Securities Industry Commentator by Bill Singer Esq

April 21, 2021

Regulators and prosecutors like to exaggerate the nature and extent of their allegations; but let's not pretend that defense lawyers don't participate in similar subterfuge through their own fanciful pleadings. Such is the stuff of our adversary system of justice. When regulators/prosecutors have a settlement to work with, however, things really get blown out of proportion -- such unbridled excess produces settlements in which the sanctions imposed don't appear to fit what is presented to us as another crime of the century. In a recent FINRA AWC, we are left somewhat breathless by a series of seemingly outrageous allegations by the regulator only to be asked to accept what comes off as tepid sanctions.
In an Indictment filed in the United States District Court for the Eastern District of New York,Val Cooper, Alex Levin and Garri Smith were charged with money laundering conspiracy and conspiracy to violate the Travel Act. As alleged in part in the DOJ Release:

As set forth in the indictment and court filings, between March 2015 and October 2019, the defendants and their co-conspirators allegedly stole over $30 million in cash and other valuables from safe deposit boxes at banks in multiple foreign countries, including the Ukraine, Russia, North Macedonia, Moldova, Latvia, Uzbekistan and Azerbaijan.  The co-conspirators targeted foreign banks that appeared to lack security features, including video surveillance cameras in certain areas.  After a bank was selected, they rented safe deposit boxes at the location by posing as customers.  The co-conspirators entered the safe deposit box rooms of the targeted banks and used sophisticated camera equipment, including borescopes that are typically used in medical procedures, to photograph the insides of locks of safe deposit boxes belonging to other individuals.  Another co-conspirator used these photographs to create duplicate keys, and then other co-conspirators used the duplicate keys to open the victim safe deposit boxes in order to steal the contents, including currency, gold bars, jewelry and other property. 

Cooper, the leader of the network, directed others, received stolen property and used his bank accounts in the United States to launder proceeds from the scheme.  Levin used his bank accounts in the United States to purchase camera equipment used in some of the thefts and also to launder the proceeds.  Smith committed some of the safe deposit box thefts himself, flying from the United States to foreign countries to steal property from victim safe deposit boxes at the targeted banks.

Earlier today, agents executed a search warrant at, among other places, Cooper's residence.  There, agents discovered, among other things, safe deposit box keys with no numbering on them, cash, jewelry and high-end handbags. Agents also searched a storage unit in Brooklyn controlled by Cooper and found a borescope and a safe deposit box lock.
In an Indictment filed in the United States District Court for the District of New Jersey, Frank N. Tobolsky was charged with eight counts of wire fraud. As alleged in part in the DOJ Release:

Beginning in 2013, Tobolsky raised money from a victim, purportedly as an investment that would loan money to season ticket holders who owned seat licenses for a professional sports team in Philadelphia, Pennsylvania. The seat licenses would be used as collateral to secure the loans. The victim sent Tobolsky approximately $2.4 million to invest in the purported business venture. The money was not used for loans to season ticket holders. Instead, Tobolsky used a substantial portion on personal expenses.   

Court Enters Final Judgment Against Investment Adviser Who Defrauded Retired Couple (SEC Release)
The United States District Court for the District of Connecticut entered a judgment against unregistered investment adviser Hai Khoa Dang enjoining him from violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and ordering him to pay $7,249 in disgorgement and pre-judgment interest and a $2,200,000 civil penalty. As alleged in part in the SEC Release:

[D]ang gained complete control over the couple's brokerage accounts and misled them about his risky trading strategies, hiding the fact that he had depleted virtually all of their retirement savings within ten months. Dang allegedly led the couple to believe that he would invest the majority of their investment portfolio conservatively and would retain a minimum of $250,000 in cash in their accounts. As alleged in the complaint, Dang instead engaged in a risky and unauthorized options trading strategy, causing the value of the couple's accounts to plummet from more than $2.2 million to approximately $27,000 between February 2018 and November 2019. Dang also allegedly lied to the clients about the losses, including misrepresenting that the value of the client's positions were not reflected in the brokerage account statements.

