Securities Industry Commentator by Bill Singer Esq

June 10, 2021
In a recent FINRA OHO Decision, we have a former LPL rep who paid commissions to a former colleague. Sometimes that's okay. Not this time, or at least that's LPL's and FINRA's position. For reasons that are not disclosed, when confronted with FINRA's allegations of misconduct, the rep opted to have his day in court (or hearing) and offer explanations for his actions. I'm guessing that the settlement offer made by FINRA Staff was much higher than what the FINRA OHO Panel imposed. Not saying that's right. May not be. Just offering my best guess.
Vijay Reddy pled guilty to an Information filed in the United States District Court for the District of New Jersey charging him with one count of conspiracy to commit wire fraud and one count of wire fraud. As alleged in part in the DOJ Release: 

From December 2015 through November 2020, Reddy and his conspirators, David Weinstein and Kevin Brown, advertised business opportunities for sale on various websites. They purported to sell "blocks" of contracts with medical providers who allegedly wanted to outsource their medical billing, collections, appeals, answering, credentialing, or transcription functions. The buyers would then provide the contracted services to the medical providers and earn a profit. The conspirators promised to deliver a specified number of providers and pledged that their proprietary marketing efforts would provide a guaranteed client base to the buyers.

To induce buyers to purchase the business opportunities, the conspirators created fake references purporting to be buyers who vouched for their prior business purchases from the conspirators. In fact, the references were Reddy, Weinstein, and their friends and family members, and they used aliases and disguised phone numbers to speak with potential buyers.

After agreeing to purchase the blocks of medical providers, victims entered contracts with companies represented by Weinstein or Reddy and wired down payments ranging from $15,000 to $240,000 to accounts controlled by Weinstein or Brown. The remainder of each purchase price was payable when the conspirators fulfilled the contract by delivering the agreed-upon number of providers.

After receiving the down payments, Weinstein and Reddy typically delivered to each victim only a small number of medical providers. Despite not fulfilling the contracts of any of the buyers identified by law enforcement, the conspirators continued to sell blocks of medical providers to new buyers and refused to provide refunds for their failures to satisfy the terms of the contracts. The conspirators also periodically sold batches of previously signed contracts and disclaimed further responsibility for those contracts to insulate themselves from complaints or legal action from disgruntled buyers.

Brown acted as the business broker for most of the transactions and received a commission for the sales he brokered. Reddy or Weinstein acted as the seller and signed the contracts with the victims. At least 77 victims sent more than $5 million to accounts controlled by the conspirators. The conspirators spent the victims' money on personal expenses, including a travel, jewelry, real estate, a wedding and a college education, and other business investments.

Burlington County Man Sentenced to 65 Months in Prison for Defrauding Investors of Over $1.5 Million (DOJ Release)
Brett Cooper, 44, pled guilty to an Information filed in the United States District Court for the District of New Jersey charging him with one count of money laundering; and he was sentenced to 65 months in prison plus three years of supervised release and he was fined $25,000. Previously, in 2015, Cooper was found liable for damages related to the fraud scheme in a civil case brought by the Securities and Exchange Commission, and ordered to pay in that case over $2 million in damages and fine. As alleged in part in the DOJ Release:

Cooper and two other individuals created a "high-yield bank scheme" and solicited investments from multiple investors, telling them that they could double or triple their initial investments in 60 to 90 days. Cooper set up several shell companies, including a company he named Peninsula Water Development and another named Dream Holdings, and he had the investors wire money to bank accounts that he had set up for these shell companies. Cooper admitted that he never invested any of the money and that he transferred the money to his personal accounts used it to pay his living expenses and for other personal expenditures.  Cooper also wired some of the money from the investors to two other conspirators. A total of eight victims lost money due to Cooper's fraudulent scheme.
Paul R. McGonigle was charged in the United States District Court for the District of Massachusetts with three counts of wire fraud, one count of mail fraud and one count of aggravated identity theft. As alleged in part in the DOJ Release:

[M]cGonigle served as a financial advisor for the victims. Beginning in July 2018, McGonigle allegedly caused unauthorized withdrawals from victims' annuities and induced victims to give him money to invest on their behalf, which he then used for personal and business expenses. To carry out his scheme, McGonigle allegedly posed as clients on calls with their annuity companies and signed their names on forms requesting withdrawals from their annuities.
The SEC Release asserts in part that:

Edward E. Matthes, who was charged by the SEC in January 2020 with defrauding his mostly elderly retail brokerage customers and investment advisory clients, has been sentenced in a parallel criminal case to 63 months in prison and ordered to pay restitution to his victims of more than $2.36 million.

