Securities Industry Commentator by Bill Singer Esq

April 14, 2021

These Foolish Things Remind Me of FINRA ( Blog)
Submitted for you disapproval is FINRA Regulatory Notice 21-15, which does nothing more than "reminds members" that they are required to do something. In case you missed it, the focal point of the reminder is about something that members are "required" to do. It's not something they may want to do. It's not something that they are musing about doing. It's something that's set out in many forms and iterations in FINRA's rulebook --  and the rules are mandatory (which is just another way of saying "required.")
In an Indictment filed in the United States District Court for theCentral District of California, John A. Santilli Jr. is charged with one count of securities fraud, eight counts of wire fraud, and one count of aggravated identity theft. As alleged in part in the DOJ Release:

          According to the indictment, Santilli managed and partly owned Aloris Entertainment, LLC, which acquired an interest - through securities called "Class A Units" - in Mike's Mobile Detailing, LLC, the company that operates the Magic Mike Live show in Las Vegas. Santilli raised funds from victims by soliciting investments in "Aloris Magic Mike LP," a different business that he falsely told investors owned the Class A Units. Santilli allegedly lied to investors, telling them that, in return for their investment, they would receive "shares" in Aloris Magic Mike LP that corresponded to a particular number of Class A Units and entitled them to a percentage of the profits from "Magic Mike Live." To bolster his false claims, the indictment states, Santilli used a doctored a legal document that made it appear that Aloris Magic Mike LP was a member (i.e., a shareholder) of Mike's Mobile Detailing.

          The indictment also states that Santilli misappropriated a significant portion of his victims' investments, including withdrawing more than $1 million at casinos across the United States. To raise more funds, Santilli falsely told his victims that new investment opportunities had arisen, resulting in Santilli selling shares in his businesses that corresponded to nearly double the number of Class A Units of Mike's Mobile Detailing that his company actually owned, the indictment alleges.
International Investment Group's ("IIG's") managing partner/Chief Operating Officer, Martin Silver, pled guilty in the United States District Court for the Southern District of New York to one count of conspiracy to commit investment adviser fraud, securities fraud, and wire fraud, and one count of wire fraud as set forth in a Superseding Information As alleged in part in the DOJ Release:   

Background of IIG 

SILVER and a co-conspirator ("CC-1") founded IIG in 1994.  SILVER was a managing partner and the chief operating officer of IIG.  IIG, an SEC-registered investment adviser, provided investment management and advisory services, including for three private funds that it operated: (1) the IIG Trade Opportunities Fund N.V. ("TOF"), (2) the IIG Global Trade Finance Fund, Ltd. ("GTFF"), and (3) the IIG Structured Trade Finance Fund, Ltd. ("STFF").  IIG also advised the Venezuela Recovery Fund ("VRF"), a fund that managed the remaining assets of a failed Venezuelan bank (VRF, together with TOF, GTFF, and STFF, the "IIG Funds").  In March 2018, IIG reported to the SEC that it had approximately $373 million in assets under management.

IIG advertised itself as specializing in global trade financing, particularly in providing trade finance loans to small and medium-sized businesses.  IIG's principal investment advisory strategy, including with respect to the IIG Funds, was investing in trade finance loans that it also originated.  Trade finance loans are used by small and medium-sized companies, typically exporters and importers, to facilitate international trade.  IIG's purported expertise was in trade finance loans to borrowers located in Central or South America, and in a variety of industries, with a stated focus on "soft commodities," such as coffee, agriculture, fishing, and other food products.  IIG's trade finance loans were purportedly secured by collateral, such as the underlying traded goods, assets held by the borrowers, or expected payments by third parties.

Investments in TOF, STFF, and GTFF were marketed by IIG to institutional investors, such as pension funds, hedge funds, and insurers.  In offering memoranda and communications with investors, IIG advertised strict risk controls, such as promises to use diligence to carefully select borrowers or issuers with trusted management and marketable assets, and portfolio concentration limits based on borrower, developing country, and industry.

IIG purported to value the trade finance loans in the IIG Funds on a regular basis.  IIG and, in turn, SILVER, received a performance fee with respect to the IIG Funds, as well as a management fee, which was calculated as a percentage of the assets under management held in the Funds.

