The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

April 20, 2021








http://www.brokeandbroker.com/5809/finra-melen-awc/
There are times when FINRA gets it right. The self-regulatory-organization conducts a diligent investigation and finds a violation of its rules. Thereafter, FINRA presents its compelling case to a respondent, but also accepts a fair settlement. That's how it should work. But for the fact that it doesn't always work like that and but for the fact that it doesn't work like that as often as it should. But, okay, let's just stand back for a moment and offer a round of applause to encourage FINRA to do more of the same as demonstrated in a recent settlement involving loans from customers and outside business activities.

In a Complaint filed in the United States District Court for the Dist4rict of Nevada
https://www.sec.gov/litigation/complaints/2021/comp-pr2021-66.pdf, the SEC charged  Spot Tech House Ltd f/k/a Spot Option Ltd. with violating the anti-fraud and registration provisions of the federal securities laws, and Spot's former executives Malhaz Pinhas Patarkazishvili a/k/a Pini Peter and Ran Amiran with violating the registration provisions of the federal securities laws and with controlling Spot Option in its violations of the anti-fraud provisions of the federal securities laws. As alleged in part in the SEC Release:

[S]pot Option - under the control of Patarkazishvili, the company's founder and former chief executive officer, and Amiran, the company's former president - defrauded retail investors worldwide through a scheme involving the sale of online binary options. Binary options are securities whose payouts are contingent on the outcome of a yes/no proposition, typically whether an underlying asset will be above or below a specified price at the time the option expires. The SEC has previously charged several entities and individuals in connection with their involvement in the sale of binary options using the Spot Option platform, including in the SEC v. Banc de Binary, SEC v. Beserglik, and SEC v. Senderov cases.

The SEC alleges that the defendants developed nearly all of the products and services necessary to offer and sell binary options through the internet, including a proprietary trading platform, and that they licensed these products and services to entities they called "white label partners," who directly marketed the binary options. According to the complaint, Spot Option instructed its white label partners to aggressively market the binary options as a highly profitable investments for retail investors. As alleged, investors were not told that the defendants' white label partners were the counter-parties on all investor trades, and thus profited when the investors lost money. To ensure sufficient investor losses and make the scheme profitable, Spot Option allegedly, among other tactics, instructed its partners to permit investors to withdraw only a portion of the monies the investors deposited, devised a manipulative payout structure for binary options trades, and designed its trading platform to increase the probability that investors' trades would expire worthless. According to the complaint, the defendants' deceptive business practices caused U.S. and foreign investors to lose a substantial portion of the money they deposited to their trading accounts. The defendants allegedly made millions of dollars as a result.

https://www.sec.gov/litigation/litreleases/2021/lr25072.htm
Without admitting or denying the allegations in an SEC Complaint filed in the United States District Court for the District of Massachusetts, Morrie Tobin, Milan Patel, and Matthew Ledvina consented to the entry of final judgments enjoining them from future violations of the securities registration provisions of Section 5(a) and 5(c) of the Securities Act and the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rules 10b-5(a) and (c) thereunder. In addition, Tobin, Patel, and Ledvina consented to penny stock bars. In parallel criminal actions, Tobin, Patel, and Ledvina pled guilty to conspiracy to commit securities fraud. Tobin was sentenced to 12 months and a day in prison, ordered to forfeit $4 million, and fined $100,000; Patel was sentenced to 15 months in prison and fined $50,000; and Ledvina was sentenced to probation and fined $50,000 -- further, Tobin, Patel, and Ledvina were ordered to pay $1,908,583 in restitution on a joint and several basis. As alleged in part in the SEC Release:

[M]orrie Tobin, a California resident, secretly controlled and owned substantially all of the stock in two public companies, Environmental Packaging Technologies Holdings, Inc. and CURE Pharmaceutical Holding Corp, and organized a scheme to sell that stock without disclosing his identity The complaint alleged that Milan Patel and Matthew Ledvina, both formerly attorneys at an international tax law firm, facilitated Tobin's scheme by hiding Tobin's ownership and control over the companies. As alleged, Patel and Ledvina deposited Tobin's stock in accounts in the names of nominee entities at offshore firms including Wintercap SA, a Swiss-based company run by U.K. citizen Roger Knox. Tobin and others allegedly paid promoters to tout the companies' stock, and when the stock rose following the touting, Tobin sold shares for a profit. On October 2, 2018, the SEC filed an emergency action and obtained an asset freeze against Knox and Wintercap SA, charging them with a scheme that generated more than $165 million of illegal sales of stock in at least 50 microcap companies, including Environmental Packaging and CURE.

https://www.sec.gov/news/press-release/2021-65
Gary Gensler was sworn into office today as a Member of the Securities and Exchange Commission; after having been nominated to Chair the SEC by President Joseph R. Biden so and confirmed by the U.S. Senate. As set forth in part in the SEC Release:

Before joining the SEC, Gensler was most recently Professor of the Practice of Global Economics and Management at the MIT Sloan School of Management, Co-Director of MIT's Fintech@CSAIL, and Senior Advisor to the MIT Media Lab Digital Currency Initiative. From 2017-2019, he served as chair of the Maryland Financial Consumer Protection Commission.

