Securities Industry Commentator by Bill Singer Esq

May 10, 2021
As readers of the Blog know, I am a critic of inarticulate legal writing -- be that a pleading, motion papers, awards, opinions, orders, or any number of press releases. In a recent ruling on a motion before the District of Connecticut, Senior District Judge Charles S. Haight, Jr. shows how it should be done -- he pens an enchanting, entertaining, comprehensive, and superbly edited opinion.

As set forth in the Syllabus of the 1Cir's Opinion:

Asociación de Empleados del Estado Libre Asociado de Puerto Rico ("AEELA"), a private financial institution serving Puerto Rico government employees, suffered significant investment losses when the market for municipal bonds in Puerto Rico crashed in 2013. Blaming its exposure to those assets on its former financial consultant, UBS Financial Services, Inc. and related entities (collectively, "UBS"), AEELA initiated arbitration with UBS before the Financial Industry Regulatory Authority ("FINRA"). A panel of three neutral arbitrators unanimously entered an arbitration award denying AEELA's claims. AEELA sought to vacate the award in the district court on the ground that one of the arbitrators had failed to disclose that he had several professional connections to UBS. The district court confirmed the arbitration award, ruling that AEELA had failed to show that those undisclosed connections amount to "evident partiality" warranting vacatur under section 10 of the Federal Arbitration Act. We affirm.

As to the nature of the arbitrator's non-disclosure, the 1Cir Opinion asserts in part that:

Osimetha - the target of AEELA's appeal - is a lawyer from Texas. In his initial disclosure report, Osimetha disclosed his then-current employment with Axiom Law ("Axiom") and that Axiom had seconded him to work as the General Counsel of DPT Laboratories, Ltd. ("DPT").3 During the two-year span of the arbitration proceedings, Osimetha updated his disclosure report twice. In September 2015, he disclosed that he had left both Axiom and DPT and joined Ciber, Inc. ("Ciber"), a publicly traded company, as its Chief Compliance Officer. Osimetha updated his disclosures again in May 2016 to reflect that had left Ciber and was once again working for Axiom. AEELA raised no objection to Osimetha's continuing to serve on the panel following these disclosures.
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Footnote 3: Although AEELA argued in the district court that Axiom is a law firm, the parties are now in agreement that it is a legal staffing agency. We accept that characterization for purposes of this appeal. 

at Pages 5 - 6 of the 1Cir Opinion
Jabari Laquan Marshall, 33, pled guilty in the United States District Court for the District of Nevada to one count of theft of government money and one count of aggravated identity theft.  Do-Defendant Jalen Tony Henry, 27, pled guilty to one count of theft of government money.  Okay . . . sure, that's all fairly cut-and-dry; however, please read on:

[J]abari Laquan Marshall, 43, devised the fraudulent tax withholding scheme while incarcerated in a Bureau of Prisons facility. As part of the scheme, Marshall provided co-defendant Jalen Tony Henry, 27, with false documents that purportedly showed the sale of certain trade secrets for $25 million during the 2014 tax year. To make those false documents appear more credible, Marshall used the real social security numbers of two other individuals.

In April 2015, Henry filed an amended tax return for tax year 2014, using the false documents and fraudulently claiming that - as part of the fictitious sale of the trade secrets - $5,575,633 in federal income tax had been withheld on his behalf. Henry requested a tax refund of $1,359,645, and actually received a refund check for $1,439,039, which he deposited into his bank account. Marshall then directed Henry to split the funds among their family members. Because of the suspicious nature of the transaction, Henry's bank account was frozen, and the IRS successfully recovered $1,433,971 of the refund amount sent to Henry.

Former Client Relationship Manager at Bank of America Sentenced for Embezzling from Client Company / Defendant used embezzled funds to purchase Porsche SUV and luxury items (DOJ Release)
Waqas Ali, 31, pled guilty in the United States District Court for the District of Massachusetts to wire fraud and unlawful monetary transactions; and he was sentenced to one year and one day in prison plus two years of supervised release, one year of which is to be served on home confinement; and he was ordered to pay $600,000 in restitution and forfeiture. As alleged in part in the DOJ Release:

Ali was the client relationship manager for the victim company, which was a Bank of America client. Ali opened a checking account in the name of the victim company without its knowledge or authorization, and between September 2016 and July 2017, fraudulently transferred over $1.5 million from the victim company's accounts to a fraudulent account.

