Securities Industry Commentator by Bill Singer Esq

December 4, 2020


Brummer v. Wey Parties Enter Into Joint Stip for Teleconferencing Depositions of Former FINRA Exec Ketchum and Current CLO Colby 


Former CEO and Founder of Technology Company Pleads Guilty to Investment Fraud Scheme (DOJ Release)

Former Investment Manager Charged in Scheme to Defraud Life Insurance Company (DOJ Release)

Maryland Lawyer Charged with Defrauding Financial Institutions and Other Entities to Obtain Control over $12.5 Million of Somali Sovereign Assets (DOJ Release)


CFTC Orders Vitol Inc. to Pay $95.7 Million for Corruption-Based Fraud and Attempted Manipulation / First CFTC Enforcement Action Involving Foreign Corruption (CFTC Release)


(BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/5571/finra-arbitration-radle/
As far as these things go, this one started out in the usual fashion with a disgruntled public customer suing for losses sustained from his purchase of annuities. Frankly, annuities are something of a lightning rod when it comes to consumer lawsuits, so, you know, nothing all that out of the ordinary here. The bottom line is some $250,000 in compensatory damages, which Respondents didn't seem in that much of a rush to pony up. And thus the FINRA arbitration moves to a hearing -- or so you would think, except, gee, things just go off the road, into a ditch, and up in flames for the Claimant.

http://brokeandbroker.com/PDF/BrummerStipDiscNYSup201203.pdf
In this high-profile, nasty, defamation lawsuit, Plaintiff Brummer; Defendants Wey and NYG Capital; and non-parties FINRA, former FINRA Chair/Chief Executive Officer Richard Ketchum, and current FINRA Chief Legal Officer Robert L. D. Colby entered into a Joint Stipulation.
For our most recent coverage of this case, read: "NYS Appellate Division Hands Defendants Setback In Lawsuit With Brummer And FINRA" (BrokeAndBroker.com Blog / October 22, 2020)
http://www.brokeandbroker.com/5499/brummer-finra-wey-appellate-division/
As set forth in part in the Joint Stipulation:

2. Notwithstanding anything herein, as permitted under applicable public health guidelines, regulations, and orders, some or all of the participants in the deposition process (Signatories, deponents, court reporters, and counsel) may be physically present in the same location. No individual, however, may be physically present in the same location as the deponent without the consent of the deponent and his counsel. 

3. The Signatories agree to use Veritext for court reporting, videoconference, and remote deposition services. The Signatories agree that a Veritext employee or agent may attend each remote Deposition to transcribe the Deposition, troubleshoot any technological issues that may arise, and administer the virtual breakout rooms. In order to facilitate email invitations for the deposition and the provision of exhibits to the deponent and all counsel, no later than five business days before the deposition, the Signatories shall provide to Veritext each attendee's name, email address, physical address for purposes of delivery of exhibits, and a phone number where they will be reachable on the day of the deposition. 

4. The transcripts produced of the remote depositions taken pursuant to this protocol may be used at a trial or hearing to the same extent that any transcript of an in-person deposition may be used at trial or hearing, and the Signatories agree not to object to the use of these transcripts on the basis that the Deposition was taken remotely. 

5. Subject to paragraph 2, the deponent, court reporter, and counsel for the Signatories may each participate in the videoconference Depositions remotely and separately. Each person attending a deposition shall be visible to all other participants, his or her statements shall be audible to all participants, and he or she should each strive to ensure his or her environment is free from noise and distractions. 

6. No counsel shall initiate a private conference, including through text message, electronic mail, or the chat feature in the videoconferencing system, with any deponent while a question is pending, except for the purpose of determining whether a privilege should be asserted, and only after the deponent has stated on the record that he needs to consult counsel regarding a question of privilege.

7. During breaks in the Depositions, the Signatories and the deponent may use the breakout room feature provided by Veritext, which simulates a live breakout room through videoconference. Conversations in the breakout rooms shall not be recorded. The breakout rooms shall be established by Veritext before the Deposition and controlled by Veritext. Alternatively, during breaks in the Depositions, the Signatories and the deponent may use phones for breakout conversations. 

. . .

