Securities Industry Commentator by Bill Singer Esq

May 3, 2021
Imagine that you got a stockbroker. Imagine that you got an elderly customer. Imagine that the client drafts a Will. Now imagine how the intersection of the stockbroker and customer could raise all sorts of troubling issues and how difficult it becomes to police potential misconduct or prevent abuse. What's the best regulatory approach? What's the best compliance policy? What happens when a customer sincerely wants to bestow a benefit upon a stockbroker via a bequest? What if the stockbroker never had a clue? What if the stockbroker did?

In 2017, Mark J. Moskowitz pled guilty to one count of wire fraud and on December 20, 2018, the SEC instituted administrative proceedings against him -- he defaulted on filing an Answer and the allegations against him were deemed true. The SEC's Order Instituting Proceedings ("OIP") alleged that Moskowitz's criminal conviction was based upon his:

"knowingly, and with the intent to defraud investors, acted as an investment adviser by providing investment advice and selling securities to at least eight clients, obtained money by means of materially false and misleading statements, engaged in the offer and sale of unregistered securities, provided false investment advice, and diverted investor funds to his personal bank account." The OIP also alleged that Moskowitz "raised at least $675,000 from the offer and sale of unregistered securities to investors who believed they were contributing to one or more investment pools or individual managed trading accounts," but that he "instead diverted a significant portion of the investor funds for his personal use and to pay off other investors in the fraudulent scheme.

Moskowitz was sentenced to 33 months in prison plus three years of supervised release, and ordered to make $694,576.71 in restitution and forfeiture and pay a $100 special assessment. The SEC OIP instituted proceedings to determine whether the allegations contained therein were true and if any remedial action was appropriate in the public interest. Accordingly, the SEC barred Moskowitz from association with any investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization. Set out in cold, methodical, and, ultimately, unnerving detail is the following colloquy from Moskowitz's allocution in federal court:

THE COURT: From in or about March 2012 through in or about October 2015, did you operate a purported hedge fund in New Jersey known as Edge Trading Partners, LP? 


THE COURT: Was the general partner of Edge Trading Partners, L.P. a company known as Edge Trading LLC? 


THE COURT: And did you own and operate Edge Trading LLC? 


THE COURT: Was Edge Trading LLC formed to purportedly make investments in U.S. and foreign equities, futures, contracts and options contracts? THE DEFENDANT: Yes, your Honor. 

THE COURT: Did you induce prospective investors to invest in Edge Trading LLC by telling them you were a successful and profitable investor? 


THE COURT: Did you induce prospective investors to invest in Edge Trading LLC by telling them that, in any given calendar year, you would only be paid 30 percent of any profit generated by Edge Trading LLC? 


THE COURT: And did you induce prospective investors to invest in Edge Trading LLC by telling them that, from March 2012 through in or around October 2015, Edge Trading LLC was profitable in each quarter of its operation? 

THE DEFENDANT: Yes, your Honor. 

THE COURT: Was each of these representations to prospective investors false? 


THE COURT: Specifically, did you fail to inform victim investors that the entirety of the investors' principal contributions would not be invested but instead would be diverted to pay your personal expenses? 


THE COURT: Did you also email account statements that falsely represented that investors' principal contributions had been fully invested and had appreciated substantially in value? 


THE COURT: Based on your misrepresentations, did investors provide you money, by wire transfer and by check, to be deposited in a bank account in the name of Edge Trading LLC? 

THE DEFENDANT: Yes, your Honor. 

THE COURT: Specifically, on or about September 20, 2013, did you cause Victim 1, an investor living in or around Byron, Georgia, to send a wire transmission of $100,000 from Victim 1's bank account to a bank account controlled by you? 


THE COURT: Did you divert money from that Edge Trading LLC bank account to personal use instead of investing in U.S. and foreign equities, futures contracts, and options contracts? 


THE COURT: Did you take all of these actions knowingly and with the intent to defraud victim investors? 


THE COURT: And as a result of this scheme, did you cause victim investors to suffer a loss of approximately $694,576.71? 


THE COURT: Are you pleading guilty to the charged offense because you are, in fact, guilty? 

