Securities Industry Commentator by Bill Singer Esq

February 22, 2021

The Long Strange Trip of Rubin v. Mangan et al.

SEC Awards Almost $3 Million Total in Separate Whistleblower Awards (SEC Release)
In a Superseding Indictment filed in the United States District Court for the Middle District of Florida, Avinash Singh was charged with 10 counts of wire fraud and 6 counts of money laundering. As alleged in part in the DOJ Release:

[S]ingh operated a local company by the name of Highrise Advantage, LLC. From February 2013 to September 2020, Singh received more than $57 million, from over 1,100 victims, that was to be invested in retail foreign currency contracts ("forex") through Highrise. To induce his victims to invest, Singh claimed that he had a proven track record of success as a forex trader, that he was going to use the funds for investments in forex, and that he would "guarantee" that his victims would not lose any funds for any trading losses. Those representations were not true. Rather than invest his victims' funds in forex trading as he had promised, Singh used funds from one investor to pay amounts owed to other investors. Singh did not invest the funds that he had promised but instead misappropriated at least $45 million in the form of payments to other investors and millions of dollars in personal expenses. Singh invested less than 5% of the funds that he had received in actual forex trading.

To cover up his scheme, Singh issued monthly statements that falsely represented that he had invested the funds in forex as he had promised and that he was making large profits. In fact, Singh's investments, when he made them, often lost significant amounts of money, which Singh attempted to cover up by creating false monthly statements.

Rene Rothstein Rubin, Plaintiff, v. Michael P. Mangan, Esq., Mangan & Ginsberg LLP, and Michael Rothstein, Defendants (Memorandum, United States District Court for the Eastern District of Pennsylvania, No. 19-CV-05301)
Sometimes its about the destination. Other times, it's about the trip. In a recent federal lawsuit in EDPA, the destination isn't all that much to talk about. Before the Court is Defendant Rothstein Motion to Dismiss for Lack of Personal Jurisdiction and Improper Venue. Also before the Court is the Mangan Defendants Motion to Dismiss for Lack of Subject Matter Jurisdiction, Lack of Personal Jurisdiction, Improper Venue, and Failure to State a Claim. Like I said, this ain't about destination, and, as such, the spoiler alert is that the Court granted all the motions except for its denial of the Mangan Defendants' Motion to Dismiss. As to that ho-hum destination, EDPA transferred the case to the Eastern District of New York. As to the trip, well, what a long strange trip it's been! I can't even begin to do the underlying fact pattern by trying to extract bits here and there and summarize who done what to whom and when and how often. As such, let me step back and allow EDPA's Memorandum to speak for itself as set forth in the "Background":

Rubin lives in Pennsylvania. Am. Compl. ¶ 2, ECF No. 34. Rubin's younger brother Rothstein lives in New York. Id. ¶ 5. Rubin, Rothstein, and another sibling maintained a joint account ("Joint Sibling Account") at the Stifel, Nicolaus & Company, Inc. ("Stifel"), a brokerage and investment banking firm. Id. ¶ 13. Rubin maintained $80,000 to $100,000 of her personal funds in the Joint Sibling Account. Id. ¶ 13. Rothstein was listed as the "Primary Owner" of the Joint Sibling Account and was supposed to be "the conduit between the broker (Stifel) and his siblings." Id. ¶ 34. Nonetheless, Stifel required the signatures of all three account holders to make any changes to the Joint Sibling Account. Id. ¶ 53. 

From 2013 to 2014, Rothstein decided to invest funds from the Joint Sibling Account in Bright Lake L.P. Id. ¶¶ 34-36. Rothstein believed that Bright Lake was a New York hedge fund that was affiliated with Wells Fargo and run by his long-time friend Ilan Preis. Id. ¶ 12, Ex. A. As such, Rothstein, who asserted that he "had authority over [the Joint Sibling Account]," decided to invest $200,000 from the Joint Sibling Account in Bright Lake. Id. ¶ 36, Ex. A. This money included the $80,000 to $100,000 in personal funds that Rubin maintained in the Joint Sibling Account. Id. ¶ 13. Rothstein neither informed Rubin of the investment nor obtained her consent. Id. ¶ 13.

To effectuate this investment, in August 2013, Wells Fargo-from a location in Brooklyn, New York-sent Stifel a form purporting to authorize the transfer of the entire Joint Sibling Account from Stifel to Wells Fargo, where it presumably would be controlled by Preis. Id. ¶ 30, Ex. D. Because Stifel required the signatures of all joint account holders to make changes to the Joint Sibling Account, the form authorizing the transfer contained a signature that was allegedly Rubin's. Id. ¶¶ 31-33, 53. Rubin's signature on the form was forged and differed drastically from her true signature. Id. ¶¶ 31-33. As Rubin's brother and a joint account holder, Rothstein was aware that the signature on the form differed from Rubin's actual signature. Id. ¶ 55. Rothstein-at a minimum-failed to verify Rubin's signature on the form and allowed the forged signature to be transmitted to Stifel. Id. As a result, the Joint Sibling Account was transferred from Stifel to Wells Fargo. Id. ¶ 30, Ex. D. 