15. The defending attorney and other counsel shall make objections and interpose instructions not to answer in substantially the same manner as he or she would at an in-person deposition. If the defending attorney or other counsel is unable to make objections and interpose instructions not to answer by reason of technical difficulties, such a failure to object or to instruct shall not be construed as waiver, and the defending attorney or other counsel shall have an opportunity to object or to instruct as soon as the technical problem has been remedied. Objections and instructions not to answer shall be regarded as timely if made as soon as practicable.

. . .

17. The Signatories agree to work collaboratively and in good faith with Veritext to assess each participant's technological abilities and to troubleshoot any issues at least 48 hours in advance of each Deposition so any adjustments can be made. The Signatories also agree to work collaboratively to address and troubleshoot technological (including audio or webcam) issues that arise during a Deposition and make such provisions as are reasonable under the circumstances to 6 address such issues. This provision shall not be interpreted to compel any Signatory to proceed with a Deposition where the deponent cannot hear or understand the other participants or where the participants cannot hear or understand the deponent or the other participants. Any period on the record during which a deponent or questioner could not hear or understand the questions or answers due to technical difficulties shall not count toward any applicable time limitation for the Deposition. 

18. Every deponent shall endeavor to have technology sufficient to appear for a remote Deposition (i.e., a webcam and computer or telephone audio), and bandwidth sufficient to sustain the remote Deposition. Counsel for each deponent shall consult with the deponent prior to the Deposition to ensure the deponent has the required technology. If not, counsel for the deponent shall endeavor to supply it prior to the Deposition. In the case of third-party deponents, counsel noticing the Deposition shall supply any necessary technology that the deponent does not have. 

19. The Signatories agree that any of the following methods, or a combination of one or more of the following methods, for administering exhibits may be employed during a remote Deposition: 

i. Counsel noticing the Deposition may choose to send physical copies of documents that may be used during the Deposition to the deponent, the deponent's counsel, the other Signatory's counsel, and the court reporter. In that event, noticing counsel shall so inform the deponent's counsel, the other Signatories' counsel, and the court reporter prior to shipping the documents and shall provide tracking information for the package. Such documents shall be delivered by 12:00 p.m. ET the business day before the Deposition. Counsel for the deponent, the other Signatories' counsel, and the court reporter shall confirm receipt of the package by electronic mail to counsel noticing the Deposition. If physical copies are mailed, every recipient of a mailed package shall keep the package sealed until the Deposition begins and shall unseal the package only when on the record, on live webcam, and during the Deposition when directed to do so by the counsel taking the Deposition. This same procedure shall apply to any physical copies of documents that any other counsel intends to use for examining the deponent. 

ii. Counsel noticing the Deposition may choose to send a compressed .zip file of the documents that may be used during the Deposition via electronic mail to the deponent, the deponent's counsel, the other Signatories' counsel, and the court reporter. The .zip file shall be delivered by 12:00 p.m. ET the business day before the Deposition. Counsel for the deponent, the other Signatories' counsel, and the court reporter shall confirm receipt of the .zip file by electronic mail to counsel noticing the Deposition. The .zip file shall be password protected, and counsel taking the Deposition shall supply the password via electronic email immediately prior to the commencement of the Deposition. No recipient of a .zip file shall open the .zip file until the Deposition begins and when directed to do so by the counsel taking the Deposition. If sending documents by electronic mail, counsel will be mindful of file size limitations, which presumptively should be less than 50 MB.

iii. Counsel may introduce exhibits electronically during the Deposition, by using Veritext's Exhibit Share document-sharing technology, by using the screen-sharing technology within the videoconferencing platform, or by sending the exhibit to the deponent and all individuals on the record via electronic mail. Any exhibit introduced pursuant to this subsection must be marked as an exhibit and be shared with and viewable in its entirety by all participants. 

iv. Regardless of which method of document-sharing is used, the deponent and the defending counsel shall have the right to private copies of the exhibits that allow the deponent and defending counsel to independently and fully navigate the exhibit while the Deposition is in progress on the record. 