Sheng-Wen Cheng a/k/a "Justin Cheng" a/k/a "Justin Jung," 24, pled guilty to one count of bank fraud, one count of securities fraud, and one count of wire fraud in an Information filed in the United States District Court for the Southern District of New York. As alleged in part in the DOJ Release:

The Coronavirus Aid, Relief, and Economic Security ("CARES") Act is a federal law enacted on March 29, 2020, designed to provide emergency financial assistance to the millions of Americans who are suffering the economic effects caused by the COVID-19 pandemic.  One source of relief provided by the CARES Act was the authorization of hundreds of billions of dollars in forgivable loans to small businesses for job retention and certain other expenses through the SBA's Paycheck Protection Program ("PPP").  Pursuant to the CARES Act, the amount of PPP funds a business is eligible to receive is determined by the number of employees employed by the business and their average payroll costs.  The CARES Act also expanded the separate Economic Injury Disaster Loan ("EIDL") Program, which provided small businesses with low-interest loans that can provide vital economic support to help overcome the temporary loss of revenue they are experiencing due to COVID-19.

CHENG, a Taiwanese national who entered the United States on a student visa, is a self-proclaimed "serial entrepreneur" who earned a Bachelor's Degree from Pennsylvania State University ("Penn State").  From at least in or about April 2020 through at least on or about August 13, 2020, CHENG used the identity of other individuals to submit online applications to the SBA and at least five financial institutions for a total of over $7 million in government-guaranteed loans through the SBA's PPP and EIDL Program for several companies controlled by CHENG, namely Alchemy Finance, Inc., Alchemy Guarantor LLC d/b/a "Celer Offer," Celeri Network, Inc., Celeri Treasury LLC, and Wynston York LLC (collectively, the "Cheng Companies").  In connection with these loan applications, CHENG represented, among other things, that other individuals were the sole owners of the Cheng Companies and that the Cheng Companies together had over 200 employees and paid a total of approximately $1.5 million in wages to those employees on a monthly basis.  In fact, however, the Cheng Companies appear to have had a total of no more than 14 employees. 

In order to support the false representations in the loan applications about the number of employees at and the wages paid by the Cheng Companies, CHENG submitted fraudulent and doctored tax records that were never actually filed with the IRS and payroll records containing the forged electronic signature of a payroll company employee.  CHENG also submitted a payroll summary for one of his companies that listed the names of more than 90 purported employees, several of whom are current or former athletes, artists, actors, or public figures.  For example, the list of purported employee names included a co-anchor on "Good Morning America," a former National Football League player, and a prominent former Penn State football coach who is now deceased.

Based on the fraudulent PPP loan applications submitted by CHENG, a total of more than $3.7 million in PPP loans were approved for the Cheng Companies and approximately $2.8 million in PPP loan proceeds were deposited into bank accounts solely controlled by CHENG.  Instead of using the PPP loan proceeds for payroll costs, mortgage interest, rent, and/or utilities for the purported Cheng Companies as required by the PPP, CHENG transferred over $1 million abroad, withdrew approximately $360,000 in cash and/or cashier's checks, and spent at least approximately $279,000 in PPP loan proceeds on personal expenses.  These personal expenses included the purchase of an 18-carat gold Rolex watch for approximately $40,000, rent and move-in fees for a $17,000 per month luxury condominium used by CHENG, approximately $50,000 of furnishings for the condominium, a portion of the purchase of a 2020 S560X4 Mercedes, and purchases totaling approximately $37,000 at Louis Vuitton, Chanel, Burberry, Gucci, Christian Louboutin, and Yves Saint Laurent.

In addition to the COVID-19 pandemic loan fraud described above, from at least in or about 2017 through at least in or about 2019, CHENG committed securities fraud by soliciting and obtaining investments in Alchemy Coin Technology Limited and related companies ("Alchemy Coin") controlled by CHENG.  These investments were obtained through materially false and misleading statements and omissions regarding Alchemy Coin's access to capital, use of investor proceeds, the product readiness of its purported blockchain-based peer-to-peer lending platform, and the registration of its tokens as part of an initial coin offering. 

Finally, from at least in or about 2018 through at least in or about 2019, CHENG committed wire fraud by fraudulently obtaining due diligence fees from various start-up companies as part of an advance fee scheme through materially false and misleading statements regarding the purpose and refundability of the fees and his interest and ability to make investments in the start-up companies.