THE DEFENDANT: Yes, your Honor
Following a jury trial, Michael Hild, the founder/former Chief Executive Officer of Live Well Financial, Inc., was convicted in the United States District Court for the Southern District of New York on one count of conspiracy to commit securities fraud; one count of conspiracy to commit wire and bank fraud; one count of securities fraud; one count of wire fraud; and one count of bank fraud.
According to the evidence presented during the trial: As alleged in part in the DOJ Release:

Live Well's Bond Portfolio and Repurchase Agreements 

Live Well was a Richmond, Virginia-based company that originated, serviced, and securitized government-guaranteed reverse mortgages known as Home Equity Conversion Mortgages ("HECMs").   In or about 2014, Live Well acquired a portfolio of approximately 15 bonds, each entitling the holder to receive a portion of the interest payments, but not the principal payments, from a particular pool of reverse mortgages ("HECM IO bonds.").  Live Well purchased the HECM IO bond portfolio for approximately $50 million.  At the same time that Live Well purchased the HECM IO bond portfolio, HILD established within Live Well a New York City-based trading desk to manage and grow Live Well's bond portfolio. 

Live Well financed the acquisition and growth of its bond portfolio through a series of loans in which Live Well used its bond portfolio as collateral.  The majority of Live Well's lenders were securities dealers whose lending arrangements with Live Well were structured as bond repurchase agreements, also known as "repo agreements."  A repo agreement is a short-term loan in which both parties agree to the sale and future repurchase of an asset within a specified contract period.  The seller sells the asset to the lender with a promise to buy it back at a specific date and at a price that includes an interest payment.  Functionally, a repo agreement is a collateralized loan in which title of the collateral is transferred to the lender.  When the loan is repaid by the borrower, the collateral is returned to the borrower through a repurchase.  Additionally, at least one of Live Well's lenders was an FDIC-insured bank, and its lending arrangement with Live Well was structured as a secured loan, with certain bonds held as collateral by a third-party custodian.

The Scheme to Mismark the Bond Portfolio 

Live Well's financing agreements with all but one of the lenders required that any bond that Live Well sought to borrow against be priced by a third-party pricing source in order to determine the market value of the bond as of the measurement date.  The lenders then used the value of the bond, coupled with the application of a haircut of generally 10% to 20%, to determine the amount of money to lend Live Well.

The lenders generally relied on a particular widely utilized subscription service (the "Pricing Service") to price various securities.  In or about September 2014, HILD and his co-conspirators embarked on a scheme to cause the Pricing Service to publish valuations for the bonds that far exceeded actual market prices.  By doing so, the conspirators induced the lenders to extend credit to Live Well far in excess of the prices for which the bonds could be sold in the market.  The inflated prices were based on a set of market assumptions that the conspirators called "Scenario 14." 

HILD was aware that if the lenders had known that the Pricing Service was publishing bond prices that did not reflect fair value, meaning the price at which a lender could sell the bond in the market if necessary to recoup its capital, they would have refused to use those prices in determining how much money to loan to Live Well.  To prevent the Pricing Service and the lenders from learning that the prices did not reflect market value, HILD directed his co-conspirators at Live Well to take steps to conceal their provision of inflated marks to the Pricing Service.  Ultimately, due to the asset overvaluation and the purchase of additional bonds using the capital generated by the scheme, Live Well grew the purported value of its bond portfolio to over $500 million by December 2016.

In addition to using the liquidity generated by the scheme to expand Live Well's bond portfolio, in or about September 2016, HILD used $18 million generated from the repo lenders to buy out the preferred stockholders in Live Well.  The elimination of the preferred stockholders gave HILD control of the company and allowed him to substantially increase his personal compensation.  Accordingly, HILD's compensation jumped from approximately $1.4 million in 2015, to approximately $5 million in 2016, approximately $9.7 million in 2017, and over $8 million in 2018.