Ali used approximately $600,000 of the funds he fraudulently obtained to fund his lifestyle and pay for luxury items, including a Porsche SUV and retail items at Neiman Marcus, Bloomingdales, Christian Louboutin and Tag Heuer.
Richard Loren Lewis pled guilty in the United States District Court for the Central District of California to a two-count Information charging him with bank fraud and making a false statement to a financial institution. As alleged in part in the DOJ Release: 

According to his plea agreement, from April 2013 to April 2016, Lewis schemed to defraud Silicon Valley Bank, a Santa Clara-based commercial bank that funds start-up technology companies.

Lewis, who was the CEO of Blue Wave Media Inc., and served on its board of directors, fraudulently obtained loans from the bank by preparing and causing to be prepared false financial documents, including balance sheets and income statements, which falsely overstated, among other things, Blue Wave Media's net worth, liquidity, and revenue.

Based on the false financial documents, Lewis caused Silicon Valley Bank to approve the loans to Blue Wave Media and deposit the loan proceeds into a bank account he controlled. Lewis's misrepresentations caused the bank to approve four loans totaling $5 million.

Lewis admitted he executed the scheme by willfully causing a loan and security agreement to be signed with Silicon Valley Bank in April 2013 to secure a $500,000 loan. In January 2014, he submitted an amendment to the agreement to the bank to secure an additional $500,000 loan. In June 2014, Lewis willfully caused another amendment to the agreement to secure a $1 million loan, and, in April 2015, Lewis signed a third amendment to the agreement with the bank to secure a $3 million loan.

As a result of Lewis's fraudulent scheme, Silicon Valley Bank sustained actual losses of approximately $3,414,064, according to the plea agreement.
After pleading guilty in the United States District Court for the Southern District of New York, Daniel Kamensky, former founder/manager of Marble Ridge Capital, was sentenced to six months of supervised release on home confinement and ordered to pay a fine of $55,000. As alleged in part in the DOJ Release:

DANIEL KAMENSKY was the principal of Marble Ridge, a hedge fund with assets under management of more than $1 billion that invested in securities in distressed situations, including bankruptcies.  Prior to opening Marble Ridge, KAMENSKY worked for many years as a bankruptcy attorney at a well-known international law firm, and as a distressed debt investor at prominent financial institutions.

The Neiman Marcus Bankruptcy

Neiman Marcus, an American chain of luxury department stores with stores located across the United States, filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") in May 2020.  At the outset of the bankruptcy, Marble Ridge, through KAMENSKY, applied to be on the Official Committee of Unsecured Creditors (the "Committee") and was thereafter appointed to be a member of the Committee.  As a member of the Committee, KAMENSKY had a fiduciary duty to represent the interests of all unsecured creditors as a group.

During the bankruptcy process, the Committee had negotiated with the owners of Neiman Marcus to obtain certain securities, known as MyTheresa Series B Shares (the "MYT Securities"), and ultimately, the Committee was successful in coming to a settlement to obtain 140 million shares of MYT Securities for the benefit of certain unsecured creditors of the bankruptcy estate.  In July 2020, KAMENSKY was negotiating with the Committee for Marble Ridge to offer 20 cents per share to purchase MYT Securities from any unsecured creditor who preferred to receive cash, rather than MYT Securities, as part of that settlement.

Kamensky's Fraudulent Scheme 

On July 31, 2020, KAMENSKY learned that a diversified financial services company headquartered in New York, New York (the "Investment Bank"), had informed the Committee that it was interested in bidding a price between 30 and 40 cents per share - substantially higher than KAMENSKY's bid - to purchase the MYT Securities from any unsecured creditor who was interested in receiving cash.

That afternoon, KAMENSKY sent messages to a senior trader at the Investment Bank ("IB Employee-1") telling him not to place a bid, and followed those messages up with a phone call with IB Employee-1 and a senior analyst of the Investment Bank ("IB Employee-2," and collectively the "Employees").  During that call, KAMENSKY asserted that Marble Ridge should have the exclusive right to purchase MYT Securities, and he threatened to use his official role as co-chair of the Committee to prevent the Investment Bank from acquiring the MYT Securities.  KAMENSKY also stated that Marble Ridge had been a client of the Investment Bank in the past but that if the Investment Bank moved forward with its bid, then Marble Ridge would cease doing business with the Investment Bank.