In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged Sheng-Wen Cheng with violations of 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. Cheng consented to the entry of a judgment enjoining him from violating the charged provisions and from participating, directly or indirectly, in any offering of a digital asset security, with monetary relief to be determined at a later date. Cheng was charged in a parallel criminal action. As alleged in part in the SEC Release:

[F]rom approximately August 2017 to June 2018, Cheng obtained investments totaling over $400,000 from several investors for a purported blockchain-based Peer-to-Peer lending marketplace startup that would be developed by several companies under his control, Alchemy Finance, Inc., Alchemy Company, Ltd., and Alchemy Coin Ltd. (collectively, "Alchemy"). As alleged, Cheng falsely stated in offering materials that he had received a $30 million investment from a single investor. Cheng also allegedly guaranteed short-term profits on the investment in Alchemy, despite the fact that Alchemy had no actual operations or revenues at the time. The complaint further alleges that shortly after obtaining investors' money, Cheng transferred the majority of proceeds to his personal bank account, misappropriating approximately $300,000 of the funds for his personal use.
The CFTC issued an order filing and settling charges against Jozef Gherman and J Squared LLC  that requires Gherman and J Squared to pay a $150,000 civil monetary penalty, with the amount to be paid by each capped at $75,000, and any post-judgment interest; also the Order requires Gherman and J Squared to pay $247,110 in restitution, with the amount to be paid by each capped at $123,555, and any post-judgment interest. Finally, the Order imposes a 10-year ban on Gherman and J Squared from trading on or subject to the rules of any CFTC-registered entity, and from engaging in any activities requiring registration with the CFTC. As alleged in part in the CFTC Release:

[F]rom at least June 2017 through at least June 2018, Gherman and J Squared solicited and accepted funds in the form of digital currency and fiat cash from over 40 customers to trade virtual currencies, including Bitcoin, Bitcoin Cash, Ether and other alternative coins.

They recklessly made false and misleading statements of material fact or omitted to state material facts which induced individuals to invest with J Squared, invest additional funds with J Squared, or continue to hold their investments with J Squared. They also made misleading statements regarding J Squared's growth and success as a company, its expanding clientele, and its ability to be selective in acquiring customers. Furthermore, Gherman and J Squared recklessly made materially false and misleading statements and omissions regarding the likelihood of profit and the risk of loss.  Customers suffered losses totaling over $247,000.
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, Brian Maguire submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Brian Maguire entered the industry in 2005, and by July 2010 he was a Research Analyst and General Securities Principal with Goldman Sachs & Co. LLC. The AWC asserts that Maguire "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA imposed upon Maguire a Bar from from associating with any FINRA member in all capacities. As alleged in the "Overview" of the AWC:

Maguire was a research analyst at Goldman Sachs. During 2020, Maguire learned one of his fellow analysts was planning to upgrade the research ratings of two companies that analyst covered. Maguire purchased the securities of those companies while in possession of that material nonpublic information in two accounts. One account was a family member's individual account over which he had discretion and control (the individual account). The other account was a trust account over which he had discretion and control and in which a member of his household had a financial interest (the trust account). By trading on the basis of material nonpublic information, Maguire willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and violated FINRA Rules 2020 and 2010. 

Maguire executed other trades that also violated several provisions of FINRA Rule 2241, which addresses research analyst conflicts of interest. Specifically, Maguire (i) traded in securities of issuers he covered in contravention of his firm's written prohibition in violation of Rule 2241(b)(2)(J); (ii) traded in a manner inconsistent with his current recommendations in violation of Rule 2241(b)(2)(J)(ii); and (iii) published research without disclosing that a member of his household had a financial interest in the securities of the issuer and the nature of that interest in violation of Rule 2241(c)(4)(A). 

In addition, during FINRA's investigation of this matter, Maguire lied to FINRA staff regarding his trading history, violating FINRA Rule 8210.
In a FINRA Arbitration Statement of Claim filed in December 2020, pro se public customer Claimant Qin sought $1,526.67 in compensatory damages plus $75 reimbursement of FINRA filing fee based upon hers allegation that:

until she requested that her long and short positions in Applied Materials, Inc. (AMAT) be offset, Respondent improperly calculated margin interest charges on Claimant's account from April 2020 to November 2020 to maximize its profit at her expense.

Respondent E*Trade generally denied the allegations. The sole FINRA Arbitrator found Respondent E*Trade liable to and ordered it to pay to Claimant Qin $12.03 in compensatory damages and to reimburse to the $75 FINRA filing fee.

The brokerage industry has an important role to play when it comes to detecting, preventing and reporting fraud. It's not just a regulatory concern, but an important reputational concern for individual firms and the industry as a whole. 

On this episode, we hear from Greg Ruppert, head of FINRA's National Cause and Financial Crimes Detection Programs, about recent trends in the fraud space and how firms can work to protect themselves and their customers.
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.
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.