The Scheme

From approximately 2007 to 2019, SILVER conspired to defraud investors in IIG-managed funds by: (i) overvaluing distressed loans held by the IIG Funds, (ii) falsifying paperwork to create a series of fake loans that were classified, fraudulently, as positively performing loans, and to otherwise hide losses, (iii) selling overvalued and fake loans to a collateralized loan obligation trust and new private funds established and advised by IIG, and (iv) using the proceeds from those fraudulent sales to generate liquidity required to pay off earlier investors in a Ponzi-like manner.
Stephen Sharkey pled guilty in the United States District Court for the Eastern District of Pennsylvania to two counts of conspiracy to commit wire fraud, eight counts of wire fraud, one count of aggravated identity theft and, one count of money laundering. Sharkey was sentenced to four years and one month in prison plus three years of supervised release, and he was ordered to pay $296,000 in restitution and to forfeit $296,000. As alleged in part in the DOJ Release:

Sharkey and his associate, Antonio Ambrosio, convinced their victims to provide Sharkey with the down payment funds in advance of the dates set for the real estate closings, with the promise that Sharkey would provide full financing for the purchases. Rather than finance the deals, Sharkey and Ambrosio simply stole the down payment money supplied by the victims and made excuses when the deals did not close. As part of the scam, Sharkey and Ambrosio even defrauded Ambrosio's own brother-in-law out of $208,000. After receiving this money, Sharkey immediately cut checks to ARMM Investments, LLC, a company owned by George Borgesi. Borgesi and Sharkey were both convicted in United States v. Merlino, et al., 99 CR 363, an early 2000s RICO case in which the Philadelphia La Cosa Nostra was named as the enterprise. Borgesi was named as a capo of the Philadelphia LCN in that Indictment, and Sharkey was identified as a bookmaker for the mob. 

After Sharkey and Ambrosio stole the down payment from Ambrosio's brother-in-law, they proceeded to lure a second victim to use Sharkey to finance his mortgage, and the victim wired Sharkey $100,000, which Sharkey promptly converted to his own use. The deal for this property fell through, but Sharkey and Ambrosio induced the victim to send the seller an extra $25,000 to hold the deal open, claiming Sharkey would get the deal done. The victim sent the seller the $25,000, but Sharkey had already disposed of the earlier $100,000 and the deal never closed.

Finally, in the real estate fraud perpetrated on the seller victim, Sharkey promised the victim that Sharkey would sell the house belonging to the estate of the victim's deceased parents and, after going to a closing the victim knew nothing about, Sharkey deposited all of the proceeds of the sale into his own bank account, stealing over $52,000 from the victim in the process.

Mexican Businessman, His Wife and Two Others Indicted in Million Dollar Investment Fraud Scheme (DOJ Release)
In an Indictment filed in the United States District Court for the Western District of Texas, Enrique Kramer and his wife Adriana Pastor, Noel Olguin, and Karina Hernandez were charged with one count of conspiracy to commit wire fraud; and, further, Kramer was charged with four counts of wire fraud, and  Pastor, Olguin, and Hernandez are charged with one count of wire fraud.  As alleged in part in the DOJ Release

[F]rome December 2015 to January 2019, the defendants conspired to promote a  "turn-key" business venture to Mexican nationals, consisting of a chain of Mexican food restaurants throughout Texas called "Las Quesadillas."  Olguin and Hernandez marketed the operation to potential buyers and were paid between $20,000 and $25,000 for each contract they secured.  Kramer and Pastor charged buyers a set fee ranging from $105,000 to $250,000, and promised to perform all tasks necessary for establishing a fully functional restaurant, including: finding and renting a suitable location, obtaining all permits, providing assistance in obtaining visas for buyers, completing construction, training employees, and handling all legal fees and incorporation issues. 

The indictment alleges that the defendants took funds from buyers and failed to provide the promised services. Instead, they used the funds for personal gain or to provide partial payments to previous customers who were demanding their money back.  In addition to partial refunds, Kramer would also offer stakes in other businesses as an alternative to repayment.  If buyers refused, the indictment alleges that Kramer and Pastor would threaten to sue them for breach of contract. The indictment alleges that the defendants perpetrated their scheme on at least eight different victims resulting in a total loss of more than $1 million.

Token Safe Harbor Proposal 2.0 (SEC Statement by Commissioner Hester M. Peirce)
As Commissioner Peirce explains in the opening paragraphs of her statement [Ed: footnotes omitted]:

Earlier today, I released on GitHub an updated version of the token safe harbor proposal that I originally suggested in February 2020. The safe harbor seeks to provide network developers with a three-year grace period within which, under certain conditions, they can facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws. The updated version reflects constructive feedback provided by the crypto community, securities lawyers, and members of the public. I am grateful for the thoughtful engagement and believe it demonstrates the need for regulatory clarity in this space. There is, however, more work to be done, which is why I, as a believer in the value of drawing on decentralized knowledge, posted the safe harbor on GitHub.

Three significant changes mark the updated version. First, to enhance token purchaser protections, the safe harbor proposal now requires semi-annual updates to the plan of development disclosure and a block explorer. Second, in response to concerns about the lack of clarity at what happens at the end of the three-year grace period, the safe harbor proposal now includes an exit report requirement. The exit report would include either an analysis by outside counsel explaining why the network is decentralized or functional, or an announcement that the tokens will be registered under the Securities Exchange Act of 1934. Third, the exit report requirement provides guidance on what outside counsel's analysis should address when explaining why the network is decentralized. The guidance is not a bright-line test, but rather attempts to strike a balance between providing a manageable number of useful guideposts while maintaining sufficient flexibility for the facts and circumstances of each network to be considered in the analysis.