The criminal charges against Matthes stem from the same misconduct alleged in the SEC's complaint. The SEC's complaint alleged that Matthes convinced his brokerage customers and advisory clients to invest in what he described as a safe investment that would earn a guaranteed minimum yield of 4% per year. As alleged in the complaint, the purported investment did not exist, and Matthes stole approximately $1.4 million for his personal use. Matthes allegedly stole an additional $1 million by making unauthorized sales and withdrawals from his customers' variable annuities. To cover up his fraud, Matthes allegedly created fake account statements and paid approximately $170,000 in Ponzi-like payments.

The SEC's litigation against Matthes is ongoing. On January 30, 2020, the district court entered a judgment by consent permanently enjoining Matthes from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and ordering him to pay disgorgement, prejudgment interest, and penalties in amounts to be determined by the court at a later date.
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, Thomas Clark Cleary submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Thomas Clark Cleary was first registered in 1992, and from December 2011 to February 2019, he was registered with UBS Financial Services, Inc., and from January to September 2019, he was registered with RBC Capital Markets. The AWC alleges that Cleary "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA imposed on Cleary a $10,000 fine (a $35,000 fine for the same alleged misconduct was previously imposed by the State of Virginia)and a one-year suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC'a "Overview":

From July 2017 through August 2019, while associated with UBS and RBC, Cleary engaged in an outside business activity by serving as the executor of his customer's estate without providing prior written notice to either UBS or RBC. As a result, Cleary violated FINRA Rules 3270 and 2010.

In addition, during the period from July 2017 through January 2019, Cleary circumvented UBS policy by failing to notify the firm that he was beneficiary of the same customer's estate and taking steps to conceal from UBS his beneficiary status. As a result, Cleary violated FINRA Rule 2010.
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, Titan Securities submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Titan Securities employs 27 registered representatives at five branch office. In accordance with the terms of the AWC, FINRA imposed on Titan a Censure and $20,000 fine. As alleged in part in the AWC: [Note: the registered rep at issue is cited as "RR1" and the product at issue is cited a Future Income Payments, LLC ("FIP"):

FIP represented itself as a structured cash flow investment that purchased pensions at a discount from pensioners and then sold a portion of those pensions as a "pension stream" to investors. FIP generally promised investors a seven to eight-percent rate of return on their investment. In April 2018, FIP ceased business, owing nearly $300 million in unpaid investor payments. In a March 12, 2019 indictment, the United States charged FIP and its owner, Scott A. Kohn, with conspiracy to engage in mail and wire fraud related to FIP's operations. 

RR 1 submitted an OBA approval form to sell FIP on April 19, 2017. The OBA form described the activity and services or products offered as "Future Income Payments" and "structured cash flow." The OBA form also described the duties relating to the OBA as "sale of structured cash flows." 

Titan failed to conduct an evaluation of the proposed FIP sales to determine whether RR l'ssale of FIP constituted securities transactions that should have been treated as outside securities activity. Instead, Titan determined the disclosure related to RR l's previously approved OBA of an insurance related d/b/a without any investigation or inquiry into the FIP product. Titan approved RR l's participation in FIP on April 20, 2017. Between May 2017 and March 2018, RR 1 sold $1,510,839.15 of FIP to 20 investors, 19 of which were firm customers.
The Wall Street career of Gopi Krishna Vungarala is a smoldering train wreck. Without question, Vungarala and his family had their personal struggles, which makes this story more poignant and tragic. That backstory notwithstanding, it's hard to argue against FINRA's imposition on Vungarala of a Bar and the SEC's ratification of same; and it's equally difficult to dispute a FINRA arbitration panel's imposition of compensatory and punitive damages against him.
In a recent FINRA regulatory settlement, we got two friends, one of whom is a stock broker. The stockbroker may well have thought that he was doing his friend a favor by trading options. In fact, the friend may also have appreciated the gesture. That is until the friend/customer didn't quite appreciate the stockbroker's trading; and we're talking about lots of trading.
You're unhappy at your present employer. You negotiate a deal with another employer. Apparently you're really wonderful at what you do because you're offered a nice compensation package. Further, you did such a fabulous job selling yourself that your likely-new-employer requests a million bucks in liquidated damages in the event you don't start working for them by a mutually agreed-to date. So . . . like what could go wrong with all of that? Apparently, a lot because we got a 17-page FINRA Arbitration Award and decisions from two federal courts!