Securities Industry Commentator by Bill Singer Esq

June 17, 2021
When it comes to Wall Street's Big Fish, FINRA is oh-so cautious and oh-so solicitous before asserting that the firm has prior, relevant disciplinary history, But that same caution and that same solicitousness just doesn't arise for FINRA's smaller firms or the industry's hundreds of thousands of registered persons. Pointedly, when the charge of failed supervision raises its ugly head, it seems that if a Large Member Firm is involved, only that firm's name appears in FINRA's regulatory caption; but when that same violations occurs at smaller broker-dealers, we often seen the names of individual C-suiters, compliance staff, and supervisors tagged as Respondents. 

Previously, on September 30, 2019, the CFTC charged Webb and Classic with misappropriation of information, supervision, and recordkeeping violations between April 2014 and September 2015. [See CFTC Press Release No. 8030-19] The second, recent Order finds that Webb and Classic continued violate the CEA and CFTC regulations for an additional four years between September 2015 and November 2019. The Order requires Webb and Classic to disgorge $585,000, to comply with undertakings to never apply for CFTC registration or engage in any activity requiring CFTC registration, and permanently bans them from trading commodity interests. The order recognizes the respondents' entry into a formal cooperation agreement with the Division of Enforcement and reserves the CFTC's determination as to monetary sanctions based on the respondents' agreement to cooperate. As alleged in part in the CFTC Release:

Case Background

The order finds that from September 4, 2015 through at least January 22, 2019, Webb engaged in a scheme to misappropriate material, nonpublic block trade order information belonging to Classic's customers. Webb did so by working in concert with certain individual traders employed by Classic's brokerage customers to disclose block trade order information to another individual trader involved in the scheme. According to the order, this trader then used the information disclosed by Webb to arrange fictitious, non-arm's length block trades between himself and the Classic customer at prices that allowed this trader to make a profit on offsetting trades. This trader shared these profits with Webb and the other traders involved in the scheme.

The order also finds that between at least September 4, 2015 and at least August 2019, Webb and Classic also defrauded one of their brokerage customers by paying a portion of the commissions Classic charged to the customer to certain of its traders as a kickback. According to the order, in exchange for these kickback payments, the traders directed more of the customer's block trade business to Classic, which resulted in more commission revenue for Classic and higher profits for Webb.

The order further finds that Webb and Classic failed to diligently supervise other Classic brokers and allowed these brokers both to misappropriate material, nonpublic block trade order information from Classic's customers and to defraud a Classic brokerage customer through kickback payments, in a manner similar to Webb. In addition, according to the order, Webb lied to ICE in the course of ICE's investigation into the trades that were the subject of the CFTC's September 30, 2019 order against Webb and Classic. 

Separate Criminal Action

In a separate, parallel matter, the Department of Justice's Fraud Section today announced that Webb pleaded guilty to one count of conspiracy both to confirm the execution of fictitious trades and engage in a scheme to defraud in violation of the CEA and CFTC Regulations and to violate 18 U.S.C. § 1348(1) and 18 U.S.C § 1343. The CFTC order will recognize and offset a portion of any criminal forfeiture paid to DOJ.
In response to an Information filed  in the United States District Court for the Southern District of New York, Romana Leyva pled guilty to one count of conspiracy to commit wire fraud and one count of conspiracy to intentionally damage a protected computer. As alleged in part in the DOJ Release:

From approximately February 2015 through December 2018, LEYVA was a member of a criminal fraud ring (the "Fraud Ring") based in the United States and India that committed a technical support fraud scheme that exploited elderly victims located across the United States and Canada, including in the Southern District of New York.  The Fraud Ring's primary objective was to trick victims into believing that their computers were infected with malware, in order to deceive them into paying hundreds or thousands of dollars for phony computer repair services.  Over the course of the conspiracy, the Fraud Ring generated more than $10 million in proceeds from at least 7,500 victims.

The scheme generally worked as follows:  First, the Fraud Ring caused pop-up windows to appear on victims' computers.  The pop-up windows claimed, falsely, that a virus had infected the victim's computer.  The pop-up window directed the victim to call a particular telephone number to obtain technical support.  In at least some instances, the pop-up window threatened victims that, if they restarted or shut down their computer, it could "cause serious damage to the system," including "complete data loss."  In an attempt to give the false appearance of legitimacy, in some instances the pop-up window included, without authorization, the corporate logo of a well-known, legitimate technology company.  In fact, no virus had infected victims' computers, and the technical support phone numbers were not associated with the legitimate technology company.  Rather, these representations were false and were designed to trick victims into paying the Fraud Ring to "fix" a problem that did not exist.  And while the purported "virus" was a hoax, the pop-up window itself did cause various victims' computers to completely "freeze," thereby preventing these victims from accessing the data and files in their computer - which caused some victims to call the phone number listed on the pop-up window.  In exchange for victims' payment of several hundreds or thousands of dollars (depending on the precise "service" victims purchased), the purported technician remotely accessed the victim's computer and ran an anti-virus tool, which is free and available on the Internet.  The Fraud Ring also re-victimized various victims, after they had made payments to purportedly "fix" their tech problems.

