Securities Industry Commentator by Bill Singer Esq

April 29, 2021

For over two decades, I have urged FINRA and the financial services industry to establish an anti-fraud fund whereby victims of Wall Street fraud would be compensated for their losses in the event they could not obtain satisfaction from insolvent firms or individuals. Instead of undertaking funding my anti-fraud initiative, FINRA provides financial support for academic studies that examine the obvious. Is there any Governor on FINRA's Board of Governors who monitors any of the garbage that is regularly published by the organization? Why not require full disclosure of the amount of funding provided by the FINRA Foundation in each report for which financial support was made? 

It is unusual for the various hirings and resignations at the SEC to attract as many "WTFs" as flooded into my email box yesterday. It was only recently, on April 23, 2012, that the "Securities Industry Commentator" published:
Alex Oh was appointed Director of the SEC's Division of Enforcement. In part the SEC Release states that:

[O]h was most recently a partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP and co-chair of the law firm's Anti-Corruption & FCPA Practice Group. She was previously an Assistant U.S. Attorney in the Criminal Division of the U.S. Attorney's Office for the Southern District of New York, where she was a member of the Securities & Commodities Fraud Task Force and the Major Crimes Unit.

. . .

Prior to private practice, Oh was the lead trial lawyer in numerous jury trials during her tenure as an Assistant U.S. Attorney. She is a member of the New York City Bar Association. She previously served as a Trustee for the Lawyers' Committee for Civil Rights Under Law and on the Board of Trustees of the Legal Aid Society of the District of Columbia. In addition, Oh served on the Criminal Justice Act Panel for the United States Court of Appeals for the District of Columbia Circuit and the United States District Court for the District of Columbia.

Oh has an extensive pro bono practice and has litigated voting rights cases and constitutional challenges to voter registration and identification laws. Oh earned a J.D. from Yale Law School and a B.A. from Williams College.

Not even a full week later, the SEC publishes this odd update:

The Securities and Exchange Commission today announced that Alex Oh has resigned her position as Director of the Division of Enforcement for personal reasons. Melissa Hodgman will return to the role of Acting Director of the Division of Enforcement.

"Melissa is an exceptional attorney who has proven to be an effective leader of the Enforcement Division. I'm grateful that she will take on this role again and look forward to working closely with her to fulfill the mission of the SEC," said SEC Chair Gary Gensler. "I thank Alex for her willingness to serve the country at this important time."

Ms. Hodgman served as the Enforcement Division's Acting Director from January 2021, through April 2021. Before that, she was the Associate Director in the SEC's Home Office since October 2016. Ms. Hodgman began working in the Enforcement Division in 2008 as a staff attorney. She joined the Market Abuse Unit in 2010 and was promoted to Assistant Director in 2012. She received the Ellen B. Ross Award, the 2010 SEC Chairman's Award, the 2017 Arthur F. Mathews Award, and the 2020 Chairman's Award for Excellence with the SEC's Employee Affinity Groups, as well as a number of Division Director Awards.

Ms. Hodgman earned her Master of Laws with distinction in securities and financial regulation in 2007 from Georgetown University Law Center, her law degree with high honors from Georgetown University Law Center in 1994, and her Bachelor of Science degree from Georgetown University School of Foreign Service in 1990. Before joining the SEC staff, she worked as an associate at Milbank, Tweed, Hadley & McCloy in Washington, D.C.

Home health aide sentenced to more than 5 years in prison for using her position to steal more than $200k from disabled victim (DOJ Release)
Jamie Kidd-Dunbar, 40, pled guilty in the United States District Court for the Northern District of Ohio; and she was sentenced to 61 months in prison and ordered to pay $217,096.52 in restitution. Oddly, the DOJ Release fails to specify the counts to which Kidd-Dunbar pled. As alleged in part in the DOJ Release:

[I]n or around March of 2016, Kidd-Dunbar became the paid home health aide for Victim 1, then 60 years old, after Victim 1 suffered a series of strokes that left her blind and dependent on the use of a wheelchair.  As Victim 1's home health aide, Kidd-Dunbar was trusted with Victim 1's debit card information so Kidd-Dunbar could purchase groceries and other household supplies for Victim 1.

In January 2018, Kidd-Dunbar began using Victim 1's debit card to make small, unauthorized purchases.  Over time, the theft escalated to include larger cash withdrawals and significant purchases from various businesses, including Amazon, PlayStation and Rent-A-Center.  

