Securities Industry Commentator by Bill Singer Esq

April 28, 2021
Given my professed distrust of FINRA mandatory arbitration, I find myself in the uncomfortable position of defending that very forum against the brunt of PIABA's April 26/27 complaints. COVID is the culprit here. The arbitration forum shutdown at FINRA is unfair to victimized public customers. I will not argue that point and it is validly espoused by PIABA. On the other hand, FINRA's shutdown was also unfair to the industry's victimized employees who are unable to get timely redress of their own employment-related claims against former employers, or are unable to clear their reputations in the face of what they may view as unprincipled customer complaints. Just as I chastise FINRA for issuing idiotic press releases that seem little more than self-aggrandizing or make-work, I see little value in PIABA's campaign to blame FINRA for the delays in conducting live arbitration hearings during a pandemic. 

SEC Charges Previously-Barred Broker with Defrauding Investors in a Pre-Ipo Investment Scheme (SEC Release)
In a Complaint filed in the United States District Court for the Eastern District of New York , the SEC charged Peter R. Quartararo with 
violating the antifraud provisions of Section 10(b) of the Securities and Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act. As alleged in part in the SEC Release:

[I]n the summer of 2019, Peter R. Quartararo of Hicksville, New York, a former broker who had previously been barred by FINRA, began soliciting investors to invest through him in shares of several "unicorn" companies, including Peloton Interactive, Inc. and Airbnb, Inc., which were expected to increase in value when those companies completed their IPOs. The complaint alleges that, over the next several months, Quartararo convinced at least four investors to invest a total of $436,000 in the purported pre-IPO shares. According to the complaint, Quartararo never purchased or held any pre-IPO shares in these companies on behalf of the investors. Instead, Quartararo stole the funds and used them for his own personal benefit, including for payments on a Maserati, and for the benefit of the four relief defendants: his father, Leonard Quartararo; his girlfriend, Lisa Eckert; his business associate, Paul Casella, a convicted felon and former broker who was also barred by FINRA; and Casella's company, Private Equity Solutions, Inc.
After pleading guilty in December 2020 in the United States District Court for the Central District of California, Edgardo Zeta Montalban, 70, violated his bond by, you guessed it, continuing to commit fraud. Which may explain why he was placed in federal custody on April 6, 2021. The Court was not amused by Montalban's antics and sentenced him to 84 months in prison. As noted in part in the DOJ Release, Montalban: 

was sentenced by United States District Judge Stanley Blumenfeld Jr., who said Montalban "exploited human frailty" in conducting his fraud. Judge Blumenfeld said the criminal conduct in this case was "despicable, cruel and callous," and it caused "devastating effects on numerous victims." 

From 2013 to September 2020, Montalban, who held himself out as an accountant and tax preparer, asked some of his clients to invest in a federal grant program he called "Suppressed IRS Accounts." Montalban told his clients that if they paid him in cash, the federal government would issue them grants many times larger than what they paid. In reality, no such grant program existed.

In furtherance of the scheme, a co-conspirator made counterfeit Treasury checks payable to the victim clients for tens of millions of dollars, which Montalban used as props to entice the victims to pay him. Montalban explained to the victims that they had to pay him in cash to protect the federal grant program's secrecy.

After his victims paid him, Montalban made up excuses as to why the Treasury checks had been delayed, and tricked the victims into paying him more money, purportedly for expenses necessary to overcome the obstacles to their checks' issuance.

"[Montalban] would promise his victims a huge windfall from the government in exchange for a modest payment up front to [Montalban] in cash," prosecutors wrote in their sentencing memorandum. "Because the windfall was a fraud, each purported difficulty overcome by an additional cash payment had to lead to yet another difficulty, requiring yet another cash payment. [Montalban] repeated this process until he had bled his victims dry, or they realized they had been defrauded and stopped paying him."
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, Kevin D. Barton submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Kevin D. Barton was first registered in 1994 and by January 2001, he was registered with Crown Capital Securities, L.P. The AWC alleges that Barton "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Barton violated NASD Rule 2510(b) and FINRA Rules 4511, 3270, 3260, and 2010. Accordingly, the self regulator imposed upon him a $17,500 fine and a four-month suspension from association with any FINRA member in all capacities. As alleged in part in the AWC: 

In December 2016, Barton signed an employment agreement with "ZM," a California corporation, and was its sole employee. His duties included marketing of financial products and services. For tax years 2017 through 2019, Barton was paid $60,000 per year by ZM. Barton failed to timely disclose this outside business activity to the firm. He omitted it from a disclosure form he completed in December 2017, and only disclosed it to the firm in November 2018, approximately 22 months after his employment began. The firm later approved the activity.
. . . 
From June 2016 to May 2019, on approximately 15 days, Barton exercised discretion without prior written authorization in four fee-based accounts maintained by four customers, including two seniors. The customers conveyed oral authorization to Barton to exercise discretion in their accounts, and none complained about the trading. However, the customers did not provide written authorization for Barton to exercise discretion nor did they always speak with Barton on the days he effected trades in their accounts. The firm's policies prohibited discretionary trading without prior written approval from the client and firm. Barton never requested or obtained approval from the firm to exercise discretion in the customers' accounts. 
. . .
From June 2016 to May 2019, in the same four customer accounts, Barton marked approximately 80 order tickets as unsolicited when the trades were solicited as a result of his exercising discretion in these accounts. None of the customers complained about the trades.
As with many lawsuits, it's not always easy to figure out just where to start the tale of woe. Sometimes there are numerous pathways that converge on the courthouse steps. For our purposes today, we're going to start in June 2019, when Wealth2k, Inc. filed a lawsuit against Key Investment Services, LLC. In trying to explain how we wound up in federal court, we're going to start moving backwards in time and then move forward, but it's going to be in fits and starts. Ultimately, we may find that out journey ends beyond the courtroom and before a FINRA arbitration panel.
140 Victims. Over $8 million in lost investments. What was being sold? Oh -- nanotechnology that turned dirt into gold. No . . . don't laugh. That's was the pitch. That was the fraud. The larger question was what, if any, due diligence did the victims perform before writing out their checks. Did anyone uncover the criminal histories of the guys pushing the deal?