Then, in May 2014, Rothstein took it upon himself to authorize the transfer of $200,000 from the Joint Sibling Account-now held at Wells Fargo-to Bright Lake. Id. ¶¶ 36, 37, Ex. E1. 

Around July 2015, Rothstein learned that Preis lost 99% of the investment in Bright Lake. Id. ¶ 14. At this point, Rubin was still unaware of the investment in Bright Lake let alone the subsequent loss in value of the investment. Id. ¶¶ 19-20. 

As a result of the loss, on April 15, 2016, the Mangan Defendants filed a lawsuit against Bright Lake and Preis in the Kings County Supreme Court in New York (the "Bright Lake lawsuit"). Id. ¶¶ 15-17. The plaintiffs named in the lawsuit included Rubin, Rothstein, and several of their family members who had also invested in Bright Lake. Id. Rubin had not authorized the Mangan Defendants to represent her in the lawsuit and was unaware that the lawsuit had been filed. Id. ¶ 18. In fact, at the time of filing, Rubin was still unaware that  Rothstein had authorized the investment from the Joint Sibling Account in Bright Lake. Id. In January 2018, a default judgment was entered against Bright Lake and Preis. Id. ¶ 21. Because Preis could not be located, the default judgment remains unlikely to result in the return of the invested funds. Id. ¶ 22.

Rubin first learned of the Bright Lake lawsuit in December 2018. Id. ¶ 23. Rubin immediately reached out to Mangan, who was listed on the pleadings as the attorney for the plaintiffs, to inquire about the lawsuit and the status of the invested funds. Id. On January 23, 2019, Rubin and Mangan spoke on the phone about the Bright Lake lawsuit. Id. ¶ 24. The same day, Mangan emailed Rubin to follow up on the call. Id. He stated: "It was good speaking with you this morning concerning the Bright Lake cases. . . . Please reach out to me with any questions or requests for documents at this email address, or to the business address below." Id. at Ex. B1. On January 26, 2019, Rubin responded: 

I know this must be difficult for you 
but I entreat you to please contact me asap 
I want to help my parents [who also invested in Bright Lake and were plaintiffs in 
the Bright Lake lawsuit] 
I want their money restored, however small the chance is 
my brother is going to screw this up for you 

Id. Mangan replied: "I will try to call tomorrow. If we don't connect on Sunday - I will call you tomorrow." Id. Based on these communications, Rubin concluded that Mangan was her attorney. Id. ¶ 24. 

On March 22, 2019, Rubin contacted Mangan again and asked to meet in person. Id. at Ex. B1. She emailed: 

nice speaking to you 
when can we meet? 
I can come to nyc late afternoons or early evenings 
I can be very helpful in this matter.

Id. Rubin and Mangan subsequently met in person at a restaurant in Penn Station in New York to discuss the Bright Lake lawsuit. Id. ¶¶ 25-26. During the meeting, Rubin informed Mangan of her shock upon finding out that she was a named plaintiff in the Bright Lake lawsuit since she had never consented to being a plaintiff in the case. Id. ¶ 26. Mangan told Rubin that since Preis had likely absconded with the invested funds and was unlikely to be found, Mangan had brought a separate FINRA arbitration against Wells Fargo (the "Wells Fargo arbitration") to recover some of the funds. Id. Mangan told Rubin that she had not been included in the Wells Fargo arbitration, but he promised to "add her" to the arbitration. Id. He further told Rubin that even if he did not formally "add her" to the arbitration, he would make sure that she was party to any settlement or payout that resulted from the arbitration. Id. 

After the Penn Station meeting in March 2019, Rubin tried to contact Mangan several times. Id. ¶ 27. Mangan did not respond. Id. Nor did he add Rubin to the Wells Fargo arbitration. Id. 

In July 2019, the Wells Fargo arbitration settled. Id. Mangan did not inform Rubin of the settlement. Id. ¶ 29. 

