Securities Industry Commentator by Bill Singer Esq

April 8, 2021
Yet again, I say. Yet again. Wall Street's lackluster regulatory scheme fails to proactively detect an oncoming tsunami, and the markets get flooded. There was not so much as a single warning from the industry's many regulators about the oncoming Archegos disaster. Yet again, a hedge fund blows up and sends shockwaves through the financial system. Yet again, a major financial services firm, this time Credit Suisse, is swamped. Yet again, I ask, what's the point of having self regulators, state regulators, federal regulators, and international regulators when those systems don't coordinate and ferret out oncoming disasters? Yet again, our 1930's regulatory approach shows its age. Yet again, at some point, don't we need to turn off the lights on self regulation and send FINRA's Board of Governors packing?
In an Indictment filed in the United States District Court for the Southern District of Florida,
Gerald Parker, Michael Assenza, Paul Geraci, Ted Romeo, a/k/a "Ted Lamar", Paul Vandivier a/k/a "Dough Wright," and Cindy Vandivier a/k/a "Madison Brooke" a/k/a "Madison Brookes" were charged with conspiracy to commit mail fraud and wire fraud; also, Parker, Geraci, Romeo, Paul Vandivier, and Cindy Vandivier were charged with substantive wire fraud and conspiracy to commit money laundering; further, Parker, Geraci, Paul Vandivier, and Cindy Vandivier were charged with substantive money laundering; and, finally,  Parker, Paul Vandiver, and Cindy Vandivier were charged with mail fraud. As alleged in part in the DOJ Release:

[T]he six defendants fraudulently sold stock in a Florida company called Social, Inc. ("Social Voucher") that was later referred to as Stocket, Inc. ("Stocket").  The indictment alleges that in 2013, Parker, the Chief Executive Officer of Social Voucher and Assenza, the Director of Technology, created Social Voucher to develop a mobile gaming application which was intended to combine online gaming and online shopping.   Social Voucher was supposed to earn revenue from users of the mobile application buying products while using the application. 

Parker hired boiler room salespeople, including Geraci, Romeo, Paul Vandivier, and Cindy Vandivier, to personally solicit investors and hire other sales agents to solicit, offer, and sell shares of Social Voucher stock to investors via telemarketing, according to the indictment.  All six defendants allegedly informed investors that their money would be used to develop the mobile gaming application.  But Parker, as alleged in the indictment, paid kickbacks and undisclosed commissions of thirty (30) to fifty (50) percent of the investor funds raised by the boiler rooms for Social Voucher that were concealed from the investors.  Geraci, Romeo, Paul Vandivier, and Cindy Vandivier sometimes falsely held themselves out to investors as employees of the company. 

The indictment further alleges that the defendants made a number of other material misstatements to the Social Voucher investors, including failing to inform investors that Parker in fact used investor funds to gamble at the casino; concealing Assenza's criminal convictions for securities fraud and money laundering and Parker's civil securities fraud judgment; and concealing prior regulatory fraud actions against Romeo, Paul Vandivier, and Cindy Vandivier.  At times, according to the indictment, Romeo, Paul Vandivier, and Cindy Vandivier used aliases or names different than the names listed on the publicly filed regulatory actions against them when soliciting potential investors or answering investors' questions.

The six defendants and others raised approximately $21 million in funds from Social Voucher investors.  At no point did the Social Voucher mobile gaming application generate any revenue or profit.
The FBI Release presents the case of Jeffrey Blackwell, an employee in the Philadelphia controller's office, who in 2013 was taking bribes to cut through the red tape. In 2015, Blackwell asked for a $3,000 payment n order to expedite a dumpster permit --  unfortunately for him, the guy willing to pay the bribe was an FBI confidential source.
In a Complaint filed in the United States District Court for Southern District of New York on September 26, 2018, the SEC alleged that William C. Skelly (a co-founder and the Chief Executive Officer of Innovational Funding LLC) had misappropriated over $1 million of investor funds for his personal use; and that he made materially false or misleading statements to investors orally and in private placement memoranda about the use of investor funds, the amount of funds that had been raised on iFunding's portal, and the number of real estate projects that iFunding had financed. On July 8, 2019, the SEC obtained a default judgment against Skelley that permanently enjoined hij from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. On March 26, 2021, the Court issued a final judgment ordering Skelley to pay disgorgement of $1,073,746.65, plus prejudgment interest of $ 184,655.27, and a civil penalty of $1,073,746.65.

Federal Court Orders Alabama Company and its Owner to Pay Over $1.1 Million for Commodity Pool Fraud (CFTC Release)
The United States District Court for the Northern District of Alabama entered a default judgment against Negus Capital Incorporated ("NCI") finding that through its owner Aaron B. Butler, the company had engaged in fraudulent solicitation, misappropriation, and registration violations in connection with binary options trading. NCI is ordered to pay $294,545 in restitution and a $883,635 civil monetary penalty; and, further, the company is permanently enjoined from engaging in conduct that violates the Commodity Exchange Act and CFTC regulations, registering with the CFTC, and trading in any CFTC-regulated markets. As alleged in part in the CFTC Release:

The court's order stems from a 2019 enforcement action that charged Butler and NCI with fraudulent solicitation, misappropriation, and registration violations. [See CFTC Press Release No. 8070-19] The court previously entered an order granting a permanent injunction against Butler and requiring him to pay a combined $755,000 in restitution and civil monetary penalty for his violations of the Commodity Exchange Act and CFTC regulations. [See CFTC Press Release No. 8184-20]

The order finds that from March 16, 2017, through February 21, 2018, NCI, through Butler, unlawfully solicited and accepted $294,545 from 70 members of the public to trade binary options contracts on the North American Derivatives Exchange (Nadex), defrauded those customers, and operated as an unregistered commodity pool operator.

