Securities Industry Commentator by Bill Singer Esq

April 1, 2021

Considering breaking away from a wirehouse to go independent? It's a big move and a big decision. If you have an entrepreneurial spirit and the desire to run your own business, it may be a risk worth taking. Veteran industry recruiter Michael King sets out the the pros and cons of going independent. 

Whoops: Schwab Sues Former Customer It Accidentally Sent $1.2 Million (Advisor Hub by Jake Martin)
Another day and another operational snafu from a Wall Street firm. Sort of makes you wonder whether anyone is watching the store -- and whether any regulators are taking note. In this latest embarrassment, Advisor Hub's Jake Martin reports in part that:

Spadoni opened a Schwab One account-a "basic" brokerage account with no account minimums, according to Schwab's website-in January. She closed the account after a month, and Schwab was attempting to transfer the $82.56 balance it said she was actually owed when it mistakenly sent the additional $1,205,536.84. 

Schwab representatives, who discovered the error the following day, tried to reclaim the errant transfer by contacting Fidelity, but it was too late, they said. Schwab attributed the error to "an issue created by a software enhancement" it had installed about a week before, causing "excess cash" to be added to a pending transfer request from Spadoni.

Schwab said Spadoni has not responded to its "numerous" attempts to contact her, including by telephone, text message and email. The firm's corporate counsel called Spadoni at her work number, but her employer said she was "present but could not come to the phone," according to the complaint.'s Patrick Donachie walks us through FINRA's recent regulatory settlements involving alleged supervisory lapses at firms where LJM Preservation and Growth Funds were sold to clients. As Donachie notes in part:

On Feb. 5, 2018, the S&P 500 fell 113 points and market volatility increased by the largest one day rise in its history, according CBOE Volatility Index. The fund lost about 80% of its value in two days. On Feb. 7, the fund closed to new investors, and by the end of March, it was liquidated and dissolved. At the time, it was among the most significant funds to "fall victim to the popular 'short vol trade,' " according to CNBC.'s Asia Martin examines the recent acquisition by an RIA of a law firm. Some say it's edgy but an effective use of professional resources; others fear the blurring of ethics and the fostering of conflicts. Clearly this is a development that will warrant ongoing monitoring. As Martin reports in part:

The Arizona Supreme Court gave its blessing to Jeff Junior of Trajan Wealth, a registered investment advisor in Scottsdale, Ariz., to co-own an estate law firm, according to a recent announcement. Arizona recently eradicated its rule opposing nonlawyer ownership of law firms.

After years of Trajan Wealth referring clients to estate attorneys, the wealth management firm with nearly $700 million in assets under management can now keep the bulk of a client's estate planning needs in-house. 

Financial planner sentenced to 17 years behind bars / Anthony Diaz allegedly bilked clients out of millions over the course of a long-running scheme. (CityWire RIA by Andrew Foerch)
CityWire's Andrew Foerch reports on the heavy-duty sentenced imposed upon fraudster Anthony Diaz.
Gina Champion-Cain pled guilty in the United States District Court for the Southern District of California to securities fraud, obstruction of justice, and conspiracy, and she was sentenced to 15 year in prison. Crispin Torres, the former Chief Financial Officer of one of Champion-Cain's companies, was sentenced to four years in prison for using funds received from investors to prop up Champion-Cain's other businesses. As alleged in part in the DOJ Release:

Gina Champion-Cain, a long-time San Diego business leader, restauranteur, and real estate magnate, was sentenced in federal court today to 15 years in prison for masterminding a massive, years-long Ponzi scheme and obstructing justice by hiding and destroying evidence from federal investigators. 

When she pleaded guilty on July 22, 2020, Champion-Cain admitted that she raised more than $350 million from investors by promising to use their money to make loans to business owners who were attempting to acquire California liquor licenses. The investors were unaware, however, that Champion-Cain was not keeping her promise. 

According to court records, Champion-Cain and her co-conspirators instead used funds from new investors to pay back others whose investments would soon be redeemed, and embezzled funds to support her other businesses and her lifestyle.  Champion-Cain and her co-conspirators kept the scheme going by, among other things, fabricating documents, forging signatures, and telling investors lies through fake email accounts so that when investors attempted to double-check on their investments with third parties, they were often really communicating with the defendant or her employees. 