In or about late 2018, the chief financial officer of Live Well resigned after HILD refused to reduce the compensation he was receiving from the company.  In or about May 2019, the company's interim chief financial officer informed HILD that he would not sign the company's interim financial statements because he believed that the company's carrying value for the HECM IO bond portfolio was significantly overstated.  In or about May 2019, Live Well announced that it would cease operations and unwind.  After the announcement of Live Well's closing, Live Well's interim chief financial officer provided a balance sheet to Live Well's lenders showing that Live Well had reduced the value of its bond portfolio by over $200 million.
John Allen, 63, was licensed to practice law in New Hampshire, until his license was suspended in 2019 and he was disbarred in 2021. Allen pled guilty in the United States District Court for the District of New Hampshire to  wire fraud and money laundering, and he was sentenced to 72 months in prison and ordered to pay restitution and to forfeit $2,561,258.15. How did this lawyer get to this place in his life? Consider the tortured path as set out in part in the DOJ Release:

[A]llen was a New Hampshire attorney who provided legal services related to, among other things, commercial real estate acquisition and development and secured lending transactions.  As an attorney in New Hampshire who handled clients' funds, Allen was required to maintain two Interest on Lawyer Trust Accounts (commonly known as IOLTA). 

From approximately January of 2014 through October of 2019, Allen engaged in a scheme to defraud several of his clients of over $2.5 million.  Allen's clients gave him funds to hold in escrow for specific purposes, including private lending, real estate transactions, and particular business deals.  Although Allen told his clients he would hold the funds in his IOLTA for these purposes, he transferred those funds between his IOLTAs and, without authority to do so, into another bank account he controlled.  He then spent the funds on his own personal expenses and for unrelated business expenses.  All the while, he misled these clients by representing that the funds were in one of his IOLTAs or were being used for their intended purposes.

For example, Allen caused one client to invest more than $1.5 million in fraudulent promissory notes that Allen created using other persons' identities.  Allen did not invest the money and instead kept it for himself.  Allen also stole nearly $1 million from other clients by transferring money they had provided for specific real estate transactions from his IOLTA to other accounts he controlled.  To hide the sources of the funds he stole from his clients, Allen comingled fraud proceeds and legitimate funds, made many transfers back and forth between accounts, and spent the funds in those accounts on unrelated business and personal expenses.  In total, Allen stole more than $2.5 million from his clients.

Allen pleaded guilty on November 12, 2020 and was originally scheduled to be sentenced at 10:00 am on February 25, 2021.  Allen failed to appear at his sentencing hearing.  The Court issued a warrant and investigators arrested Allen at around noon in a hotel in Manchester.  While trying to locate Allen, investigators learned that after pleading guilty to defrauding his clients, Allen stole $10,000 from his girlfriend's father by stealing a check from his girlfriend's father's checkbook and writing himself a check.
Elaine M. Levidow, 60, pled guilty in the United States District Court for the Middle District of Florida to five counts of wire fraud and one count of fraud involving Department of Education Financial Aid. As alleged in part in the DOJ Release:

[B]eginning in approximately July 2017 and continuing through April 2019, Levidow devised and perpetrated a scheme to defraud the United States Department of Education of more than $90,000 in Title IV Federal Student Assistance (FSA), the primary federal loan and grant funds available to students attending college and career schools. The United States Department of Education requires that the Title IV funds be applied only to specific allowable charges, which include: tuition, mandatory fees, and room and board contracted by the participating institutions of higher education. 

As the owner and Chief Executive Officer of The Training Domain, Inc., located in Fort Myers, Levidow used a website to market her company as offering business software application courses to make individuals more employable. As a part of the scheme, Levidow knowingly enrolled students that did not have a high school diploma or GED certificate, making them ineligible to receive FSA funds, and she assisted them in applying for FSA funds. In one instance, Levidow knowingly enrolled a student who was a felon serving a life term in a Florida State prison, assisting him in obtaining FSA funds even though he was ineligible.

In other instances, Levidow applied for FSA loans on behalf of students without telling them, then caused those FSA funds to be wired to Training Domain even though it was not entitled to them. 

Levidow admitted to agents that she knew many if not all the students did not have a high school diploma or a GED, but she enrolled them anyway.  Further, she admitted that she staged a fictitious class, during an accreditation visit, with students who did not attend class and whom she paid to be there to make it appear she was actually holding classes.   

