Securities Industry Commentator by Bill Singer Esq

April 19, 2021
With surprising regularity, we have reported about families with a stockbroker, and how such a relationship proves fertile ground for over-reaching or fraud. In a recent FINRA regulatory settlement, we come across the scenario of a mother with an Edward Jones account and her daughter who is not a stockbroker but who is an Edward Jones Branch Office Administrator. Astute readers will likely infer that since this blog is about a "FINRA regulatory settlement" that the daughter took improper advantage of the mother.

In a Complaint filed in the United States District Court for the District of Marylan, Eddy Blizzard is charged with wire fraud and aggravated identity theft. As alleged in part in the DOJ Release:

[B]lizzard held several licenses that allowed him to operate as a registered broker and a registered investment adviser per the Financial Industry Regulatory Authority ("FINRA").  From 2003 to 2014, Blizzard was employed by a bank securities company (Bank 1) and from 2014 to 2017 he was employed by a bank investment services company (Bank 2), both in Maryland.   

As detailed in the affidavit, victim R.M. was a resident of Maryland and was 75 years old in January 2020.  On December 12, 2019, R.M. was interviewed as part of this investigation.  R.M stated to investigators that beginning in 1963, R.M. went to work for a Baltimore based commercial air-conditioning company, where he enjoyed a successful career installing commercial grade air conditioning units around the country.  R.M. told investigators he routinely worked approximately 15 to 30 hours of overtime per week during his career to make extra money.  In 2003, after approximately 40 years of service with the air conditioning company, R.M. took a buyout and retired.  Six months later, R.M. decided to invest his retirement funds in order to provide an inheritance for his grandchildren.  R.M. sought investment advice from Bank 1, where he had his depository accounts.

Blizzard began working at Bank 1 shortly after R.M. began investing there and became R.M.'s financial adviser.  R.M. allegedly told investigators that in about 2005, Blizzard "went on his own" meaning that Blizzard began working as an independent financial advisor and asked R.M. if R.M. wanted to leave Bank 1 and use Blizzard as a full-time financial advisor.  Blizzard allegedly told R.M. that it would be a while before he had his own office, but he would continue to work out of the Bank 1 branch in Catonsville, Maryland.  A review of publicly available FINRA records shows that Blizzard never went to work as an independent financial advisor.  As detailed in the affidavit, approximately once a month, R.M. would drive from his new home in Chester, Maryland on the Eastern Shore to meet with Blizzard at Bank 1 in Catonsville, approximately one hour away; however, R.M. and Blizzard would meet in Blizzard's car, not the office.  These meetings lasted 30-45 minutes and R.M. was never told why they were meeting in Blizzard's car. 

In approximately 2010, the affidavit alleges that, at Blizzard's request, R.M. gave Blizzard 15-20 signed blank checks, which Blizzard used.  According to the affidavit, R.M. did not know what the checks were for, but recognized Blizzard's handwriting when he received the cancelled checks in the mail.   During the years of investment with Blizzard, R.M. stated that he believed his retirement funds were protected, meaning they would not lose value - a fact that was allegedly told to R.M. numerous times by Blizzard and Blizzard's wife.  R.M. also believed that his mortgage was being paid by Blizzard.   

The affidavit alleges that on approximately 12 different instances, R.M. went to his local bank to withdraw cash and was told there was not enough money in the account.  R.M. would then call Blizzard to let him know about the deficiency.  Blizzard allegedly would then tell R.M. to wait a day or two and there would be funds in the account to withdraw. 

In August 2019, R.M. was preparing to go on a family vacation and attempted to withdraw $1,000 to $1,500 in cash from the local Bank 1 branch and was told there were not sufficient funds in the account.  R.M. attempted to contact Blizzard on his cell phone for a week with no response.  R.M. then went to Blizzard's Perry Hall, Maryland residence to talk to Blizzard in person, knocking on the front and back doors of Blizzard's residence.  No one came to the door, but according to the affidavit R.M. received a voicemail from Blizzard, while he was still at Blizzard's home.  In the voicemail, Blizzard allegedly stated that the neighbors had called him and were complaining about the banging on the door.  As detailed in the affidavit, Blizzard further explained that all of R.M.'s money was gone. 

According to the affidavit, a review of R.M.'s depository and investment accounts showed that between January 2013 and August 2019 there were a total of 242 distributions totaling approximately $1.4 million from R.M.'s retirement accounts. Of those, 129 distributions totaling $1.2 million were specifically requested from R.M.'s retirement accounts instead of being regular systematic annuity payments. After taxes and fees were deducted from those requested payments, approximately $1 million was deposited into R.M.'s Bank 1 account.  This review allegedly also revealed that from April 2016 to April 2019 Blizzard deposited approximately 112 checks drawn on R.M.'s account into various bank accounts at Bank 1 and elsewhere that were held by Blizzard jointly with his wife or individually.  These checks totaled approximately $848,000 and were written to Blizzard or Blizzard's wife.  A review of these checks showed that almost all had comments written on the memo section indicating various purposes such as payment of property taxes, construction, boat payments, and down payments for a new house.  

In addition, the affidavit alleges that R.M. received a letter from the IRS, which he turned over to Blizzard as Blizzard had instructed.  R.M.'s relatives later determined that R.M. owed approximately $63,000 in federal income tax due to disbursements from R.M.'s retirement accounts that were allegedly stolen by Blizzard.  In the fall of 2019, R.M.'s home was put into the foreclosure process because of lack of payment which R.M. allegedly thought was being handled by Blizzard.  R.M. died on March 20, 2020.