. . .

Throughout her scheme, Champion-Cain made agreed-upon payments to her investors so that they would continue to believe that the supposed investment program was legitimate, according to court filings.  This, in turn, helped her perpetuate the scheme and recruit more victims. Champion-Cain also stole tens of millions of dollars of investor funds to keep her other businesses afloat and enrich herself.  Because many of Champion-Cain's restaurant and retail businesses were failing or had negative cash flow, they needed funds to meet expenses. Time after time, Champion-Cain and Torres worked together to steal millions of dollars of investor funds to cover the shortfall. Champion-Cain also spent millions of investor dollars to pay for her own salary, box seats at professional baseball and football games, credit card bills, automobiles, jewelry, and other personal luxuries.

Champion-Cain's plea agreement also describes her efforts to obstruct federal investigations into the scheme.  Beginning in July 2019, after learning of investigations being conducted by federal agencies, she instructed her employees to destroy emails; not produce electronic calendar, messaging, and trash files; alter accounting records to hide the fact that investor funds were used to pay her personal expenses; and shred paper records.  Champion-Cain even attempted to solicit an investment of $150 million in the hopes that she could use the funds to hide her scheme.  Despite her efforts, investigators were able to recover a significant volume of the evidence Champion-Cain attempted to destroy.
CFTC Charges Washington State Rancher and Feedyard with $233 Million Phantom Cattle Fraud Scheme(CFTC Release)

Cody Allen Easterday pled guilty in the United States District Court for the Eastern District of Washington to one count of wire fraud and agreed to repay $244,031,132 in restitution. As alleged in part in the DOJ Release, Easterday:

used his company, Easterday Ranches Inc., to enter into a series of agreements with Tyson and Company 1 under which Easterday Ranches agreed to purchase and feed cattle on behalf of Tyson and Company 1. Per the agreements, Tyson and Company 1 would advance Easterday Ranches the costs of buying and raising the cattle. Once the cattle were slaughtered and sold at market price, Easterday Ranches would repay the costs advanced (plus interest and certain other costs), retaining as profit the amount by which the sale price exceeded the sum repaid to Tyson and Company 1.

Beginning in approximately 2016 and continuing through November 2020, Easterday submitted and caused others to submit false and fraudulent invoices and other information to Tyson and Company 1. These false and fraudulent invoices sought and obtained reimbursement from the victim companies for the purported costs of purchasing and growing hundreds of thousands of cattle that neither Easterday nor Easterday Ranches ever purchased, and that did not actually exist. As a result of the scheme, Tyson and Company 1 paid Easterday Ranches over $244 million for the purported costs of purchasing and feeding these ghost cattle.

Easterday used the fraud proceeds for his personal use and benefit, and for the benefit of Easterday Ranches, including to cover approximately $200 million in commodity futures contracts trading losses that Easterday had incurred on behalf of Easterday Ranches. In connection with his commodity futures trading, Easterday also defrauded the CME Group Inc. (CME), which operates the world's largest financial derivatives exchange. On two separate occasions, Easterday submitted falsified paperwork to the CME that resulted in the CME exempting Easterday Ranches from otherwise-applicable position limits in live cattle futures contracts.

The CFTC filed a Complaint in the United States District Court for the Eastern District of Washington charging Easterday Ranches, Inc. and Cody Easterday, co-owner and formerly president of Easterday Ranches, for engaging in fraud in connection with the sale of more than 200,000 non-existent head of cattle to a beef processor, making false statements to an exchange, and violating exchange-set position limits. As alleged in part in the CFTC Release:

[E]asterday accumulated more than $200 million in losses over a 10-year period from speculative trading in the cattle futures markets. To meet margin calls, Easterday devised a scheme to defraud one of his biggest business partners, a South Dakota-based beef producer. The complaint alleges that, from at least October 2016 to November 2020, Easterday caused Easterday Ranches to submit false invoices and reimbursement requests relating to more than 200,000 head of cattle that Easterday Ranches never actually purchased or raised on the producer's behalf. Through the use of fraudulent invoices and reimbursement requests, Easterday Ranches received from the producer more than $233 million to which it was not entitled.