The Investment Bank thereafter decided not to make a bid to purchase MYT Securities and informed the legal adviser to the Committee of its decision.  The Investment Bank further told the legal adviser it made that decision because KAMENSKY - a client of the Investment Bank - had asked them not to.

Advisers to the Committee informed counsel for Marble Ridge of their call with the Employees, and after speaking with KAMENSKY, counsel for Marble Ridge falsely informed the advisers that KAMENSKY had not asked the Employees not to bid, but instead had told them to place a bid only if they were serious.  Later that evening, KAMENSKY contacted IB Employee-1 and attempted to influence what IB Employee-1 would tell others, including the Committee and law enforcement, about KAMENSKY's attempt to block the Investment Bank's bid for the MYT Securities.  KAMENSKY said at the outset of the call, in substance, "this conversation never happened."  During the call, KAMENSKY asked IB Employee-1 to say falsely that IB Employee-1 had been mistaken and KAMENSKY had actually suggested that the Investment Bank bid only if it were serious, and made comments including the following:  "Do you understand . . . I can go to jail?"  "I pray you tell them that it was a huge misunderstanding, okay, and I'm going to invite you to bid and be part of the process."  "But I'm telling you . . . this is going to the U.S. Attorney's Office.  This is going to go to the court."  "[I]f you're going to continue to tell them what you just told me, I'm going to jail, okay?  Because they're going to say that I abused my position as a fiduciary, which I probably did, right?  Maybe I should go to jail.  But I'm asking you not to put me in jail."

During a subsequent interview with the Office of the United States Trustee, which was conducted under oath and in the presence of counsel, KAMENSKY stated that his calls to IB Employee-1 were a "terrible mistake" and "profound errors in lapses of judgment."

After this series of events, Marble Ridge resigned from the Committee and advised its investors that it intended to begin winding down operations and returning investor capital.

SEC Approves Registration of First Security-Based Swap Data Repository; Sets the First Compliance Date for Regulation SBSR (SEC Release)
The SEC issued an Order approving the registration of of DTCC Data Repository (U.S.), LLC ("DDR") as the first security-based swap data repository ("SDR"). DDR intends to operate as a registered SDR for security-based swap transactions in the equity, credit, and interest rate derivatives asset classes.

The U.S. District Court for the Central District of California has entered final judgments against the remaining three defendants in a 2019 SEC action charging them for their alleged roles in a pump-and-dump scheme in the stock of southern California beverage and cannabis company Green Cures & Botanical Distribution, Inc. The SEC previously charged Ishmail Calvin Ross, Zachary Logan, Jessica Snyder, and David N. Osegueda with deceiving a brokerage firm into allowing Ross, Logan, and Osegueda to deposit their Green Cures stock into their accounts in advance of their pumping up the company's stock price through a promotional campaign. Ross, Logan, and Osegueda then allegedly dumped their shares on unsuspecting investors, generating approximately $1.9 million in illicit proceeds.

Without admitting or denying the allegations of the complaint, Ross and Snyder consented to final judgments entered by the court. The court also entered a final judgment against Logan based upon his default. The judgments permanently enjoin Ross, Logan, and Snyder from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and further enjoin Ross and Logan from violating the securities registration provisions of Section 5 of the Securities Act. The judgments order Ross and Logan to pay disgorgement and prejudgment interest of $781,868 and $184,293, respectively. The court further ordered that Ross, Logan, and Snyder pay civil penalties of $400,000, $164,000, and $100,000, respectively. The judgments also prohibit all three defendants from participating in the offering of a penny stock, and impose ten-year and permanent officer and director bars against Ross and Snyder, respectively.

Without admitting or denying the allegations of the complaint, Osegueda previously consented to a final judgment that permanently enjoined him from violating Sections 5 and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, ordered him to pay disgorgement and prejudgment interest of $933,181 and a civil penalty of $835,941, and imposed a penny stock bar and a ten-year officer and director bar.

Statement Before the Financial Services Committee U.S. House of Representatives by Robert W. Cook, President and Chief Executive Officer of the Financial Industry Regulatory Authority ("FINRA") / May 6, 2021
Read President/CEO Cook's remarks in full; and also read: Testimony Before the House Committee on Financial Services of SEC Chair Gary Gensler / May 6, 2021