Further, although Levidow's business, Training Domain, was represented to be an educational institution, she did not use FSA funds to pay for students' tuitions since her business did not actually hold required classes.  Instead, Levidow used the  FSA funds to pay for her own personal expenses.
Felix Gorovodsky, 29, pled guilty in the United States District Court for the District of Massachusetts to one count of bank fraud; and agreed to a sentence subject to the Court's approval of 33 months in prison plus two years of supervised release with at least $318,000 in restitution. As alleged in part in the DOJ Release:

[G]orovodsky served as a financial advisor for the victim. In or about July 2019, the victim terminated that advisor relationship and revoked the power of attorney she had previously granted him. Approximately nine months later, Gorovodsky accessed and liquidated the victim's bank account, transferring more than $250,000 into his own bank account. Gorovodsky then used the victim's stolen retirement funds for personal expenses, including paying off more than $100,000 in federal student loans. As part of the scheme, Gorovodsky forged the victim's signature on a purported "gift letter," which he sent to the bank in an attempt to legitimize the fraudulent transfer.

Former Financial Advisor Sentenced to 78 Months in Prison for Role in $2 Million Ponzi Scheme Targeting Elderly Investors (DOJ Release)
Daniel Rivera, 51, pled guilty in the United States District Court for the District of New Jersey to a Superseding Information charging him with one count of wire fraud and one count of subscribing to a false tax return; and he was sentenced to 78 months in prison plus three years of supervised release, and ordered to pay $1.47 million in restitution and $284,863 to the IRS. As alleged in part in the DOJ Release:

From 2008 through 2017, Rivera solicited primarily elderly investors to invest their money in a company called Robbins Lane Properties Inc. Rivera represented to investors that Robbins Lane was a company staffed by experienced real estate professionals that invested in real estate ventures. Rivera told investors that by investing in Robbins Lane, senior investors would share in the company's investment portfolio by lending it money to invest in real estate. Rivera further promised investors that they would receive a guaranteed monthly income, and that the company's rate of return was based on secure real estate investments in the company's portfolio. In reality, Robbins Lane had no employees, no real estate portfolio, and the monies used to pay investors as a purported return on their investments was from funds he received from other investors. Rivera also used funds sourced from investors to pay his personal and unrelated business expenses, including paying his child's college tuition and sorority fees.

During the course of the fraudulent scheme, on March 5, 2014, Rivera filed with the IRS a federal income tax return that underreported his taxable income by $33,276.
After a jury trial in the United States District Court for the Eastern District of Virginia, Daryl Bank was convicted of conspiracy, mail and wire fraud, selling unregistered securities, securities fraud, and money laundering. Previously, attorney/co-conspirator Billy Seabolt pled guilty to conspiracy and  in February 2020, he was sentenced to 10 years in prison. Also, co-conspirator Roger Hudspeth pled guilty to investment advisor fraud and money laundering and in May 2018, he was sentenced to over 12 years in prison. As alleged in part in the DOJ Release, Bank:

ran an investment fraud scheme from approximately January 2012 through July 2017, based in the Tidewater area and Port St. Lucie, and operating across the country. Bank and his co-conspirators-including attorney Billy Seabolt, 56, Raeann Gibson, 49, of Florida, and Roger Hudspeth 51, of Suffolk-deceived hundreds of unsuspecting investors, most of whom were at or near retirement age, by convincing them to invest in companies owned and controlled by Bank. At Bank's direction, co-conspirators stole significant portions of investment contributions to fund their criminal enterprise and Bank's lavish lifestyle.

In 2010, Bank, then a registered securities broker, was barred from the securities industry by the Financial Industry Regulatory Authority (FINRA). Undeterred, Bank created a private equity company called Dominion Private Client Group (Dominion) and continued to sell unregistered securities on his own and through insurance salesmen across the country. Billy Seabolt served as Dominion's legal counsel and was involved in the development of many of the fraudulent investments and corporations.

The conspirators made material misrepresentations and omissions to sell illiquid, highly speculative investment vehicles. Based on these fraudulent representations, unsuspecting investors cashed out of 401(k) and other retirement accounts to invest in Bank's investment vehicles, without knowing that Bank immediately transferred 20%-70% of the investors' funds to companies that he controlled in the form of purported "fees." As a result of this investment fraud scheme, the victims suffered losses in excess of $25 million.