In addition, the complaint alleges that Easterday caused Easterday Ranches to report false or misleading information concerning its cattle inventory, purchases, and sales to the Chicago Mercantile Exchange in at least two hedge exemption applications seeking permission to exceed the exchange's position limits. Easterday allegedly made the false statements to the exchange in 2017 and 2018 to avoid disciplinary actions and scrutiny when Easterday Ranches exceeded exchange-based position limits in the live cattle and feeder cattle futures markets. Because they were based on false or misleading information, the hedge exemptions were invalid. As a result, Easterday Ranches violated exchange-set position limit violations on at least two occasions.

In the Matter of Gordon Bryan, Respondent (FINRA AWC 2018060741801)
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, Gordon Bryan submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Gordon Bryan was first registered in 1984, and by 2009, he was registered with Wells Fargo Clearing Services, LLC.The AWC alleges that Bryan "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Bryan violated FINRA Rule 2010; and the self regulator imposed upon him a $5,00 fine and a two-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

In September 2017, Bryan formed a limited liability company (the "Company") with four other individuals, three of whom were Bryan's Wells Fargo clients, to purchase and develop a local shopping center. Bryan did not provide written notice to the firm of the Company until October 2017. In addition, he did not disclose that firm clients co-owned the Company until December 6, 2017, after the Company's November 30, 2017 purchase of the shopping center. 

After the firm made inquiries about this disclosure during December 2017, Bryan stated that he would not play a role in the Company's operations. However, he continued to engage in operational activities for the Company, including marketing shopping center space to tenants, negotiating lease terms, and communicating with commercial lenders. 

In addition, Bryan stated during December 2017 that he would transfer his ownership interest in the Company to his wife. Although Bryan subsequently attested that the Company remained one of his outside business activities on an August 2018 compliance questionnaire, he described it as a passive real estate business, rather than one in which he engaged in operational activity. In addition, he stated inaccurately that his wife had become a partner in the Company, even though he did not transfer his partnership interest to his wife until later in August 2018.

In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Respondent (FINRA AWC 2018060741801)
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, Merrill Lynch, Pierce, Fenner & Smith Incorporated submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges Merrill Lynch has been a FINRA member since 1937 with 35,000 registered representatives at some 3,900 branches. The AWC alleges that Merrill Lynch "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Merrill Lynch violated FINRA Rules 3110, 3010, and 2010; and the self regulator imposed upon the firm a Censure, $450,000 fine (to be parsed among FINRA, NYSE Arca, Inc., the Nasdaq Stock Market LLC, Cboe EDGX Exchange, Inc. and Cboe EDGA Exchange, Inc.). As alleged in the "Overview" portion of the AWC:

From on or about September 1, 2013 through approximately June 2016 (the Relevant Period), Merrill did not reasonably supervise certain types of public and private side employee communications under the firm's policies and procedures, in violation of NASD Rule 3010 and FINRA Rules 3110 and 2010.

Bill Singer's Comment: Seriously?  I mean, really?? Merrill Lynch has no relevant disciplinary history? What utter nonsense. Shame on FINRA for perpetuating this falsehood. READ: "FINRA Says Impeccable Merrill Lynch Has No Relevant Disciplinary History" ( Blog /  May 19, 2020)
Fourteen-year veteran New York Life employee Ketler Bosse was the company's first African-American District Agent. Following his 2016 termination, he filed a federal Complaint against various New York Life entities asserting discrimination, retaliation, and civil rights violations. NY Life moved to force the case into FINRA arbitration. The District Court declined to remand the matter to arbitration; however, on appeal, the 1Cir reversed and remanded.

The Great FINRA Hand Sanitizer Caper!!! ( Blog)
In the midst of a pandemic, FINRA got out its hammer and its tongs, and went after a Respondent, who had decided not to invest in a company and prepared to engage in a business that never materialized. Sort of like pretending that we launched a satellite into orbit despite the fact that the rocket exploded on the launching pad. I'm sure that you and I will both sleep safer tonight knowing that Wall Street's self-regulatory-organization is so vigilant and walking the industry beat.
In a recent FINRA regulatory settlement, we got a stockbroker who goofed. We got a customer, who paid a price for the stockbroker's goof. In the spirit of let's just move on and put this behind us, the stockbroker dug into his pocket, came out with a wad of cash, tried to settle with the customer, and -- hey, you look like a smart person, if I'm writing about it, ya think things worked out for the best?