Securities Industry Commentator by Bill Singer Esq

November 17, 2020

Shasta County and Butte County Residents Charged in $35M Ponzi Scheme (DOJ Release)
Okay, I'll admit it, the headline for this DOJ press release grabbed me. Nothing like a liquor and graveyard scam to pique my interest. 
Mikayel Hmayakyan, 43, pled guilty in the United States District Court for the Central District of Californiato two counts of bank fraud and one count of aggravated identity theft, and he was sentenced to 84 months in prison and ordered to pay $4,906,534 in restitution. Previously, Gayane Hakobyan, 70, admitted in June that she participated in the "bust-out" scheme by allowing others to open credit card accounts in her name; and she was sentenced to two years' probation and ordered to pay $223,235 in restitution. Also, Mikayel Hovhannisyan, 38,pled guilty in 2019 to one count of bank fraud; and he served a nine-month prison sentence and was ordered to pay $412,413 in restitution. Remaining Defendant Vahan Aloyan awaits trial. As alleged in part in the DOJ Release:

Hmayakyan and his co-conspirators fraudulently obtained credit cards - sometimes using their real names, but also with synthetic identities created with a combination of real and fictitious information. After the cards were run up to the credit limit, members of the scheme "paid down" the cards by submitting payments from accounts with insufficient funds or through other fake accounts to restore the credit line, which allowed them to make additional fraudulent purchases.

For example, from 2014 through 2017, Hmayakyan - with no intention to pay any credit card bills - charged and directed others to charge over $3 million to buy things such as liquor, Rolex watches and Forest Lawn cemetery plots.

The liquor was purchased on behalf of the now-closed Liquor Spot in Glendale, where co-defendant Vahan Aloyan, 45, of Glendale, was a manager. During the execution of a search warrant in 2016, law enforcement seized more than 37,000 bottles of alcoholic beverages, worth approximately $300,000, from the Liquor Spot. They also seized nearly $13,000 in cash from the store, as well as nearly $13,000 in cash and 37 watches and other jewelry items from Aloyan's residence, according to court documents.

In another set of scams, from 2010 through 2011 and again from 2015 through 2016, Hmayakyan applied for a number of loans in the name of real and fictitious people. He used the loan proceeds to finance the purchase of vehicles, but would not make the payments. Hmayakyan caused losses of more than $400,000 to the banks who gave those loans.

The total actual loss to which the financial institutions were exposed was $4,906,534.

RIABiz's Oisin Breen delves into the legally complex and morally challenging world of investor losses in the world of trading apps. As Breen notes in his opening remarks:

Robinhood allegedly implied a fiduciary duty to novice investors in the marketing of its 'game-like' trading app, even though it's a FINRA-regulated broker-dealer, new class action charges . . .
You got personal expenses. You got business expenses. If you work for a company, they tend to reimburse your business expenses. The personal expenses -- well, you know, that's on you. Except for some folks, that normally bright line between what's personal and what's business gets blurred. If you're lucky, the company reimburses you for your personal expenses and no one's any the wiser. If you're not so lucky, you could lose your job, get charged with a crime, and you come off looking like a crook. Of course there are times when certain expenses are debatable. I know it. You know it. On the other hand, c'mon, let's not blow smoke up our respective you know whats. If you're going to try and scam your employer, don't complain if you get caught.
Jacob Roach, 38, was convicted of bank fraud in the United States District Court for the District of Arizona and sentenced to 40 months in prison and ordered to pay $1.25 million in restitution to his 82-year-old victim. As alleged in part in the DOJ Release: "Roach was employed as a business relationship banker for a large bank in the Tucson area, where he fraudulently created a bank account in the victim's name, and thereafter embezzled $1.25 million for his own use. Roach resigned from his position before the bank discovered the scheme."
In an Indictment filed in the United States District Court for the Eastern District of California, Matthew Piercey was charged with wire fraud, mail fraud, money laundering, and witness tampering. DOJ also filed a Detention Memorandum against Piercy Why the need for Piercy's detention, you might wonder -- well consider this extract from the Memorandum:

A. Piercey already fled from arresting agents, has access to cash and a history of placing large amounts of money in others' names, and has significant family ties in Illinois. When FBI agents attempted to arrest Piercey in Redding this morning, he fled by car. First, he led law enforcement on a vehicle chase that went off-road twice in residential neighborhoods including next to an apartment complex, and then later onto Interstate 5 northbound. Law enforcement tracked Piercey's vehicle from the air during the chase. Then, Piercey abandoned his truck near the edge of Lake Shasta, pulled something out of it, and swam into Lake Shasta. Piercey spent some time out of sight underwater where law enforcement could only see bubbles. He remained in the frigid water for approximately 25 minutes. When Piercey finally emerged from the lake, law enforcement discovered that he had a Yamaha 350LI underwater submersible device . . . 