20. Counsel for the Signatories may keep any document or exhibit used during the Depositions, in accordance with the Stipulation and Order for the Production and Exchange of Confidential Information (Doc. Nos. 1087, 1088) entered by the Court in this action, and shall return any physical documents not used during the Depositions to the counsel who sent them originally within five business days following the completion of the Depositions, and shall not retain in any manner any documents not used during the Depositions. Counsel noticing the Depositions shall include a pre-paid return shipping label in any package of documents mailed to a deponent. . . .

Bill Singer's Comment: For industry respondents and their counsel, I commend the above Joint Stipulation for your consideration when you may need to negotiate teleconferencing rules for the conduct of a FINRA proposed Rule 8210 sanctioned on-the-record interview ("OTR") or any OHO/NAC hearings. 

https://www.sec.gov/news/press-release/2020-306
Without admitting the findings in an SEC Order
https://www.sec.gov/litigation/admin/2020/34-90565.pdf, The Cheesecake Factory Incorporated agreed to pay a $125,000 penalty and to cease-and-desist from further violations of the charged provisions. The action is the SEC's first charging a public company for misleading investors about the financial effects of the pandemic. As alleged in part in the SEC Release:

[I]n its SEC filings on March 23 and April 3, 2020, The Cheesecake Factory stated that its restaurants were "operating sustainably" during the COVID-19 pandemic. According to the order, the filings were materially false and misleading because the company's internal documents at the time showed that the company was losing approximately $6 million in cash per week and that it projected that it had only 16 weeks of cash remaining. The order finds that although the company did not disclose this internal information in its March 23 and April 3 filings, the company did share this information with potential private equity investors or lenders in connection with an effort to seek additional liquidity. The order also finds that, although the March 23 filing described actions the company had undertaken to preserve financial flexibility during the pandemic, it failed to disclose that The Cheesecake Factory had already informed its landlords that it would not pay rent in April due to the impacts that COVID-19 inflicted on its business.

https://www.justice.gov/opa/pr/former-ceo-and-founder-technology-company-pleads-guilty-investment-fraud-scheme
Former Trustify, Inc. Chief Executive Officer/Co-founder Daniel Boice pled guilty in the United States District Court for the Eastern District of Virginia to one count of securities fraud and one count of wire fraud. As alleged in part in the DOJ Release:     

[B[eginning in 2015,  Boice fraudulently solicited investments in Trustify, a privately held technology start-up company that connected customers with private investigators.  Boice raised approximately $18.5 million from over 90 investors by, among other things, falsely overstating Trustify's financial performance.  Despite representing to investors that their funds would go towards operating and growing Trustify's business, Boice diverted at least $3.7 million for his own benefit and to fund his lifestyle.  This included the purchase of a home in Alexandria, Virginia, travel by private jet, and furnishing a seaside vacation home.      

https://www.justice.gov/opa/pr/former-investment-manager-charged-scheme-defraud-life-insurance-company
In an Indictment filed in the United States District Court for the Middle District of North Carolina
https://www.justice.gov/opa/press-release/file/1342711/download, Bradley Reifler was charged with four counts of wire fraud and one count of perjury. The DOJ Release alleges in part that Reifler, the  Chief Executive Officer/Founder of Forefront Capital Holdings:

served as an investment advisor for over $34 million in assets belonging to the life insurance company.  Rather than investing the $34 million in permissible investments, the defendant invested funds in high-risk, "junk", or self-dealing investments and otherwise diverted funds for his personal and business use.  The indictment further alleges that after a 2016 audit of the trust assets raised concerns about investments made by the defendant, the defendant concealed the fraud by falsifying and causing others to falsify supporting documentation, including valuations, promissory notes, and agreements, purporting to underly investments made with the trust assets. 

The indictment also alleges that the defendant submitted a false declaration in connection with a civil suit brought by the life insurance company, falsely swearing, under penalty of perjury, that all investments had been approved and that all of the funds had been invested in debt instruments.  As a result of the defendant's scheme, the life insurance company was only able to recoup a portion of the approximately $34 million that it entrusted to the defendant, was unable to pay out on claims by its beneficiaries, and was placed in rehabilitation. 

https://www.justice.gov/opa/pr/maryland-lawyer-charged-defrauding-financial-institutions-and-other-entities-obtain-control
In an Indictment filed in the United States District Court for the District of Maryland
https://www.justice.gov/opa/press-release/file/1342831/download, lawyer Jeremy Schulman was charged with one count of conspiracy to commit mail fraud, wire fraud and bank fraud; three counts of wire fraud; one count of mail fraud; one count of bank fraud; one count of conspiracy to commit money laundering; and four counts of money laundering. As alleged in part in the DOJ Release:

[F]rom 2009 to 2014, Schulman conspired with others to fraudulently obtain control of financial assets held on behalf of the Somali government around the world and enrich himself and his co-conspirators by taking a portion of those assets in fees and expenses. 