Associated Person Cites Favoritism and Retaliation in FINRA Arbitration
In a FINRA Arbitration Statement of Claim filed and as amended by pro se, associated person Claimant Ketel, she asserted breach of contract; fraud; misrepresentation; duress and intimidation; unfair business practices; favoritism; and retaliation. Claimant Ketel sought "damages in the amount of $1,430,519.00 as well as cost of inflation; interest; changes in the Respondent's business practices for new hires; and a letter of apology." Respondent Citizens Securities generally denied the allegations, asserted various affirmative defenses, and filed a Counterclaim asserting contractual indemnity and breach of contract. The FINRA Arbitration Panel dismissed Claimant's claims without prejudice pursuant to FINRA Rule 13206(a) citing the six-year eligibility threshold.
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, Jared Matthew Reinstein submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Jared Matthew Reinstein entered the industry in 2007 and by June 2013, he was registered with LPL Financial LLC. The AWC asserts that Reinstein "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Reinstein violated FINRA Rule 2010. Accordingly, the self regulator imposed upon Reinstein a $5,000 fine, and a one-month suspension from associating with any FINRA member in all capacities. As alleged in part in  the AWC:

On September 4, 2018, Respondent sold two securities with a principal value of $1,929.10 in a customer's account without obtaining the customer's authorization. Respondent effected the transactions to generate sufficient cash in the customer's account to cover a required minimum distribution. Shortly thereafter, the customer complained to the firm. With the customer's authorization, the firm repurchased the shares of one of the securities Respondent sold, and effected another sale to generate cash. In addition, the firm refunded all fees and commissions to the customer and compensated the customer for all losses. On January 7, 2019, the firm issued a letter of caution to Respondent regarding his conduct and fined him. 

Approximately three weeks later, on January 30, 2019, Respondent purchased two securities with a principal value of $1,500.55 in a second customer's account without obtaining the customer's authorization. Shortly thereafter, the customer complained to the firm and the firm reversed the transactions.
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, CF Secured, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that CF Secured, LLC has been a FINRA member since 2017 with 94 registered individuals at two branches. The AWC asserts that CF Secured "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA imposed upon CF Secured a Censure and a $125,000 fine. As alleged in the AWC's "Overview":

Between April 2018 and January 2019, CF Secured failed to accurately calculate its required customer reserve on three separate occasions, resulting in nine hindsight deficiencies ranging from approximately $4 million to $29.8 million and totaling approximately $126 million. The firm's failure to accurately calculate its customer reserve obligations caused the firm to maintain inaccurate books and records and to make two FOCUS filings inaccurately reporting its customer reserve. As a result of the foregoing, CF Secured violated Sections 15(c) and 17(a) of the Securities Exchange Act of 1934, Exchange Act Rules 15c3-3, 17a-3 and 17a-5, and FINRA Rules 4511 and 2010. 

CF Secured also failed to establish and maintain a supervisory system, including written procedures (WSPs), reasonably designed to ensure its compliance with customer reserve requirements, in violation of FINRA Rules 3110 and 2010. publisher Bill Singer was the third generation of his family in the wine and liquor business. Mounted on a wall in Bill's home is the framed First Dollar that his father got when he opened his liquor store in the 1950s. It's a "Silver Certificate" with its own unique serial number -- almost like cryptocurrency but for the fact that it is a legacy, paper currency with a physical manifestation but, hey, if my aunt were a man she'd be my uncle.  Also, someone (whose name is now lost to history) wrote on the First Dollar: "Best of Luck!" Imagine if Bill's father had transformed his First Dollar into an NFT way back in the 1950s. Why that First Dollar would be worth -- what? -- something like $2 or even $3? You would have doubled or tripled your investment.
If you file a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934, a basic element of your proof must be to show that the defendant had acted with "scienter." What's scienter? Ahh, that's as easy as explaining what's cryptocurrency -- or what's "enough" or "a lot" or "frequently." In legalese, courts refer to "scienter" as a mental state embracing intent to deceive, manipulate, or defraud. Yeah, sure, that's helpful (not). Complicating things, in 1995, the Private Securities Litigation Reform Act imposed a further threshold upon plaintiffs in that they must plead a "strong inference" of scienter; and, as held in 2007 by the United States Supreme Court in Tellabs, Inc. v. Makor Issues & Rights, LTD, a securities fraud complaint must allege facts establishing that the strong inference of scienter is "cogent and at least as compelling as any opposing inference of nonfraudulent intent." Confused? Welcome to the club. See how all of this plays out in a recent Class Action.