During the same period, Kidd-Dunbar also assisted Victim 1's 90-year old aunt, who is identified in court documents as Victim 2.  Kidd-Dunbar was similarly given Victim 2's credit card information so Kidd-Dunbar could make authorized purchases of groceries and other supplies for Victim 2.  After Victim 2 passed away in 2017, Kidd-Dunbar continued to use Victim 2's credit card to make unauthorized personal purchases.  Kidd-Dunbar used Victim 1's bank card to pay the balance on Victim 2's credit card.  

In June of 2019, a different home health aide substituted for Kidd-Dunbar while Kidd-Dunbar was away on vacation.  This home health aide asked Victim 1 about certain charges on Victim 1's statements, which led Victim 1 to discover Kidd-Dunbar's numerous and unauthorized purchases, withdrawals and credit card payments.  As a result of Kidd-Dunbar's theft, Victim 1 suffered a total loss of $217,096.52.

Rochester Man Second To Plead Guilty In Ponzi Scheme That Bilked Investors Out Of Thousands Of Dollars (DOJ Release)
John Piccarreto, Jr. pled guilty in the United States District Court for the Western District of New York to conspiracy to commit mail fraud and filing a false tax return. As alleged in part in the DOJ Release:

[B]etween 2017 and June 2018, the defendant conspired with co-defendants Perry Santillo, Christopher Parris and others, to obtain money through an investment fraud commonly known as a Ponzi scheme. The scheme, which was conducted under the umbrella of a business entity called Lucian Development, involved the sale of fraudulent promissory notes that were issued under the names various entities that Santillo and Parris controlled, including Lucian Development, First Nationale Solutions, United RL Capital Services, and Percipience Global Corporation (the issuers), among others. These issuers had little to no substantial bona fide business activities, and other than monies obtained from defrauded investors, the issuers had no material revenue streams. The vast majority of financial activity for the issuers involved receiving money from new investors, and then redistributing that money to repay earlier investors, to pay the expenses of the scheme, and to finance the lifestyles of Santillo, Parris and others involved in the scheme. 

Piccarreto began working for Lucian Development in March 2012, and initially was unaware that the business was, in fact, a Ponzi scheme. The defendant's responsibilities included assisting with the completion of transaction paperwork for clients of Lucian Development, including checks and wire transfers, and other clerical responsibilities. As he gained experience with investments and obtained a securities license, Piccarreto's responsibilities increased to include meeting with existing investors who had questions or complaints about Lucian Development and selling investment products, including promissory notes and other investments, to a few investors. By January 2017, the defendant realized that the Lucian Development business was, indeed, a Ponzi scheme after the company stopped paying promised returns to client investors whom he serviced. However, rather than severing his association with Lucian Development, Piccarreto continued to work for Santillo and Parris, knowingly lying to investors by falsely reassuring them that their investments were safe and secure, even though he knew this was not true, and encouraging investors to "reinvest" their fraudulent investments by signing new promissory notes. 

For example, in May 2018, the defendant met with Victim 1 who over the years had invested approximately $93,199.75 with Lucian Development and First Nationle Solutions. Piccarreto represented to Victim 1 that his money was safe in an account, even though he knew that was untrue. Piccarreto also tried to convince Victim 1 to reinvest his principal and accrued interest in another fraudulent promissory note. In August 2014, the defendant accompanied co-defendant Parris to meet with a potential investor who would become another victim (Victim 2). Between 2014 and 2016, Victim 2 and his wife invested a total of approximately $660,250.00 in the Ponzi scheme, specifically, in fraudulent promissory notes issued by United RL Capital Services and Percipience Global Corporation. Piccarreto knew by January 2017 that Victim 2 and his wife had received fraudulent promissory notes but continued to lull the couple by falsely reassuring them that their investments were safe, and they would be fully repaid.

Piccarreto admitted that from January 1, 2017, and June 19, 2018, he was involved in defrauding approximately 400 investors out of approximately $18,081,556, which resulted in financial hardship to more than 25 of its investor victims. Piccarreto also admitted that, while working in Texas, he personally solicited and defrauded at least eight investors out of approximately $598,695.

In addition, on his 2017 tax return, the defendant claimed that he had taxable income in the total amount of $6,576.  In fact, Piccarreto's taxable income was approximately $538,548. As a result, the defendant avoided paying income taxes to the Internal Revenue Service in the amount of approximately $159,423.

Perry Santillo was previously convicted and is awaiting sentencing. Charges remain pending against Christopher Parris. The fact that a defendant has been charged with a crime is merely an accusation and the defendant is presumed innocent until and unless proven guilty. 

