Securities Industry Commentator by Bill Singer Esq

April 15, 2021

Another day and another dispute about whether an employment dispute is arbitrable before FINRA. In today's iteration, we got two former employees of a non-FINRA-member-firm but they are also employees of a FINRA member firm -- and both firms are subsidiaries of the same parent. After the employees resign to join Wells Fargo Advisors, only the non-FINRA employer sues them in federal court. In trying to get their case before a FINRA Arbitration Panel, the former employees argue that as FINRA registered representatives, their disputes are subject to the arbitration provisions of the Form U4 and FINRA Rule 13200, and if the Court ain't buyin' that, the employees further argue that the FINRA member firm is an indispensable party and must be joined, which would then give them another avenue to argue for FINRA arbitration.

Statement on Senate Confirmation of Gary Gensler (SEC Public Statement by Acting Chair Allison Lee, Commissioner Hester M. Peirce, Commissioner Elad L. Roisman, and Commissioner Caroline A. Crenshaw)

A warm congratulations to Gary Gensler on his Senate confirmation to become Chair of the SEC. He will be joining a dedicated staff that works tirelessly day in and day out on behalf of investors and our markets. We welcome him back to public service and look forward to working together to execute our vital mission.

Bill Singer's Comment: Just wonderin' here what the vote was congratulating Gensler? Three to One? Two in Favor with Two Abstentions? All of which reminds me of the joke about the Chief Executive Officer who was rushed to the hospital for emergency surgery. The following day, a beautiful vase filled with flowers was delivered to his room with a card that read: "By a vote a 14 in favor, 6 opposed, and 1 abstention, the Board of Directors wishes you a speedy recovery."

The panel reversed the district court denial of defendants' motion to compel arbitration of statutory employment discrimination and civil rights claims, and remanded with the direction that all claims be sent to arbitration and the case be dismissed without prejudice. 

When Shannon Zoller became an investment banker with GCA Advisors, LLC, she signed an employment contract that included an arbitration agreement, and she also signed a Form U4, as required by the Financial Industry Regulatory Authority. GCA later fired her, and she brought an action alleging various contract claims, as well as statutory claims under the Equal Pay Act, California's Fair Pay Act, California's Fair Employment and Housing Act, and the Civil Rights Act of 1871. The parties stipulated to arbitrate some of Zoller's claims, but the district court denied GCA's motion to compel arbitration of the statutory employment discrimination and civil rights claims because it held that Zoller did not knowingly waive her right to pursue these claims in court. 

The panel stated that, under Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), while not all statutory claims may be appropriate for arbitration, if a party agreed to arbitrate, the party will be held to that agreement unless the party can prove a congressional intent to preclude a waiver of judicial remedies for the statutory rights at issue. Zoller, therefore, carried the burden to show such an intention. Prudential Ins. Co. of Am. v. Lai, 42 F.3d 1299 (9th Cir. 1994), extended Gilmer to Title VII claims and held that there must be at least a knowing agreement to arbitrate employment disputes before an employee may be deemed to have waived judicial remedies. 

The panel assumed, without deciding, that this knowing waiver requirement remained good law and was applicable to the statutes at issue. The panel concluded that the arbitration agreement included clear language encompassing employment disputes, and the evidence showed that Zoller knowingly waived her right to a judicial forum to resolve her statutory claims. Accordingly, the panel reversed the district court's denial of GCA's motion to compel arbitration of these claims.
In an Indictment filed in the United States District Court for the Eastern District of New York, Gyanendra Asre was charged with two counts of failure to maintain an anti-money laundering program, five counts of failure to file Suspicious Activity Reports, and one count of operation of an unlicensed money transmitting business. Also, Hanan Ofer was charged with one count of operation of an unlicensed money transmitting business. As alleged in part in the DOJ Release, from 2014 to 2016, Asre and Ofer:

devised and executed a scheme to bring lucrative and high-risk international financial business to small, unsophisticated financial institutions. Asre and Ofer were trained in anti-money laundering compliance and procedures, and represented to the financial institutions that, because of their experience and training, they understood the risks associated with the high-risk business and would conduct appropriate anti-money laundering oversight as required by the Bank Secrecy Act. 

Based on Asre and Ofer's representations, the New York State Employees Federal Credit Union (NYSEFCU), a small financial institution with a volunteer board that primarily served New York state public employees, allowed Asre and Ofer to conduct high-risk transactions through the NYSEFCU. Asre and Ofer then caused the transfer of more than $1 billion in high-risk transactions, including hundreds of millions of dollars originating from foreign jurisdictions, through the NYSEFCU and other entities. Contrary to their representations, Asre willfully failed to implement and maintain the requisite anti-money laundering programs or conduct oversight required to detect, identify, and report suspicious transactions. This caused, among other things, the NYSEFCU to process more than a billion dollars in high-risk transactions during Asre's tenure, without ever filing a single Suspicious Activity Report, as required by law.

Asre and Ofer owned and operated DDH Group LLC, a money transmitting business and money services business that conducted some of these high-risk transactions, without it being licensed or registered as required by law.

An Indictment filed in the United States District Court for the Eastern District of New York, charged Richard Dale Sterritt, Jr., Michael Greer, Robert Magness, Mark Ross and Robyn Straza with conspiracy to commit securities fraud, wire fraud and money laundering, among other offenses.  As alleged in part in the DOJ Release:

According to the indictment, between March 2018 and January 2021, Sterritt, Greer, Magness and Ross engaged in a series of related fraudulent schemes.  The schemes included an offering fraud in the securities of Zona Energy (the "Zona Energy Offering Fraud") and a scheme to manipulate the price and trading volume of publicly traded shares of stock in OrgHarvest, Inc., which traded under the stock ticker "ORGH" (the "ORGH Market Manipulation," and, together with the Zona Energy Offering Fraud, the "Fraudulent Schemes").  In addition, all of the defendants, including Straza, laundered the proceeds of the Fraudulent Schemes by facilitating financial transactions to conceal and promote the Fraudulent Schemes. 

