Securities Industry Commentator by Bill Singer Esq

January 20, 2021

SEC Charges Father and Son Investment Advisers with Fraud (SEC Release)

A Hard Rain Falls On A Shattered Nation ( Blog)
As we transition from Trump to Biden, I am reminded of the Japanese art of Kintsugi, whereby broken pottery is repaired in a manner that venerates the shards rather than hides the cracks and missing pieces. For some who practice this form of repair, precious metals are mixed into the fine powder used to mend the shattered pottery. As such, the broken and imperfect are highlighted rather than hidden.
As a member organization, the Financial Industry Regulatory Authority ("FINRA") only affords votes to its member firms. Indeed, FINRA is a "self" regulatory organization to the extent that we all acknowledge that the "self" is its member firms in contradistinction to those firms' employees and customers. Unfortunately, FINRA's conflict of interest as engendered by its employer/member-firms comes at the expense of independence in the service of all other stakeholders. In a recent sexual harassment case brought by a former female employee against Morgan Stanley, we see how FINRA's rulebook favors its member firms. Worse, FINRA's management and its Board must be aware of the inequities yet fail to reform the conduct. 

In a Complaint filed in the United States District Court for the District of Arizona, the SEC charged Jacob C. Glick with violating the antifraud provisions of 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 further charged Glick with aiding and abetting Advanced Practice Advisors, LLC'x ("APA's") books and records violations under Section 204(a) of the Advisers Act and Rule 204-2(a)(7) thereunder. As alleged in part in the SEC Release:

[F]rom mid-2016 through mid-2018, Glick defrauded his advisory clients in three different ways. First, Glick allegedly placed the majority of his clients, many of whom had moderate or conservative risk tolerances, in unsuitable and risky investments that resulted in substantial losses. In addition, Glick failed to disclose the risks involved in these investments to clients. As also alleged in the complaint, after APA told Glick to liquidate the risky investments, he instead bought more of the same investments in client accounts. Second, Glick allegedly defrauded two advisory clients by representing that he would use their money for a real estate investment. As alleged, Glick instead misappropriated the clients' money and used it for his own options trading and to pay the clients purported interest payments on their investment. Third, after APA terminated Glick in June 2017, he allegedly misappropriated hundreds of thousands of dollars from an elderly widow who was a longtime advisory client. The complaint alleges that Glick told the client that he would invest all her money in real estate and instead, he misappropriated over $355,000 of her investment funds, including to pay his credit card bills. Glick also allegedly used a portion of her money to pay back other clients in Ponzi-like fashion.
In a Complaint filed in the IUnited States District Court for the Southern District of California, the SEC charged Michael Sztrom, David Sztrom, and Sztrom Wealth Management, Inc. with violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940; and, further charged David Sztrom with aiding and abetting APA's books and records violations of Section 204(a) of the Advisers Act and Rule 204-2(a)(7) thereunder. As alleged in part in the SEC Release:

[F]rom November 2015 through March 2018, David and Michael Sztrom provided investment advice to clients through Sztrom Wealth Management (SWM). As alleged, David and Michael Sztrom concealed from clients that Michael Sztrom was not associated with APA or any registered investment adviser and was not subject to compliance oversight by APA or any other firm. As alleged in the complaint, David, without any disclosure to clients, also allowed Michael to use APA's clearing broker for client transactions. Furthermore, and again without disclosure to clients, Michael impersonated David on telephone calls with the clearing broker on at least 38 separate occasions, leading the clearing broker to terminate its agreement with APA. The Sztroms' and SWM's deception and multiple failures to disclose breached their fiduciary duties to clients. The complaint also alleges that David Sztrom allowed Michael Sztrom to access to confidential client information and to use his personal cell phone, instead of APA's email system, to text advisory clients about their investments.

SEC Charges California Resident with Fraudulent Free Riding Scheme (SEC Release)
In a Complaint filed in the United States District Court for the Central District of California, the SEC charged Abhi Batra with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. In part the SEC Release alleges that Batra:

transferred money from bank accounts to brokerage accounts via ACH, then used the funds to purchase speculative options contracts. The complaint further alleges that when the options trades lost money, Batra would recall the ACH transfers to the brokerage firm by falsely representing to the bank that he had not authorized the initial transfers. As a result, Batra allegedly imposed his trading losses on the brokerage firms. By contrast, according to the complaint, when his trading was profitable, Batra kept the profits for himself. As alleged, Batra engaged in the free-riding scheme between 2016 and 2020 in brokerage accounts in his name, and in the names of six others, at times without their knowledge or consent. In total, Batra allegedly recalled more than $1 million in ACH transfers, withdrew approximately $98,000 in trading profits from the brokerage accounts, and left losses in the brokerage accounts estimated at $665,000.
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, Bryce R. Scarfone submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Bryce R. Scarfone entered the industry in 2015 with HSBC Securities (USA) Inc. and was first registered with the firm in 2017. In accordance with the terms of the AWC, FINRA found that Scarfone violated FINRA Rule 2010, and the self regulatory imposed upon him a Bar from associating with any FINRA member in any capacity. The AWC alleges that:

From May 24, 2019, through August 9, 2019, Scarfone was suspended in all capacities, pursuant to FINRA Rule 9552, for failing to timely respond to FINRA requests for information.  

As alleged in part in the AWC: 

On December 5, 2018, HSBC issued a check in the amount of $1,798.14 to Scarfone's roommate. On January 7, 2019, Scarfone intentionally and without authority altered the check to his roommate by changing the check number and making the check payable to himself. On the same day, Scarfone endorsed the check and deposited the check into his savings account at HSBC's bank affiliate . In addition, on the same day, the check cleared. On January 8, 2019, Scarfone transferred the $1,798.14 from his HSBC savings account into his HSBC checking account and afterwards used the funds for his own benefit.