LEYVA's roles in the scheme included (1) creating several fraudulent corporate entities that were used to receive fraud proceeds from victims, (2) recruiting others (including through misrepresentations) to register fraudulent corporate entities that became part of and facilitated the activities of the Fraud Ring, and (3) assisting others in setting up fraudulent corporate entities and bank accounts, including coaching them to make misrepresentations to bank employees where necessary.  As she acknowledged as part of her guilty plea, LEYVA was a leader or organizer in this conspiracy.
In response to charges in a Complaint and, thereafter, an Information filed in the United States District Court for the Northern District of California, Andrew Chapin, Chief Executive Officer/Founder of the digital advertising company Benja, pled guilty to bank fraud, wire fraud, and securities fraud. As alleged in part in the DOJ Release:

[F]rom June 2019 to September 2020 Chapin was looking for additional investors and lines of credit for Benja.  He told creditors and prospective investors that Benja generated $6,200,000 and $13,200,000 in revenue in 2018 and 2019, respectively, and had signed large contracts with numerous well-known national companies to place advertisements for their excess inventory.  He admitted today in his plea agreement that he had no contracts with these companies, he falsified Benja's revenue, and he impersonated corporate representatives, or caused their impersonation, to bolster the appearance of company relationships that did not exist.

Chapin detailed in his plea agreement that he submitted false information about Benja to a victim bank to obtain lines of credit totaling $5,000,000.  In one example, Chapin took advances on a line of credit and used the money to pay off creditors and investors as well as his personal credit cards, and he also transferred money to his cryptocurrency exchange account.

Chapin also admitted he made false statements to induce venture capital firms to invest in Benja.  His false statements led to investments of $1,000,000 from a venture capital firm and $1,800,000 from a SAFE (simple agreement for future equity) fundraising round from multiple investors.  To obtain these investments, he fabricated documents to reflect Benja had millions in revenue and account receivables from companies that never contracted with Benja. 

In one example in his plea agreement, Chapin described that on March 23, 2020, he directed a New York venture capital firm to Benja's virtual data room that displayed a spreadsheet showing Benja's total 2019 revenue had exceeded $13,000,000 and listed contracts with well-known national sportswear companies that represented more than $7,000,000 of Benja's total 2019 income.  However, Chapin admitted today that Benja had no contracts with the national sportswear companies and that he fabricated the spreadsheet.  Chapin further admitted that for reference calls from the venture capital firm, he paid a Benja employee to impersonate a national running shoe company's representative and instructed another individual to impersonate a national sportswear company's representative.  The venture capital firm relied on these representations and invested $1,000,000 in Benja.  Chapin used that money to pay off a creditor.

Chapin also admitted defrauding individual investors.  For example, in his plea agreement Chapin stated that in November 2018 he emailed false financial statements to an individual investor reflecting Benja had over $4,000,000 in revenue in 2018.  Chapin further told the individual investor that a St. Louis, Missouri, venture capital firm was considering a $1,500,000 investment in Benja, although Chapin already knew the firm had declined to invest in Benja.  Chapin also had a person impersonate the St. Louis venture capital firm's manager during a reference call with the individual investor.  In the call, the impersonator told the individual investor that a third party had verified Benja's financials and had also made customer reference calls about Benja that were positive.  Chapin admitted he then provided false contact information for the St. Louis venture capital firm's manager that allowed Chapin - not the venture capital firm's manager - to respond to the individual investor's questions about Chapin's shareholder agreement.  The individual investor signed the shareholder's agreement, purchasing 1,278 shares of common stock in Benja for $100,000.  Chapin admits he used that money to pay personal credit card bills and to transfer the funds to his personal bank and cryptocurrency exchange accounts. 

Chapin agreed in his plea agreement that from June 2019 through September 2020, the total loss amount attributable to his fraud scheme exceeded $3,500,000.
Among the mysteries of the Universe is whether a revocation of a license is the same as a bar of a license.  On top of that puzzler, if something happens but you didn't know about it at the time but you eventually learn about it, does that mean you had failed to timely report what you didn't know had happened but now do?  Finally, we are asked to ponder the ethical and legal implications of whether the SEC should stay a determination by FINRA that someone has become statutorily disqualified after that same individual voluntarily reported the facts that prompted FINRA's determination.
Some say that FINRA stands all along the watchtower and protects the investing public from the oncoming hordes of Wall Street. Some say that FINRA is perched atop the castle walls, enjoying a smoke of a dubious substance, sippin' a glass of wine, and mesmerized by the sunset. Others say that FINRA had some other regulator punch in for them and blew off the whole standing on the bulwarks thing. In any event, today's blog features yet another example of FINRA discharging its role as the protector of the realm. We don't have raging hordes threatening to storm the castle. No, today's attackers are from the fearsome tribe of the Notaries. And as the joker said to the thief, there's too much confusion and I can't get no relief.