Case Background

The order finds that NCI, through Butler, misrepresented that for customer deposits between $500 and $5,000, he would pool those customers' funds into a single trading account at Nadex, and Butler, acting as the trader for NCI, would use those funds to trade binary options on the customers' behalf. The order also finds that NCI, through Butler, misrepresented that it would deposit each customer payment of $5,000 or more into separate customer trading accounts at Nadex, and Butler would manage and trade binary options on behalf of customers. Rather than trade customer funds as promised, NCI instead misappropriated most, if not all of the funds for Butler's personal benefit, including spending tens of thousands of dollars on jewelry, purchases at Apple stores, and Toys "R" Us gift cards.

Lifecycle of a FINRA Investigation (FINRA Virtual Conference Panel)
As set forth in part on the FINRA webpage:
Join FINRA staff as they walk through the stages of a FINRA Investigation and Enforcement process. Panelists provide detailed descriptions of each step in the process, explain potential pitfalls, and suggest effective practices.
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, Joseph A. Ambrosole submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Joseph A. Ambrosole was first registered in 2011 and by November 2017, he was registered with Joseph Stone Capital L.L.C. The AWC alleges the following "Relevant Disciplinary History" for Ambrosole:

In February 2017, Ambrosole entered into an AWC with FINRA through which he consented to findings that he executed five unauthorized trades in a customer's account in October 2015, in violation of FINRA Rule 2010, Ambrosole was suspended from associating with any FINRA member firm in 411 capacities for one month, fined $5,000, and ordered to pay restitution to the affected customer in the amount of $645.97, plus interest. 

In accordance with the terms of the AWC, FINRA found that Velasco violated FINRA Rules 2111 and 2010; and the self regulator imposed upon him a 5,000 fine, a six-month suspension from associating with any FINRA member in all capacities, and a certification that $147,031.50 in restitution has been paid pursuant to a New Hampshire Securities Division Consent Order. The AWC alleges in part that:

During the relevant period, Ambrosole engaged in quantitatively unsuitable trading in two customer accounts. The first belonged to an elderly customer (Customer A), who was 78 years old when he opened the account. Prior to the relevant period. Customer A began to sustain permanent, progressive, neurological and cognitive impairments. Customer A's account had an average monthly equity of approximately $300,000 and, during the relevant period, Ambrosole recommended and executed 157 trades, which caused Customer A to pay more than $126,000 in commissions and other trading costs. Ambrosole's recommended trades resulted in an annualized cost-to-equity ratio of approximately 20 percent, which means that Customer A's account would have had to grow by more than 20 percent annually just to break even. The second account belonged jointly to Customer A and his wife (Customer B); Customer B was a senior with limited investment knowledge and experience. Customer A and Customer B's joint account had an average monthly equity of approximately $70,000. During approximately one year in the relevant period (specifically, from July 2019 to June 2020), Ambrosole recommended and executed 40 trades in this account, which caused Customer A and Customer B to pay more than $20,400 in commissions and other trading costs. Ambrosole's recommended trades resulted in an annualized cost-to-equity ratio of approximately 35 percent in the joint account. Customer A and Customer B relied on Ambrosole's advice and accepted his recommendations. Collectively, Ambrosole's recommendations caused Customer A and  Customer B to pay $147,031.50 in commissions and other trading costs during the relevant period. 1
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Footnote 1: On March 15, 2021, Ambrosole, Joseph Stone, and the New Hampshire Securities Division entered into a consent agreement, through which, among other things, Ambrosole consented to findings that he traded the same accounts discussed above in a quantitatively unsuitable manner. That agreement ordered Ambrosole and Joseph Stone to pay restitution, which Ambrosole and Joseph Stone thereafter paid.
Over a decade ago, when the stock markets were cratering in the wake of the Great Recession, investors saw their pre-2009 gains vanish. Lots of black ink became red. As was all too common in those days (but, let's be fair, often justified), customers complained that they were given lousy investment advice by their stockbroker. And that wave of customer complaints flooded onto the industry records of thousands of men and women. A recent case illustrates that once posted online, a customer complaint may have the half-life of xenon-124 -- trust me, that's a long half-life.
At its best, remorse demonstrates a pang of conscience. At its worst, it may arise only in anticipation that you are about to get caught. Contrition and regret are two very different things. As such, we're often caught up in the ambivalence of the moment when we consider the motivation behind someone's renunciation of a crime or fraud. Were the remedial steps prompted by a guilty conscience or the malefactor's sense that someone's hot on his trail? In a recent FINRA regulatory settlement we have all the classic elements of such puzzle.
If your brokerage firm decides that a customer "communication" was a complaint, the drafting of a regulatory disclosure often involves a lot of interpretation, inferences, assumptions, and filling-in-the-blanks. At times, what gets reported isn't a fair or accurate reflection of what the customer said.  Which means that an expungement may not involve removing what a customer said but what a brokerage firm thought was said or, worse, what was meant. A recent case illustrates the worst aspects of this process.