Securities Industry Commentator by Bill Singer Esq

January 27, 2021

FINRA Appoints Scott W. Anderson as Head of Market Regulation and Transparency Services (FINRA Release / December 15, 2020)  . . . What's Up With This ????
About six weeks ago, FINRA published the above press release announcing its appointment of Scott W. Anderson as Executive Vice President and Head of Market Regulation and Transparency Services. Anderson replaced the recently deceased and highly respected Tom Gira. As noted in part in the FINRA Release:

Anderson joins FINRA from Société Générale, where he served as Managing Director - Chief Compliance Officer, Americas. In that role, he managed more than 200 compliance professionals in the United States, Canada and Brazil while providing strategic guidance to U.S. and global management and governing boards on compliance, regulatory and legal issues.

Previously, Anderson held senior compliance and legal roles at UBS AG, Fidelity Investments and JP Morgan Chase. He also worked at The Nasdaq Stock Market as an attorney in the Market Structure and Regulatory Policy Group of the Office of the General Counsel. He started his career at NASD Regulation as an Investigator in the Enforcement Department.

Bill Singer's Comment: I don't want to make too much of this but today is January 27, 2021, and the December 2020 FINRA Release advised that Anderson "will join FINRA on Jan. 25, report to President and CEO Robert W. Cook and serve on FINRA's Management Committee." If Anderson was supposed to be onboard this past Monday, FINRA sure as hell is keeping it all under wraps. Given the importance of Anderson's role with Market Regulation, the silence from FINRA is a bit disconcerting. By now, I would have expected at least another FINRA release announcing that Anderson had joined the management team on January 25th and he was looking forward to working with staff and the industry. Oddly, there isn't much word from FINRA about the status of this hire. Given that Wall Street's regulatory community is quite predictable, I'm wondering what's up.
FINRA says that there is going to be a new Form U4 or, at least the form itself may not really be changing, but it will be more digitized and functional, and, well, you know, someone decided that the older, online document needed more bells and whistles, and then, when we log back onto the old, comfortable version, we find a new, unfamiliar version, and we can't quite figure out how to use the newer iteration, but, sure, over time, we get a handle on things, and after a lot of cursing and revised versions and updates, we figure out what we need to do, but we never quite understand why they futzed with something that was perfectly serviceable for a long time notwithstanding that they published an explanation that sort of seemed like it made sense, but for the fact that it doesn't but, hey, like I'm going to admit that I'm the only one befuddled by all the techy-sounding verbiage?
In response to an Information filed in the United States District Court for the District of New Jersey, Ivan Ramos pled guilty to one count of securities fraud. As alleged in part in the DOJ Release;

Ramos, who worked at New York Life selling life insurance, sought out inexperienced investors seeking low-risk investments. The victims met Ramos after purchasing life insurance through him, or through New York Life marketing events, or through mutual acquaintances. Ramos led his victims to believe, through misrepresentations and omissions, that two entities that he controlled, Invexperts LLC and Wealth Seeds Capital LLC, were associated with New York Life when they were not. The victims believed that the money they entrusted to Ramos would be placed in investments through New York Life, and accordingly multiple victims referenced New York Life on the memo line of their investment checks. One victim, for example, attended a New York Life seminar, then subsequently met with Ramos at his office in Edison, and ultimately invested in Invexperts believing it was associated with New York Life.

Ramos falsely told victims that their investments in Invexperts and Wealth Seeds were no-risk with fixed annual returns. Instead of investing their money as he promised he would, Ramos used the funds for purposes not disclosed to the victims, including, among other things, to pay for personal expenses for Ramos and others, to develop a restaurant called "Frisky Bull Barbeque" in Elizabeth, New Jersey, and to repay other investors. 

Ramos obtained over $1 million in investor money through the fraudulent scheme.   

Cryptocurrency Trader Charged In Manhattan Federal Court With Fraudulent Scheme Involving Over $5 Million  (DOJ Release)
In a Complaint filed in the United States District Court for the Southern District of New York, Jeremy Spence, 24, was charged with one count of commodities fraud and one count of wire fraud. As alleged in part in the DOJ Release:

From November 2017 through April 2019, SPENCE solicited investors in various cryptocurrency investment pools that SPENCE had created and managed (the "Funds"). SPENCE solicited investments for several Funds, the largest and most active of which were the Coin Signals Bitmex Fund, a/k/a the "CS Mex Fund," the Coin Signals Alternative Fund, a/k/a the "CS Alt Fund," and the Coin Signals Long Term Fund. Investors who wanted to participate in a Fund would transfer cryptocurrency, such as Bitcoin and Ethereum, to SPENCE in order for SPENCE to invest it. 