Later in July, after receiving no response from Mangan since March, Rubin threatened to report Mangan to the New York Disciplinary Board. Id. ¶ 27. Only then did Mangan call Rubin back. Id. On the call, Mangan did not inform Rubin that the Wells Fargo arbitration had already settled earlier that month. Id. ¶¶ 27, 29. Instead, Mangan again promised that he would "add" Rubin to the Wells Fargo arbitration. Id. ¶ 28. On July 18, 2019, Mangan emailed Rubin the Stipulation of Confidentiality filed in the Wells Fargo arbitration. Id. ¶ 28, Ex. C. Mangan told Rubin to add her name and signature to the end of the document. Id. ¶ 28. Mangan represented to Rubin that by doing so, Rubin would be "added" to the Wells Fargo arbitration and would be represented by Mangan in the next phase of the proceedings. Id. Without knowing that the Wells Fargo arbitration had already settled earlier that month, Rubin added her name and signature to the Stipulation of Confidentiality. Id. ¶¶ 28, 29, Ex. C. 

After she added her name and signature to the Stipulation, Rubin had trouble contacting Mangan regarding the Wells Fargo arbitration. Id. ¶ 29 & n.2. Rubin then contacted the attorney for Wells Fargo who was listed in the Stipulation. Id. The attorney for Wells Fargo informed Rubin that the Well Fargo arbitration had already settled and advised Rubin to contact her own attorney. Id. 

On October 7, 2019, Rubin contacted Mangan and requested her file. Id. ¶ 40, Ex. F. Mangan did not send Rubin her file. Id. ¶ 42. 

On November 11, 2019, Rubin filed this lawsuit in the Eastern District of Pennsylvania. Rothstein and the Mangan Defendants filed motions to dismiss.

at Pages 2 - 6 of the EDPA Memorandum
what a long strange trip it's been . . .
When I first starting working in-house at Smith Barney, Harris Upham & Company in 1982, folks in the biz thought that the industry's regulators were, by and large, idiots. Similarly, when I started working as a regulator in 1985 at the old American Stock Exchange and then NASD, a lot of my regulatory colleagues thought that those in the biz were con artists, cheats, liars, and fraudsters. Some 40 years later, not much has changed in terms of how the regulated and the regulators view each other. After all my years on Wall Street, however, I've realized that those who are regulated are not quite as smart or as clever as they think they are when it comes to getting away with something that they were certain that they would get away with. All of which brings us to today's blog in which we come upon some folks trying to get away with something and we come upon FINRA imposing fines and suspensions.

In the Matter of Scott Wayne Reed, Respondent (FINRA AWC 2020066246901)
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, Scott Wayne Reed submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Scott Wayne Reed was first registered in 1999, and by April 2016, he was registered with Wells Fargo Clearing Services, LLC. The AWC asserts that Reed "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Reed violated FINRA Rules 3280 and 2010, and the self regulator imposed upon him a Bar from associating with any FINRA member in all capacities. In part,  the AWC alleges that:

Beginning in early 2019 and continuing until his termination from Wells Fargo in April 2020, Reed solicited at least six individuals, including at least two Wells Fargo customers, to invest in securities issued by a software and web development company based in Pasadena, California. The securities were notes issued by the company to raise capital for its ongoing operations and for investors to profit from the repayments, which included a 15% rate of interest. Reed participated in at least $3.5 million in these investments away from the firm by providing written materials about the company to investors, and by communicating with them orally, by email and text message about the company and encouraging them to invest. Reed also facilitated the transactions by, among other things, helping investors send or receive transfers of funds. In one case, Reed offered to personally guarantee half of an individual's investment. He received selling compensation of $191,340 from the company for his role in soliciting and facilitating the investments. Reed also personally invested over $200,000 in the company. Reed failed to provide Wells Fargo with prior notice or obtain the firm's advance approval for his participation in these private securities transactions. By participating in private securities transactions away from the firm, Reed violated FINRA Rules 3280 and 2010.
In an Order Determining Whistleblower Award Claim (SEC, '34 Act Rel. No. 91163; Whistleblower Award Proc. File No. 2021-25), the SEC awarded a whistleblower over $2.2 million. As asserted in part in the Order:

The information in Claimant's submission was of such high quality that staff was able to draft document requests based on Claimant's information without speaking with Claimant. 

In addition, Claimant took personal and professional risks by raising concerns internally in an effort to remedy the misconduct, and Claimant's information helped cause the return of millions of dollars to harmed clients. Redacted 

In an Order Determining Whistleblower Award Claim (SEC, '34 Act Rel. No. 91164; Whistleblower Award Proc. File No. 2021-26), the SEC awarded a whistleblower almost $750,000. As asserted in part in the Order:

Claimant alerted Commission staff to a fraudulent reporting scheme in the Covered Action, which prompted the opening of the investigation. Claimant provided additional critical documents and information to Commission staff and helped to identify key documents and witnesses and helped conserve Commission time and resources. Finally, Claimant internally raised concerns about the perceived misconduct in an effort to remedy the violations.