As part of the Zona Energy Offering Fraud, the defendants misappropriated more than $10 million of investor funds through the sale of shares in Zona Energy, an oil and gas exploration production company based in the Permian basin of West Texas.  Sterritt elicited investors in Zona Energy using the alias "Richard Richman."  Sterritt and his co-conspirators made material misrepresentations about Zona Energy's business, management and the use of proceeds from the share offering.  Of the more than $16 million raised from Zona Energy investors in the offering, Sterritt and his co-conspirators, including Ross, Straza and Greer, misappropriated more than $10 million, including to purchase luxury items, pay personal expenses or funnel funds into other businesses Sterritt controlled, including a cannabis company.

With regard to the ORGH Market Manipulation scheme, Sterritt, Magness and Ross engaged in matched trading to artificially prop up the price of ORGH shares as a part of a scheme to raise revenue and hide the misappropriation from and true financial condition of Zona Energy.  They coordinated those ORGH trades with an undercover law enforcement agent (the "Undercover Agent") posing as a corrupt stock promoter, who they believed controlled a team of corrupt brokers who would buy the artificially inflated ORGH stock in their customers' accounts.  Sterritt, who secretly controlled the majority of ORGH shares through trusts in the name of his girlfriends, family members and co-conspirators, agreed with the Undercover Agent to place matched trades at specific prices, volumes and times to inflate the price of ORGH stock

To facilitate the misappropriation of funds from Zona Energy, Sterritt, Greer, Ross and Straza laundered investor money from the sale of Zona Energy shares between bank accounts controlled by Sterritt, Greer and Straza.  In some cases, investor funds were wired between bank accounts for multiple different entities in the name of Greer and/or Straza, or their entities, before those funds were used to pay personal expenses; to purchase luxury goods, including plastic surgery; or provided in cash to Sterritt's family, friends, girlfriends and to co-conspirators.   

In a Complaint filed in the United States District Court for the Eastern District of New York, the SEC alleged that between March 2018 and at least November 2020, that Richard Dale Sterritt, Jr. a/k/a "Richard Richman" and:

Michael Greer, Deanna Looney, Robert Magness, Jr., Katie Mathews, James Christopher Pittman, and Mark Ross raised more than $16 million from more than 300 investors through an unregistered private placement of the common stock of Zona Energy Inc., a Dallas-based company that claimed to be focused on the oil and gas industry. According to the complaint, the defendants made various false and misleading statements verbally and in offering materials to solicit investors, including that their funds would be used to support Zona's operations, namely to develop the mineral rights on a West Texas cattle ranch. The complaint further alleges that instead of using investors' money to capitalize Zona, Sterritt and his co-defendants misappropriated millions of dollars raised in the offering, using the funds to pay for luxury goods, rental apartments, a car, and to make cash payments to friends, family members, and Sterritt's girlfriends. Also, according to the complaint, the offering materials falsely claimed that Zona had no debt when the company actually owed millions of dollars in demand notes to various Sterritt-controlled companies.

The complaint alleges that Sterritt, Magness, and Ross also conducted a manipulative trading scheme in the securities of OrgHarvest Inc., a Sterritt-controlled public issuer, in an attempt to inflate the price of the stock so that they could sell their shares to unsuspecting investors for a profit.
In a Superseding Criminal Information filed in the United States District Court for the District of Oregon, Susan Tranberg was charged with mail fraud, aggravated identity theft, and tax evasion. Tranberg pled guilty to all three counts and was sentenced to 57 months in prison plus three years of supervised release, and ordered to pay over $5.3 million in restitution. As alleged in part in the DOJ Release:

According to court documents, beginning as early as June 2004 and continuing to January 2019, Tranberg defrauded Weyerhaeuser out of more than $4.5 million by submitting fraudulent invoices for payment to a fake vendor she created. Tranberg had worked for Weyerhaeuser in Springfield, Oregon in various positions for more than 40 years. A financial analysis determined that the vast majority of the money was used to fund a lavish lifestyle of expensive dinners, vacations, six-figure wedding expenses, and shopping sprees.

At some point in or before June 2004, Tranberg created a fake timber contract between the company and a vendor she named after her mother, who was unaware of the scheme. Over the next 10 years, Tranberg would use her positions in the company's accounting and finance departments to request cashier's checks, which she then cashed into her own bank account. During this time period, Tranberg requested and received more than $2.6 million.

In June 2014, Weyerhaeuser transitioned to a new payment processing system. To continue her scheme, Tranberg set up a fake vendor account in the new system and attached a letter purportedly from her mother describing the documentation provided to set up the account. This documentation included a Form SSA-1099 Social Security Statement and a forged Form W-9 Request for Taxpayer Identification Number and Certification. At the time Tranberg sent the letter and documentation, Tranberg's mother had been deceased for five years.

After setting up the fake vendor account, Tranberg continued her scheme by forging colleagues' signatures on check requests and using her colleagues' computer login credentials without authorization to create requests and approve fraudulent payments. All requested cashier's checks were sent via private or commercial interstate carrier directly to Tranberg. During these final five years, ending in January 2019, Tranberg requested and received nearly $1.9 million.

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.") 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.