To effectuate this scheme, Schulman and others allegedly created false documents regarding Schulman's authority to recover assets on behalf of the Somali government.  Schulman presented these allegedly false documents to a federally insured bank and other institutions.  In addition to using forged and fraudulent documents, Schulman also allegedly made material misrepresentations and concealed material information from these banks and institutions regarding his authority to act on behalf of the Somali government. 

As a result of this scheme, Schulman, his co-conspirators, and the law firm where Schulman was a shareholder ultimately obtained control of approximately $12.5 million of frozen Somali funds.  Schulman caused his law firm to improperly retain more than $3.3 million of the Somali funds while remitting the rest to the Somali government.  Schulman received hundreds of thousands of dollars of additional compensation from his law firm based on the revenue from the scheme, and allegedly engaged in further fraud and money laundering to cause a portion of the funds retained by his law firm to be wired to accounts for the benefit of his co-conspirators.  

Vitol Inc. Agrees to Pay Over $135 Million to Resolve Charges for Bribery Schemes in Latin America / First Ever Parallel Foreign Bribery Enforcement Action with the Commodity Futures Trading Commission (DOJ Release)
https://www.justice.gov/opa/pr/vitol-inc-agrees-pay-over-135-million-resolve-foreign-bribery-case#:~:text=(Vitol)%2C%20the%20U.S.%20affiliate,and%20to%20resolve%20a%20parallel
-and-
https://www.cftc.gov/PressRoom/PressReleases/8326-20

Vitol Inc., the U.S. affiliate of the Vitol group of companies, which together form one of the largest energy trading firms in the world, agreed to a combined total criminal penalty of $135 million to resolve bribery charges with law enforcement authorities in the United States and Brazil (subject to a $45 million creidt for the resolution of an investigation by the Brazilian Ministério Público Federal for conduct related to the company's bribery scheme in Brazil.).  Separately, Vitol agreed to disgorge over $12.7 million to CFTC and to pay the CFTC a penalty of $16 million related to trading activity not covered by the deferred prosecution agreement with the department.   

In furtherance of an Information filed against Vitol in the United States District Court for the Eastern District of New York and charging the firm with two counts of conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act ("FCPA"), Vitol entered into a deferred prosecution agreement ("DPA") whereby Vitol Inc. and Vitol S.A. agreed to: (i) continue to cooperate with the department in any ongoing investigations and prosecutions relating to the charged conduct, including conduct of individuals, (ii) enhance their compliance programs, and (iii) report to the department on the implementation of their compliance programs.

The DPA https://www.justice.gov/usao-edny/press-release/file/1342821/download
The Information https://www.justice.gov/usao-edny/press-release/file/1342826/download 

As alleged in part in the DOJ Release:

[B]etween 2005 and 2014, Vitol and its co-conspirators paid bribes of more than $8 million to at least four officials at Brazil's state-owned and controlled oil company Petróleo Brasileiro S.A. - Petrobras (Petrobras).  Vitol paid these bribes in exchange for receiving confidential Petrobras pricing and competitor information.  Vitol concealed the scheme through the use of intermediaries and a fictitious company that facilitated the payments to offshore accounts and, ultimately, to the Petrobras officials.

Vitol also admitted that from 2011 to 2014, it bribed at least five additional Petrobras officials in exchange for receiving confidential pricing information that Vitol used to win fuel oil contracts with Petrobras.  During that scheme, a consultant acting on behalf of Vitol engaged in back-channel negotiations with a Houston-based Petrobras official.  The parties would then hold staged negotiations, ultimately settling on the pre-arranged price that allowed for bribes to be paid from Vitol to the Petrobras officials.  Several of the co-conspirators communicated using alias email accounts and code names, including "Batman," "Tiger," "Phil Collins," "Dolphin," "Popeye" and "Beb." 

