Securities Industry Commentator by Bill Singer Esq

May 17, 2021
As readers of the Blog know, our publisher Bill Singer is a frequent critic of many FINRA Regulatory Notices, which unwisely divert the focus of industry compliance staff from serious tasks and this stress has been exacerbated by the COVID pandemic. Perhaps in response to some of Bill's recent complaints, FINRA just published the truly helpful "Cybersecurity / FINRA Shares Practices Firms Use to Protect Customers From Online Account Takeover Attempts" (FINRA Regulatory Notice 21-18 / May 12, 2021).

Florida Man Sentenced for $1.3 Million Securities Fraud Scheme (DOJ Release)
David C. Coggins, 42, pled guilty in the United States District Court for the Southern District of Florida to one count of securities fraud; and he was sentenced to four years in prison and ordered to pay $1,305,000 in restitution. As alleged in part in the DOJ Releaes:

[C]oggins solicited investors to his investment fund between 2015 and 2020 by touting the fund's successful performance and total assets under management. Over time, the fund lost money and Coggins used money from new investors to pay other investors. Coggins also misappropriated funds for his personal purposes. To conceal the fund's actual losses and persuade investors to part with their money, Coggins fabricated reports purportedly showing the fund's successful performance and created a fraudulent independent auditor's report. By the end of 2020, the net asset value of the fund was nearly zero. 

Hudson County Man Sentenced to 27 Months in Prison for Role in Wire Fraud Scheme to Defraud Financial Institution Customers (DOJ Release)
Ramon Herrera, 37, pled guilty in the United States District Court for the District of New Jersey to an Information charging him with one count of wire fraud; and he was sentenced to 27 months in prison plus three years of supervised release. As alleged in part in the DOJ Release:

Between May 2015 and January 2018, Herrera used his position as a registered broker and financial advisor at a clearing services company associated with "Financial Institution-1" to meet and learn confidential information about Financial Institution-1 customers in the Hudson County area, for whom he was ostensibly providing advice and brokerage services. Herrera caused the Financial Institution-1 customers he was advising, many of whom were elderly or communicated with Herrera in Spanish, to sign blank withdrawal slips, which Herrera then completed and presented to bank tellers at Financial Institution-1 branches. Herrera directed the bank tellers to withdraw the money from the customers' accounts in the form of cashier's checks, which enabled Herrera to then apply the checks against the various personal accounts that Herrera and a family member maintained at Financial Institution-1. Herrera stole more than $450,000 from approximately 40 Financial Instiution-1 customers. He used the stolen funds for his own purposes without the customers' knowledge or authorization.

Man Pleads Guilty to Million Dollar Investment Fraud Scheme (DOJ Release)
After three-days of a jury trial in the United States District Court for the Eastern District of Virginia, Manish Singh pled guilty to wire fraud and identity theft. In part the DOJ Release alleges that Singh: 

entered into an agreement in 2016 with a married couple to create a business that would design and sell high-end fabrics. The business was to be called Sanaa Home and Lifestyle. The couple was to provide the capital for the business, and Singh was to contribute his expertise and contacts in the fabric industry.

Singh represented to the victim investors that their money was being used for numerous expenses related to Sanaa, such as the manufacture of fabric in India. In reality, Singh was using the victims' money almost entirely for personal expenses, mostly to view live pornography online. Based on Singh's misrepresentations, the victims gave him approximately $1.26 million for the fraudulent joint business venture.
Bill Singer: Singh spent nearly $1.26 million "mostly to view online pornography?" Wow . . . didn't he know that there's a lot of free porn online? Not that I would know. That's what I've heard.
A Consent Order for Permanent Injunction, Restitution, and Ancillary Equitable Relief was entered in the United States District Court for the Eastern District of Virginia against defendant Leonard J. Cipolla The Order requires Cipolla to pay $5,102,283.51 in restitution and imposes permanent trading and registration bans. As alleged in part in the CFTC Release:

[C]ipolla admitted, from June 2009 through April 2019, Cipolla fraudulently solicited and received approximately $7,096,303 from pool participants in connection with futures and options pooled trading. The order also found that Cipolla misappropriated more than $2.5 million for business expenses or personal use and made more than $3 million in Ponzi-like payments to pool participants.  

Despite having accepted approximately $7,096,303 from pool participants, the order found that Cipolla transferred only approximately $1,462,834 into Tate Street's trading accounts. While Cipolla typically promised pool participants substantial returns, his actual trading between June 2009 and April 2019 was profitable in only two years and resulted in cumulative net losses of approximately $1,462,305. The order also found that Cipolla provided statements to pool participants that did not accurately reflect their trading results.

Parallel Criminal Action

In a separate, parallel criminal action, the U.S. Attorney for the Eastern District of Virginia previously announced that Cipolla pleaded guilty to mail fraud and acting as an unregistered commodity pool operator in connection with the scheme. On July 1, 2020, Cipolla was sentenced to 121 months in federal prison and ordered to pay restitution to victims. [See United States v. Leonard J. Cipolla, Case No. 3:19-cr-00126, ECF No. 40 (E.D. Va. Jul. 1, 2020)]

Mind the (Data) Gaps (Speech by SEC Commissioner Caroline A. Crenshaw)
During her keynote address at the 8th Annual Conference on Financial Market Regulation, SEC Commissioner Crenshaw touched a number of issues involving data, its use, and its potential misuse in regulation. Among some of Commissioner Crenshaw's more provocative comments [Ed: footnotes omitted]:

[A]nother piece of the rulemaking package, Regulation Best Interest, requires broker-dealers to make certain disclosures to their retail customers. For example, they must make disclosures about the nature of the relationship between the broker-dealer and the customer; the fees and costs the customer will incur; the type and scope of the services to be provided; and conflicts of interest.[21] However, the SEC has never performed investor testing on the effectiveness of these disclosures. The materials provided to investors are often lengthy and technical, using industry terms that may be unfamiliar to retail investors. Whether this truly enables informed decision-making is a crucial question in terms of the effectiveness of our regulatory approach.

I believe we need to engage in investor testing of the actual forms and disclosures that investors receive in order to determine whether or not they are effective. This will allow us to improve the disclosures and make them more useful for, again, all investors. We can also use the testing to assess the limits of disclosure as our primary means of investor protection in this area. Disclosure should not be used as an end run around the obligation to act in a client's best interest. If there are areas in which even the best disclosures do not appear to provide a full understanding of key information, we should consider other ways to protect investors. This could potentially include eliminating certain practices that create conflicts of interest - particularly if conflict mitigation measures are not sufficiently protecting investors.

Our reliance on disclosure in Regulation Best Interest, Form CRS, and other documents like Form ADV, is based on the idea that it is an effective investor protection tool. But in the absence of investor testing, we lack information on how effective it really is.
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I am confident the CAT was helpful in our efforts to understand the GameStop-related market activity. However, I know that we would be in an even better position to understand if the CAT was complete. We would also be in a better position to understand and address myriad other issues, including issues related to market manipulation, market structure, and order routing. I therefore believe it should be a priority to finish the CAT, so that it finally reaches its full potential as a tool for understanding and analyzing the markets we regulate.