: (1) Claimant's information was significant as it caused staff to re-focus an ongoing investigation and inquire into different conduct; (2) Claimant provided exemplary and continuing assistance to the staff which saved significant Commission time and resources; and (3) Claimant's information and assistance were critical to the Commission's ability to successfully bring an emergency action before assets could be dissipated.

The Order further asserted in Footnote 2 that:

Claimant's information was based on Claimant's "independent analysis," a constituent element of "original information." Specifically, Claimant examined and evaluated publicly available materials that provided important insight into possible securities violations that were not apparent from the face of the public materials themselves., the SEC alleged that former Wells FArgo & Co. Community Bank head Carrie L. Tolstedt violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and with aiding and abetting violations of Exchange Act Sections 10(b), 13(a), and 13(b)(2)(A) as well as Exchange Act Rules 10b-5, 13a-1, 13a-13, and 12b-20. As alleged in part in the SEC Release:

[F]rom mid-2014 through mid-2016, Tolstedt publicly described and endorsed Wells Fargo's "cross-sell metric" as a means of measuring Wells Fargo's financial success despite the fact that this metric was inflated by accounts and services that were unused, unneeded, or unauthorized. The complaint further alleges that Tolstedt signed misleading sub-certifications as to the accuracy of Wells Fargo's public disclosures when she knew or was reckless in not knowing that statements in those disclosures regarding Wells Fargo's cross-sell metric were materially false and misleading.
After a five-day jury trial in the United States District Court for the Southern District of New York, Doinal LaGuardia, the Chief Executive Officer/Co-Founder of L-R managers, LLC, was convicted of one count each of securities fraud, investment adviser fraud, and wire fraud. As alleged in part in the DOJ Release:

From in or about 2013 through in or about 2017, LAGUARDIA solicited millions of dollars from investors for the LR Global Frontier Master Fund and two related feeder funds (collectively, the "Frontier Funds"), which had a stated focus on investments in "frontier" markets in Latin America, Central and Eastern Europe, the Middle East, Africa, and Asia.  Contrary to LAGUARDIA's representations, and in breach of his duties to investors in the Frontier Funds, LAGUARDIA misappropriated more than $1.2 million in investors' money to finance L-R Managers' payroll, rent for its office space on Park Avenue in Manhattan, and hundreds of thousands of dollars in charges on the firm's credit card, among other unauthorized expenses.  At least $191,000 of the misappropriated money went directly to, or for the benefit of, LAGUARDIA personally.

In one example, in 2013, LAGUARDIA solicited an $800,000 investment in the Frontier Funds from an investor ("Investor-1").  Upon receipt of Investor-1's money, an L-R Managers employee sent an email to LAGUARDIA and another person asking for approval to forward the $800,000 to the Frontier Funds.  LAGUARDIA responded, "Dont [sic] wire anything yet!"  LAGUARDIA then caused approximately $390,000 of Investor-1's investment never to be transmitted to the Frontier Funds, but instead to be used to pay himself approximately $52,000 and for various other personal and business expenses.

By September 2015, L-R Managers faced substantial financial difficulties.  On September 1, 2015, an L-R Managers principal sent an email to LAGUARDIA and others at the firm stating that it would be "ethically troubling to accept money into the [Frontier Funds] when [L-R Managers] can no longer support . . . payroll and mission critical services."  Nevertheless, just a few days later, a new investor solicited by LAGUARDIA ("Investor-2") made a $2 million investment into the Frontier Funds.  Prior to this investment, LAGUARDIA concealed his firm's near insolvency from Investor-2 and did not disclose that the Frontier Funds had been paying substantial expenses for L-R Managers, contrary to the representations in the funds' offering documents.  LAGUARDIA then proceeded, over the course of several months, to use a substantial portion of Investor-2's investment in the Frontier Funds to continue paying himself and subsidizing his firm's business expenses.
In a FINRA Arbitration Statement of Claim filed in March 2020, associated person Claimant Sherer sought the expungement of an unsettled, customer complaint from his Central Registration Depository record ("CRD")Respondent Aegis Capital did not participate in the expungement hearing and did not oppose the request for expungement. The customer did not participate in the expungement hearing but opposed the expungement request by attorneys' affirmation dated September 21, 2020. . In recommending expungement, the sole FINRA Arbitrator made a Rule 2080 finding that the customer's claim, allegation, or information is factually impossible or clearly erroneous; and the claim, allegation, or information is false. The Arbitrator offered this rationale:

A preponderance of the evidence submitted by Claimant supports his claim that the arbitration award in the underlying customer dispute, in which Claimant was not named and did not appear, was based on substantive flagrant misrepresentations by the customer. The customer's misrepresentations were negligently not challenged by the firm's attorney, who at the time of such arbitration was in the midst of a personal disbarment and criminal procedure for which said attorney was later incarcerated. Evidence shows the new attorney, who took over representation of the firm shortly before the hearing date, was unable to discover evidence of fraudulent misrepresentations due to the Panel's refusal to extend discovery dates and/or further adjourn hearing dates. Among such discovery was the fact that the customer had filed a prior arbitration claim against a different brokerage house for the identical claims which would adequately refute his allegation that he was an inexperienced and naive investor. Evidence also indicated the customer was a police lieutenant, and a knowledgeable real estate speculator. 

The Arbitrator reviewed the affirmation submitted by the customer's attorney dated September 21, 2020. After consideration of same, the Arbitrator decided to grant the expungement request based upon all the evidence submitted. 

Accordingly, the Arbitrator found Claimant was not named in the underlying customer complaint which resulted in a disclosure on his CRD, and Claimant did not have an opportunity to defend himself. The Arbitrator found that the award issued against the Claimant's firm in the underlying case was false, based on a fraud, and is clearly erroneous.

Bill Singer's Comment: The firm's attorney, who at the time of such arbitration was in the midst of a personal disbarment and criminal procedure for which said attorney was later incarcerated. Now that's not something to come across everyday! Compliments to Sherer's lawyer who did a superb job with the expungement claim: Irwin Weltz, Esq., of Weltz Kakos Gerbi Wolinetz Volynsky LLP,