Securities Industry Commentator by Bill Singer Esq

February 17, 2021

SEC Charges Ratings Agency With Disclosure And Internal Controls Failures Relating To Undisclosed Model Adjustments (SEC Release)

Craig C. Garrick, Jr. Sentenced To A Year In Federal Prison For Securities Fraud / Defrauded Victims out of $450,000 in Financial Fraud Scheme (DOJ Release)

Northampton County Man Sentenced to 4 1/2 Years for Bilking Family, Friends & Fraternity Brothers out of Over $1 Million in Phony Stock Scheme (DOJ Release)
Perhaps you didn't know. Perhaps you were unaware. There is a League of Extraordinary Gentlemen pounding the pavement of Wall Street. I mean, sure, you're right, it's somewhat of a well-kept secret, which I've just blown by telling you. Now that the cat's out of the bag, I'll step back and let the Securities and Exchange Commission explain the secret society stuff.
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged Morningstar Credit Ratings LLC with violating disclosure and internal control provisions of the Securities Exchange Act of 1934 applicable to credit rating agencies. As alleged in part in the SEC Release [Ed: "CMBS" is the acronym for "commercial mortgage-backed securities"]:

[I]n 30 CMBS transactions totaling $30 billion that Morningstar rated from 2015 to 2016, the credit rating agency permitted analysts to make undisclosed adjustments to key stresses in the model that it used in determining the rating for that transaction.  The complaint also alleges that Morningstar failed to establish and enforce an effective internal control structure governing the adjustments for a total of 31 transactions.

According to the complaint, analysts frequently made these undisclosed adjustments to reduce the stress applied in the model and, by easing the stresses, Morningstar lowered the credit enhancement it required for many of the ratings it awarded classes of the CMBS transactions.  This, the complaint alleges, in certain instances benefited the issuers that paid for the ratings because it enabled those issuers to pay investors less interest than they would have without the adjustments.
Craig C. Garrick, Jr., 42, pled guilty in the United States District Court for the District of Utah to securities fraud; and he was sentenced to 12 months and one day in prison and ordered to pay $450,000 in restitution (Garrick had already arranged for the victims to be repaid prior to sentencing). As alleged in part in the DOJ Release:

[F]rom 2019 to 2020, he induced victims to invest at least $450,000 in his company without disclosing the fact that he was serving a probationary sentence for felony charges of mortgage fraud arising out of the Utah State Courts. Garrick also admitted that that he planned to use, and did use, investment money for his own benefit and living expenses; that he knew it was illegal to fraudulently take money from investors; to make a misrepresentation or an omission of a material; and to engage in conduct that operates as a fraud or deceit upon a person, in connection with the purchase or sale of securities.

Bill Singer's Comment: So lemme see if I got this -- Garrick was "serving a probationary sentence for felony charges" as ordered in a state fraud case at the time he engaged in the more recent federal fraud. And given that fact pattern, the federal court only imposes a 12 month plus one day term of incarceration?  Wow!
In an Information filed in September 2020 in the United States District Court for the Eastern District of Pennsylvania, former stockbroker and convicted securities fraudster Robert McCabe,76, was charged with 21 counts of securities fraud, mail fraud, and wire fraud. After pleading guilty, McCabe was sentenced to 4 1/2 years in prison plus three years of supervised released, and he was ordered to pay $1,111,582 in restitution to more than 50 victims. As alleged in part in the DOJ Release:

[F]or almost ten years, from September 2010 until June 2020, he defrauded life-long friends, fraternity brothers from Phi Kappa Psi fraternity at Lafayette College, and even his wife by promising to sell them "founders shares" of Esperion Therapeutics, Inc. McCabe claimed to have acquired shares of Esperion through a corporation he owned, McCabe Properties, Inc., at a very low price - approximately $2.67 per share. Over the course of nearly a decade, the defendant took in more than $1 million from more than 50 investors who thought they were getting in on the 'ground floor' of Esperion, by selling to them almost 387,000 phony "founders shares." If McCabe had possessed these "founders shares" in reality, his investors would have made a fortune, as shares of Esperion peaked at more than $38 per share recently. McCabe's investors believed they were soon going to be able to cash out their fortunes, but they were stalled at every opportunity by various misrepresentations the defendant made regarding a purported inability to liquidate their holdings. Ultimately, the defendant's victims uncovered his fraud in June 2020, at which point he admitted to them that he had been lying all along.