Massachusetts Man Pleads Guilty to Operating Nationwide Scheme to Steal Social Media Accounts and Cryptocurrency (DOJ Release)
Eric Meiggs pled guilty in the United States District  Court for the District of Massachusetts to one count of conspiracy, four counts of wire fraud, one count of computer fraud and abuse and one count of aggravated identity theft. As alleged in part in the DOJ Release:

Meiggs and co-conspirators targeted victims who likely had significant amounts of cryptocurrency and those who had high value or "OG" (slang for "Original Gangster") social media account names. Using an illegal practice known as "SIM-swapping," Meiggs and others conspired to hack into and take control of these victims' online accounts to obtain things of value, including OG social media account names and cryptocurrency. 

As alleged in the indictment, "SIM swapping" attacks involve convincing a victim's cell phone carrier to reassign the victim's cell phone number from the SIM card (or Subscriber Identity Module card) inside the victim's cell phone to the SIM card inside a cell phone controlled by the cybercriminals. Cybercriminals then pose as the victim with an online account provider and request that the provider send account password-reset links or an authentication code to the SIM-swapped device now controlled by the cybercriminals. The cybercriminals can then reset the victim's account log-in credentials and use those credentials to access the victim's account without authorization, or "hack into" the account.

According to the indictment, Meiggs and his co-conspirators targeted at least 10 identified victims around the country. Members of the conspiracy stole (or attempted to steal) more than $530,000 in cryptocurrency from these victims. Meiggs also took control of two victims' "OG" accounts with social media companies.
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, Ronald V. Pullman submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Elias Ronald V. Pullman was first registered in 1987 and from April 2009 through August 2020, he was registered with Trustmont Financial Group, Inc. The AWC asserts that Pullman "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA imposed upon Pullman a $5,000 fine, and a two-month suspension from associating with any FINRA member in all capacities. Notably, the AWC includes this acknowledgement:

Respondent understands that this settlement includes a finding that he willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this omission makes him subject to a statutory disqualification with respect to association with a member. 

As alleged in part in  the AWC:

Between 2015 and 2020, six states brought actions or issued administrative orders against Pullman concerning his insurance license, on the basis of Pullman's failure to disclose earlier state regulatory actions to each of the six states. Pullman was aware of each of these state actions and orders and knew that he should have disclosed them on his Form U4 within thirty days of when he learned of the action. Pullman disclosed one state action through a Form U4 amendment more than four years after the order was issued and did not disclose the remaining five state regulatory actions at all. The state actions and orders were material facts that a reasonable employer or customer would want to know about a representative.  

Therefore, Pullman willfully failed to timely disclose material facts on his Form U4 in violation of Article V, Section 2(c) of the FINRA By-Laws and FINRA Rules 1122 and 2010.  

Werewolves of Change: Remarks before the ISDA Derivatives Trading Forum on Regulatory Change (Speech by SEC Commissioner Hester M. Peirce / April 28, 2021)
In her recent remarks, Commissioner Peirce muses in part that:

I suspect that many of you are wondering what other changes you have to look forward to under the new leadership at the SEC and other agencies. I share that interest and look forward to hearing Chairman Gensler set out his priorities for the coming months. Market events, of course, will dictate some of the agenda. The staff is working on a report about the events related to meme stock trading earlier this year, and some regulatory initiatives may come out of that work. Similarly, as we understand more about the failure of Archegos Capital Management, discussion about regulatory changes might be appropriate. As usual, commentators have gotten a head start and have identified a number of regulatory responses, including possible regulation of family offices and enhanced disclosure requirements for synthetic stock positions created through the use of total return swaps and possibly other derivative instruments. Determining which proposed regulatory response will develop momentum is hard, and resisting that momentum once it has started is even more difficult. Let us not assume, as regulators so often do, that there is a problem and that since something needs to be done, any "something" will do. Let us instead carry out the necessary analyses to determine whether there is a problem that market participants cannot resolve on their own.

Preventing family offices from losing their fortunes is not in the category of problems that the SEC needs to step in to solve. I am much more interested in expanding access to our capital markets so that less well-heeled families can build their fortunes. Similarly, the mere fact that trading desks at some financial institutions lost a lot of money should not cause us a great deal of concern as long as their activity was consistent with our rules. The very nature of trading in the financial markets means that trading desks occasionally will lose money.

Financial regulators do have a legitimate interest in risk management at regulated entities, and it may be worth exploring whether there were problems in this area that need to be addressed. But even here, such events inevitably serve as lessons for risk managers (underscored by the demotions and firings that followed the Archegos failure), but they need not serve as justifications for more regulation. The counterparties of market participants like Archegos have the strongest incentive to get their risk management processes correct and to determine whether those processes have weaknesses that need to be addressed. I encourage you all to take this responsibility seriously, to identify weaknesses, and to work to remedy them.
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.
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?