Fedir Hladyr, 35, pled guilty in the United States District Court for the Western District of Washington to conspiracy to commit wire fraud and to conspiracy to commit computer hacking, and he was sentenced to 10 years in prison. As alleged in part in the DOJ Release:

[S]ince at least 2015, members of FIN7 (also referred to as Carbanak Group and the Navigator Group, among other names) engaged in a highly sophisticated malware campaign to attack hundreds of U.S. companies, predominantly in the restaurant, gambling, and hospitality industries. FIN7 hacked into thousands of computer systems and stole millions of customer credit and debit card numbers that were then used or sold for profit. FIN7, through its dozens of members, launched waves of malicious cyberattacks on numerous businesses operating in the United States and abroad. To execute its scheme, FIN7 carefully crafted email messages that would appear legitimate to a business' employees, and accompanied emails with telephone calls intended to further legitimize the emails. Once a file attached to a fraudulent email was opened and activated, FIN7 would use an adapted version of the Carbanak malware, in addition to an arsenal of other tools, to access and steal payment card data for the business's customers. Since 2015, many of the stolen payment card numbers have been offered for sale through online underground marketplaces.

In the United States alone, FIN7 successfully breached the computer networks of businesses in all 50 states and the District of Columbia, stealing more than 20 million customer card records from over 6,500 individual point-of-sale terminals at more than 3,600 separate business locations.  According to court documents, victims incurred enormous costs that, according to some estimates, totaled billions of dollars. Additional intrusions occurred abroad, including in the United Kingdom, Australia, and France. Companies that have publicly disclosed hacks attributable to FIN7 include such chains as Chipotle Mexican Grill, Chili's, Arby's, Red Robin, and Jason's Deli.  

Hladyr originally joined FIN7 via a front company called Combi Security - a fake cyber security company that had a phony website and no legitimate customers. Hladyr admitted in his plea agreement that he soon realized that, rather than a legitimate company, Combi was part of a criminal enterprise. Hladyr served as FIN7's systems administrator who, among other things, played a central role in aggregating stolen payment card information, supervising FIN7's hackers, and maintaining the elaborate network of servers that FIN7 used to attack and control victims' computers. Hladyr also controlled the organization's encrypted channels of communication.

In an Order Determining Whistleblower Award Claim (SEC, '34 Act Rel. No. 91584; Whistleblower Award Proc. File No., 2021-40)
The SEC's Claims Review Staff "CRS" issued a Preliminary Determination recommending the denial of a whistleblower award claim to a Claimant based upon findings that:

(1) Claimant did not qualify as a whistleblower under Exchange Act Rules 21F-2(a)(1)-(2) since Claimant did not submit information about a possible securities law violation in the form and manner required by Exchange Act Rules 21F-9(a)-(b);4 and (2) the information that Claimant later submitted to the Commission did not lead to the successful enforcement of the Covered Action under Exchange Act Rule 21F-4(c)(1)-(2).

The SEC Order further explains in part that:

[C]laimant did not submit *** tip to the Commission until Redacted after the Commission filed its complaint in the Covered Action, and more than two years after he Enforcement staff opened its investigation of the Company Redacted. Indeed, by the time Claimant filed * * * tip on Redacted, the staff had already completed its investigative work, and the tip did not provide the staff with any new or useful information that assisted the Commission in obtaining judgments in the Covered Redacted Action. Claimant does not dispute that Claimant's Redacted tip was not new information to the staff. Accordingly, Claimant did not provide information to the Commission that led to the success of the Covered Action and, therefore, Claimant is not eligible to receive a whistleblower award.
The SEC reopened the comment period on the proposed rules for the use of universal proxy cards in all non-exempt solicitations for contested director elections.

SEC Charges IIG Co-Founder Martin Silver With Fraud (SEC Release)

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.

In November 2019, the SEC charged IIG with fraud and revoked the investment adviser's registration. As noted in part in the SEC Release:

[F]rom October 2013 to at least July 2018, Silver, the co-founder and chief operating officer of IIG, a formerly registered investment adviser, defrauded IIG's investment advisory clients by, among other things, grossly overvaluing the assets in IIG's flagship hedge fund. As alleged, the overvaluation of these assets resulted in the fund paying inflated fees to IIG, some of which went to Silver.  The complaint further alleges that Silver falsely reported to investors that certain fake and overvalued loan assets that IIG sold between funds it advised were legitimate assets and were fairly valued.

The complaint, filed in the U.S. District Court for the Southern District of New York, charges Silver with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Silver, who is cooperating with the SEC, consented to a bifurcated settlement, agreeing to be permanently enjoined from violations of the charged provisions, with monetary relief in an amount to be determined by the court at a later date upon motion of the Commission.

On March 30, 2020, the SEC obtained a final judgment on consent enjoining IIG from violating the antifraud provisions of the federal securities laws and requiring IIG to pay more than $35 million in disgorgement and prejudgment interest. The SEC also previously charged other individuals for their roles in IIG's fraud. On July 17, 2020, the SEC charged IIG co-founder David Hu with violations of the antifraud provisions of the federal securities laws. On February 1, 2021, the court entered a partial judgment against Hu enjoining him from violating the charged provisions, and on February 4, 2021, the SEC imposed an associational bar on Hu. The SEC instituted settled administrative proceedings on July 22, 2020, against Carlos Cano, a former IIG employee, for aiding and abetting IIG and Hu's violations. The settled order against Cano imposed a cease-and-desist order, an associational bar, and a $300,000 civil penalty. On December 22, 2020, the SEC charged Charles Samel, a former IIG consultant with aiding and abetting IIG's violations.