Finally, Vitol admitted to participating in a second conspiracy to bribe officials in Ecuador and Mexico in order to obtain and retain business in connection with the purchase and sale of oil products.  Between 2015 and July 2020, Vitol agreed to offer and pay more than $2 million in bribes to those officials.  In furtherance of this scheme, Vitol and its co-conspirators entered into sham consulting agreements, set up shell companies, created fake invoices for purported consulting services and used alias email accounts to transfer funds to offshore companies involved in the conspiracy-all while knowing that the funds, at least in part, would be used to pay bribes to Ecuadorian and Mexican officials.

In related matters, the government recently unsealed charges against Houston-based former Petrobras official Rodrigo Berkowitz, who pleaded guilty in the Eastern District of New York on February 8, 2019 to one count of conspiracy to commit money laundering.  In addition, the government recently unsealed charges against one of the intermediaries involved in the Brazil scheme, Luiz Eduardo Andrade, who pleaded guilty on September 22, 2017 to one count of conspiracy to violate the FCPA in connection with a related bribery scheme.  Both individuals are awaiting sentencing.  Further, on September 22, 2020, a federal grand jury in the Eastern District of New York returned an indictment against Javier Aguilar, a Vitol trader, for his alleged role in the Ecuador scheme.

The CFTC issued an Order 
https://www.cftc.gov/media/5346/enfvitolorder120320/download filing settling charges against Vitol Inc. for manipulative and deceptive conduct. As alleged in part in the CFTC Release:

[V]itol committed fraud by making corrupt payments (e.g., bribes and kickbacks) to employees and agents of certain state-owned entities (SOEs) in Brazil, Ecuador, and Mexico to obtain preferential treatment and access to trades with the SOEs to the detriment of the SOEs and other market participants. Vitol concealed its fraud by funneling the corrupt payments through offshore bank accounts or to shell entities, and at times, issuing deceptive invoices for purported "market intelligence" or "sell support." Vitol engaged in this conduct to secure unlawful competitive advantages in trading physical oil products and derivatives.

The order further finds that Vitol committed fraud by making corrupt payments to employees and agents of the Brazilian SOE in exchange for confidential information, including confidential material involving Vitol's trading in physical oil and derivatives. This material included at times the specific price information-referred to internally at Vitol as the "gold number"-at which Vitol understood it would win a supposedly competitive bidding or tender process. The order also finds that in August 2014 and July 2015, Vitol acted to manipulate two Platts fuel oil benchmarks for the purpose of benefiting Vitol's related physical and derivatives positions, including positions obtained while in possession of confidential information. By attempting to manipulate such benchmarks, Vitol was also attempting to manipulate -and would have distorted-numerous futures, swaps, and other derivatives and physical trades that price in reference to those benchmarks. If successful, such conduct would have been to the detriment of market participants who held opposing positions-including Vitol's counterparties-or those who rely on the benchmarks as an untainted price reference for U.S. physical or derivative trades.

The order recognizes Vitol's cooperation with the Division of Enforcement's investigation in the form of a reduced civil monetary penalty. 

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, Great American Investors, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Great American Investors, Inc. has been a FINRA member firm since 1992 with 13 registered representatives at 5 branches. The AWC alleges that the firm "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA deemed that Great American Investors, Inc. had violated FINRA Rules 3310(c) and 2010; and the self-regulator imposed upon its member firm a $5,000 fine. In part, the AWC alleges that:

In accordance with Rule 3310(c) and the supplementary material to the rule, GAI is required to conduct annual (on a calendar-year basis) independent testing of its AML compliance program. GAI failed to do so three times over a five-year time period between 2016 and 2020. Specifically, the firm's 2016 AML test was not independent because the test was conducted by a firm registered representative who was supervised by and reported to GAI's AML Compliance Officer. In addition, the firm failed to conduct its annual independent AML test in 2017; instead GAI conducted the 2017 test with its 2018 AML test. Lastly, the firm failed to conduct its annual independent AML test in 2019; instead GAI conducted the 2019 test with its 2020 AML test.