Separately, Kenneth Winton was charged in an Information with conspiracy to commit wire fraud. As alleged in part in the DOJ Release:

[F]rom about July 2015 through August 2020, Piercey carried out an investment fraud scheme that raised a total of approximately $35 million in investor funds. Piercey used Family Wealth Legacy and Zolla to solicit funds from investors using a variety of false and misleading statements, including about trading algorithms, the success of the companies' investment strategies, and the liquidity of investments. For example, Piercey solicited investor money for an "Upvesting Fund" that allegedly was an algorithmic trading fund with a history of success, but he admitted privately to an associate that there was no Upvesting Fund. Piercey first recruited Winton as an investor, then to assist with raising investor funds, and ultimately to take on management responsibilities at Zolla. From 2018 to 2020, Winton conspired with Piercey and made various false and misleading statements to investors, including about the success of Zolla's investment strategies, the reasons for delays in payment to investors, and the current location, value, and nature of Zolla investments.

Piercey and Winton used some investor money to make payments to other investors in a "Ponzi scheme." In total, they paid back approximately $8.8 million to investors. They used other investor money for various business and personal expenses, including two residential properties and a houseboat. Few, if any, liquid assets remain to repay investors.

According to court documents, Piercey also tampered with multiple witnesses by discouraging them from responding to grand jury subpoenas related to the investigation.

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, Philip Anthony Simone submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Philip Anthony Simone has been registered since 1987, and from May 2017 to April 2019, he was registered with AXA Advisors, LLC. The AWC asserts that Simone "has no relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Simone violated FINRA Rules 3240 and 2010, and the self-regulator imposed upon him a $12,500 fine, and an eleven-month suspension from associating with any FINRA member in any capacity, and an order of $35,000 in restitution to Customer A. The AWC alleges in part that:

From July 2017 through February 2019, Simone received six loans totaling $43,000 from his Finn customer A, and two loans totaling $90,000 from his Firm customer B. A and B were not immediate members of Simone's family, and were both approximately 71 years old as of the first loans. 

The loans Simone received from Customer A were not documented in a writing, but Customer A understood that the funds would be returned in full with 12% interest within one year. The loans Simone received from Customer B - were documented in two promissory notes dated December 20, 2018 and February 13, 2019, respectively, and executed by B and Simone. Both promissory notes provided that the loan would be repaid in full with 15% interest within 120 days. In July 2020, Simone repaid Customer B in full plus interest; as of October 2020, Simone had repaid Customer A approximately $8,000. 

Simone did not disclose or seek prior approval from AXA for the loans, even though he knew the Finn's WSPs prohibited him from borrowing funds from his Firm customers. Simone also falsely stated on two compliance questionnaires that he had not borrowed funds from a client, and made a false statement to Customer A in order to obtain additional time to repay the loans.  

. . .

In February 2019, Simone submitted a personal mortgage application to a third-party bank. In support of his application, Simone created and submitted three false documents: (1) an account statement for his personal Firm account, which he falsified using customer information to reflect that the value of the assets was approximately $30,000 instead of $10,000; (2) a pay stub issued by the Firm, which he falsified to reflect deferred compensation due and owing to him in the amount of $95,250; and (3) an employment verification letter that Simone executed using the name of a sales assistant who he misrepresented was a member of the Firm's Human Resources department. Simone submitted the falsified documents to ensure he qualified for the mortgage. 

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, Ming Dang submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Ming Dang entered the industry in 2008, and from August 2012 to November 2018, he was registered with Apollo Global Securities, LLC. The AWC asserts that Dang "has no relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Dang violated FINRA Rules 3270 and 2010, and the self-regulator imposed upon him a $5,000 fine and a five-month suspension from associating with any FINRA member in any capacity. The AWC alleges in part that:

From approximately October 2016 through November 2018, while he was associated with AGS, Dang provided financial analyses and related services to Company X, a holding company that was formed for the purpose of owning and managing insurance companies. Company X was founded by former employees of AGS's corporate parent and was engaged in the same line of business as an AGS affiliate. Among other work he performed for Company X, Dang helped prepare a business plan that was sent to prospective investors and assisted with formulating Company X's strategy for acquiring an entity that the AGS insurance affiliate had expressed an interest in acquiring. In 2018, while associated with AGS, Dang accessed materials belonging to the AGS insurance affiliate. 

While he was associated with AGS, Dang spent hundreds of hours rendering services to Company X. He reasonably expected to be compensated for this work. In 2019, after Dang left AGS, he became a salaried employee of Company X and was given an ownership interest in an affiliate of Company X. 

During the relevant period, AGS required registered representatives to request and receive written approval from the firm prior to engaging in any outside business activity. Dang failed to notify AGS of his outside business activities involving Company X and took affirmative steps to conceal his conduct. For example, Dang made false statements to the firm in two compliance questionnaires and a certification in which he denied engaging in any outside business activities.