SPENCE solicited these investments through false representations, including that SPENCE's crypto trading had been extremely profitable when, in fact, SPENCE's trading had been consistently unprofitable.  For example, on January 28, 2018, SPENCE posted a message in an online chat group falsely claiming that his trading of investor funds over the past month had generated a return of more than 148%. As a result of this misrepresentation, investors transferred additional funds to SPENCE. In fact, over that same period of approximately one month, SPENCE's trading resulted in net losses in the accounts in which he traded investor funds.

To forestall redemptions by investors, and to continue to raise money from investors to fund his scheme, SPENCE generated fictitious account balances, which he made available to investors online. Instead of accurately reporting the trading losses SPENCE was incurring, the account balances falsely indicated to investors that they were making money by investing with SPENCE. To hide his trading losses, SPENCE used new investor funds to pay back other investors in a Ponzi-like fashion. In total, SPENCE distributed cryptocurrency worth approximately $2 million to investors substantially from funds previously deposited by other investors. 

In a Complaint filed in the United States District Court for the Southern District of New York, the CFTC charged Spence with fraud. As alleged in part in the CFTC Release:

The complaint alleges that Spence, at times operating as "Coin Signals," ran a Ponzi scheme in which he fraudulently solicited and obtained digital assets such as bitcoin and ether worth more than $5 million from customers. According to the complaint, Spence's trading resulted in significant trading losses and, as in all Ponzi schemes, his payouts of supposed profits to customers in actuality consisted of other customers' misappropriated funds. Spence allegedly engaged in numerous efforts to conceal his misconduct, including misrepresenting his trading profitability and the amount of assets he had under management, misappropriating customer funds, and issuing false performance statements. As stated in the complaint, Spence eventually admitted to his customers that he had engaged in "lies and deceit."
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, Michael August Pellegrino submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Michael August Pellegrino entered the industry in 2011 and was first registered in 2011 with Taylor Capital Management, Inc. The AWC alleges that Pelligrino "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Dougherty violated FINRA Rules 2210(d) and 2010; and the self regulator imposed upon him a $10,000 fine and an two-month suspension from association with any FINRA member in any capacity. The AWC alleges in part that:

In a single mailing in July 2017, Pellegrino distributed the Ad promoting the short-term, high yield contract to approximately 80 retail investors, about 50 of whom were Pellegrino's customers at TCM. Although the Ad stated that the product was not a security, it promoted a financial instrument and referenced the broker-dealer TCM, and that TCM was a member of FINRA. In order to invest, investors signed a "Memorandum of Indebtedness" (MOI), whereby they agreed to provide funds for distribution at the issuer's discretion. In addition, these retail investors signed a Statement of Understanding relating to the MOIs that referenced TCM. The issuer pooled investor monies and distributed the funds to small businesses as a "Merchant Cash Advance" (MCA). These small businesses were typically unable to borrow money through traditional avenues. The investors entered into the MOIs with the expectation of investment returns based on a percentage of the merchants' future revenues. Approximately 50 of the retail investors who received the Ad from Pellegrino executed MOIs with the issuer.

The Ad contained false and misleading claims, improper projections of future performance, and omitted material information regarding the operation of the MOI. For example, the Ad made investment projections by multiple references to "6-10%" investment returns. The MOI, however, did not contain any contractual obligation for the issuer to make payments to investors, nor did the MOI assure the timeliness of any distributions. Instead, the issuer had the sole discretion to decide what, if anything, would be paid to investors. Thus, the promise of specific returns in the communication was false and misleading; it was also a prohibited projection of investment performance. The Ad further used the terms "consistent," "predictable," and "high yield contract" when describing the investment. This language was misleading because the MOI provided no contractual obligation for the issuer to distribute any investment returns, let alone "consistent," "predictable" or "high yield" returns. The use of these terms was further misleading because of the significant risk that the small businesses would be unable to generate revenue.

The Ad additionally stated that the investment would be "Backed by Collateral . . . Asset Backed Like Cash, CDs, Oil and Real Estate" and would involve "No Stock Market or Interest Rate Risk." The Ad's references to collateral were misleading because the collateral was not a tangible asset, rather an interest in MCA contracts and future proceeds that would only be paid at the issuer's discretion. By claiming that the investment involved no stock market risk, the Ad incorrectly suggested that the MOI was risk averse. 

Finally, the Ad omitted material information regarding the risks and features of the investment, causing it to be misleading. Specifically, the Ad failed to include any statements that investing in cash advances could result in complete loss of principal, that MOIs were illiquid, automatically renewed, had fees, and that the investment relied upon revenues from small businesses that often use MCAs as a funding option of last resort.