Gensler was formerly chair of the U.S. Commodity Futures Trading Commission, leading the Obama Administration's reform of the $400 trillion swaps market. He also was Senior Advisor to U.S. Senator Paul Sarbanes in writing the Sarbanes-Oxley Act (2002) and was Under Secretary of the Treasury for Domestic Finance and Assistant Secretary of the Treasury from 1997-2001. In recognition for his service, he was awarded Treasury's highest honor, the Alexander Hamilton Award. He is a recipient of the 2014 Frankel Fiduciary Prize.

Prior to his public service, Gensler worked at Goldman Sachs, where he became a partner in the Mergers & Acquisition department, headed the firm's Media Group, led fixed income & currency trading in Asia, and was co-head of Finance, responsible for the firm's worldwide Controllers and Treasury efforts.

A native of Baltimore, Maryland, Gensler earned his undergraduate degree in economics in 1978 and his MBA from The Wharton School, University of Pennsylvania, in 1979. He has three daughters.

Securities Commissioner Issues Order Stopping Fraudulent Cryptocurrency Trading Program (TSSB Release)
https://www.ssb.texas.gov/news-publications/securities-commissioner-issues-order-stopping-fraudulent-cryptocurrency-trading
Securities Commissioner Travis J. Iles entered an emergency cease and desist order to stop offers of a fraudulent cryptocurrency trading program in Texas. As alleged in part in the TSSB Release:

[B]itles and Lacis are directing potential investors to deposit principal in one of eight different "savings plans." They claim proprietary algorithmic trading software referred to as the Cryp-Spider AI Algo-Trading System that trades the principal across different cryptocurrency exchanges. The artificial intelligence's cryptocurrency trading purportedly generates daily returns between 0.3% and 6.0% of principal, and Bitles and Lacis are promising to pay other profits derived from speculation on the relative value of cryptocurrencies and the US Dollar. 

In addition, Bitles and Lacis are issuing and promoting the sale of BTL Tokens. According to the order, they have been referring to BTL Tokens as "internal tokens" and describe BTL Tokens as utility coins - a term that typically refers to tokens used to purchase goods or services from an issuer. In this case, however, the order accuses Bitles and Lacis of claiming the BTL Tokens will appreciate in value - as much as 10 to 60% per month - and that holders of the BTL Tokens will realize profits of at least 30% per month. 

. . .

The order also alleges Bitles and Lacis are recruiting sales agents to recruit Texas investors. Their recruitment allegedly requires attendance of a seven-day training program - and after the conclusion of this program, sales agents purportedly expect to receive at least $10,000 per month through commissions, bonuses, awards and prizes including a Rolex Watch, luxury yacht and a villa in Dubai.

According to the order, however, the parties are not registered to offer securities in Texas and they are recruiting sales agents who are not registered to offer securities in Texas. Likewise, the investments in the cryptocurrency trading program are not registered or permitted for sale in Texas.

The order also alleges the offering is a fraud. The parties are accused of concealing critical information, such as the identity and qualifications of traders and key personnel, information relating to the Cryp-Spider AI and financial information relating to business operations. 

In a FINRA Arbitration Statement of Claim filed in December 2020, pro se public customer Claimant Lohrey sought $33,000 in damages based upon his allegation that Respondent Robinhood:

did not process his withdrawal from the cash value of his account and, instead, the funds disappeared. Claimant further alleged that, during the review of his complaint, Respondent provided inaccurate data for the value of his option holdings. 

Respondent Robinhood generally denied the allegations and asserted various affirmative defenses. The sole FINRA Arbitrator denied the claims but found Respondent liable for and ordered it to pay to Claimant Lohrey $300 as reimbursement for half of the FINRA filing fee.

Bill Singer's Comment: Oh how I wish the FINRA Arbitration Award had detailed Claimant Lohrey's allegations and Respondent Robinhood's explanations. And oh how I wish that Lohrey had retained a lawyer rather than proceeded pro so, but, for all I know (or don't), he may have done a superb job arguing his case .
  As has been frequently disclosed in the press and social media, many online brokerage firms have failed to maintain adequate "operational capacity" during the Covid-Pandemic-Reddit-Fueled market. Among the most frequent customer complaints are platform outages and the inability to obtain timely customer service to resolve real-time issues. During a given trading day, traders complaint that they lose Level II quotes, cannot obtain real-time portfolio valuations, and are unable to obtain timely confirmation of entered buys and/or sells. Further, there are numerous complaints about account transactions that appear to have gone astray but for which no human being can be timely located at a given brokerage firm to explain what happened and when it will be corrected. 
  I am anticipating far more FINRA Arbitration cases brought by customers against Robinhood, Schwab, and other similarly situated firms.

http://www.brokeandbroker.com/5798/nrf-finra-awc/
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.

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