Nigerian National Sentenced to Prison for $11 Million Global Fraud Scheme (DOJ Release)
Obinwanne Okeke, 33, pled guilty in the United States District Court for the Eastern District of Virginia to Okeke pleaded guilty to conspiracy to commit wire fraud; and he was sentenced to 10 years in prison. As alleged in part in the DOJ Release, Okeke:

operated a group of companies known as the Invictus Group based in Nigeria and elsewhere. From approximately 2015 to 2019, Okeke and others engaged in a conspiracy to conduct various computer-based frauds. The conspirators obtained and compiled the credentials of hundreds of victims, including victims in the Eastern District of Virginia.

As part of the scheme, Okeke and other conspirators engaged in an email compromise scheme targeting Unatrac Holding Limited, the export sales office for Caterpillar heavy industrial and farm equipment. In April 2018, a Unatrac executive fell prey to a phishing email that allowed conspirators to capture login credentials. The conspirators sent fraudulent wire transfer requests and attached fake invoices. Okeke participated in the effort to victimize Unatrac through fraudulent wire transfers totaling nearly $11 million, which was transferred overseas. Additionally, Okeke engaged in other forms of cyberfraud, including sending phishing emails to capture email credentials, creating fraudulent web pages, and causing other losses to numerous victims.
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, Actinver Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Actinver Securities, Inc. has been a FINRA member firm since 1996 with 40 registered individuals, and that the firm "obtains the majority of its clients from its Mexican affiliates, including Actinver Bank located in Mexico." The AWC asserts that Actinver "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Actinver violated FINRA Rules 3310(a) and (c); 3130(b); and 2010; and the self regulator imposed upon the firm a Censure and a $150,000 fine, and the firm undertakes to certify its remediation of the cited issues. The AWC alleges in the "Overview" that:

During the period August 26, 2015 to March 11, 2017, Actinver failed to establish and implement an Anti-Money Laundering (AML) program that could be reasonably expected to detect and cause the reporting of suspicious activity. Specifically, Actinver's AML surveillance system was unreasonable because it generated reports that were inaccurate and failed to capture certain potentially suspicious activity. In addition, the firm failed to tailor its AML program to the risk presented by its practice of allowing customers to engage in foreign currency exchange and maintain accounts used primarily for managing cash. 

Actinver also failed to reasonably implement certain aspects of its AML program. Although the firm's AML program included procedures that required the firm to gather specific information and forms when opening foreign accounts or accounts for Politically Exposed Persons (PEPs), Actinver's registered representatives frequently failed to obtain these forms or left information blank on the forms. Finally, the firm failed to follow its procedures regarding responses to inquiries from its clearing firm concerning red flags of potentially suspicious activity. 

As a result of these failures, Actinver violated FINRA Rules 3310(a) and 2010. 

In addition, the firm failed to conduct an adequate independent AML test in 2016, because the testing failed to review key aspects of the firm's AML program. Therefore, the firm violated FINRA Rules 3310(c) and 2010. 

Finally, Actinver failed to have its Chief Executive Officer complete the firm's Annual Certification Requirement in 2015 and 2017 in violation of FINRA Rules 3130(b) and 2010.
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, Nathaniel Leigh Goldenberg submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Nathaniel Leigh Goldenberg was first registered in 2005 and by 2013, he was registered with International Assets Advisory, LLC ("IAA"). The AWC asserts that Goldenberg "has no relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Goldenberg caused IAA to violate the  SEC's Regulation S-P: Privacy of Consumer Financial Information and Safeguarding Personal Information (Regulation S-P), and in so doing, he violated FINRA Rule 2010, and the self regulator imposed upon him  a $5,000 fine and a one-month suspension from associating with any FINRA member in any capacity. The AWC alleges in part that [Ed: "NPI" is "Nonpublic Information"]:

In June 2020, Goldenberg voluntarily left IAA to start his own RIA. Prior to his departure from IAA, Goldenberg saved copies of documents containing nonpublic personal information (NPI) for at least four customers into an electronic folder on a thumb drive with the intention of using this information at his new RIA. This NPI included names, birthdates, social security numbers, and account numbers of four customers. Goldenberg kept the customer documents and NPI in his possession on June 15, 2020 after he left IAA, in violation of IAA's policies and without providing notice to or obtaining consent from these four customers.