Securities Industry Commentator by Bill Singer Esq

July 2, 2021

 settlement confidentiality/
In a recent federal court case involving a class action settlement agreement, the court addressed two threshold issues: one, was the settlement agreement enforceable, and two, who was and was not covered by the confidentiality provision. Sometimes it's about the journey. Sometimes it's about the destination. In this federal case, I think we got to the right place but it was quite the bumpy ride.
FinOps Reports' Chris Kentouris tackles a big question: Do Chief Compliance Officers need a new operating model in order to avoid being personally penalized by the US Securities and Exchange Commission?
In an Indictment filed in the United States District Court for the Southern District of Ohio, William T. Caniff was charged with multiple counts of wire fraud and money laundering. As alleged in part in the DOJ Release:

[C]aniff and another individual formed Berkley Capital Management, LLC in January 2016 which purported to be in the business of trading binary options.  Berkley Capital Management was the general partner for Bbot 1 LP (Bbot) which was created in January 2016 and Berkley II LP (Berkley II), which was created in August 2017.  Bbot 1 LP and Berkley II LP were established as an investment pool that would offer participants the opportunity to trade binary options in a pool with other participants.

Caniff was the designated trader for Bbot and Berkley II.  Caniff established bank accounts for Berkley Capital Management, Bbot 1, and Berkley II and had control of the bank accounts.

The indictment alleges that Caniff knowingly made and caused to be made materially false representations to investors to fraudulently obtain and retain money, including false representations about the risks involved with the investments, the expected and actual returns on investments, and the ways investor funds would be used and were used.  Caniff created or caused to be created false documents in order to mislead investors, including false account statements.

The indictment also alleges that, even though Bbot and Berkley II received more than $4 million in funds from investors, Caniff caused only $85,000 of the funds to be invested through Nadex, an online binary options exchange. Caniff fraudulently misappropriated at least $2 million of investors' funds for his own benefit and the benefit of a business partner, the indictment charges.

In a Complaint filed in the United States District Court for the Southern District of New York
("SDNY"), Sean Wygovsky was charged with one count of securities fraud and one count of wire fraud. As alleged in part in the DOJ Release:

SEAN WYGOVSKY has been employed at the Employer Firm since approximately 2013.  The Employer Firm is an asset management firm based in Toronto, Canada, with at least approximately $19 billion in assets under management. WYGOVSKY has a number of close relatives who live in the United States, including a relative in North Carolina ("Relative-1") and two relatives in Virginia ("Relative-2" and Relative-3") who are married to each other.

The Front Running Scheme

Based on his position as a trader at the Employer Firm, WYGOVSKY had access to the trade information and trade orders of the Employer Firm.  Like most large asset managers, the Employer Firm had rules and regulations concerning employees' personal trading, including requirements about the confidentiality of client information and prohibitions against insider trading and personal trading in the same securities as the Employer Firm.  The size of the Employer Firm's trade orders often caused slight, temporary movements in the price of the securities traded.  For example, if the Employer Firm engaged in a large purchase of stock, the increased demand could cause a slight rise in the stock price, and if the Employer Firm engaged in a large sale of stock, the increased supply could cause a slight drop in the stock price.  Because WYGOVSKY had access to the Employer Firm's trade orders, he knew in advance when a particular stock price would move slightly up or down based on that trading.

WYGOVSKY's relatives maintained brokerage accounts for the personal purchase and sale of securities.  In particular, Relative-1 maintained at least one brokerage account and Relative-2 and Relative-3 maintained at least four brokerage accounts (the "Subject Accounts").  From at least 2015 through April 2021, after obtaining information about the Employer Firm's upcoming trading activity but before those trades were executed, WYGOVSKY caused the Subject Accounts to buy or sell the same securities the Employer Firm would be buying or selling, in order to profit through the subsequent movement of the stock that would often result from the Employer Firm's trading.  WYGOVSKY would then cause the Subject Accounts to exit those positions once the Employer Firm's trading was underway, often within hours of when the Subject Accounts had first entered the positions.  For example, if WYGOVSKY knew that the Employer Firm would be buying a particular stock, WYGOVSKY would cause one or more of the Subject Accounts to purchase that stock beforehand in relatively small amounts.  Then, as the Employer Firm made relatively large purchases, the stock price would increase and WYGOVSKY would cause the Subject Accounts to sell their holdings at a profit. 

At times, WYGOVSKY personally conducted the trading on behalf of both the Employer Firm and the Subject Accounts.  For example, on occasion, IP log-ins from the Subject Accounts show the Subject Accounts were being accessed from locations where WYGOVSKY was travelling.  On other occasions, WYGOVSKY would cause others to execute the timely, profitable trading in the Subject Accounts.  Over an approximately five-year period, WYGOVSKY caused the Subject Accounts to engage in more than 700 such short-term timely, profitable trades, resulting in at least over $3.6 million of profits in the Subject Accounts. 

Financial Transfers Back to Wygovsky

During the course of the front running scheme, Relative-2 and Relative-3 caused at least approximately hundreds of thousands of dollars to be sent back to WYGOVSKY from the Subject Accounts.   For example, between 2015 and 2020, Relative-2 and Relative-3 moved millions of dollars from the Subject Accounts to bank accounts that they controlled, and wrote checks to WYGOVSKY and his immediate family members for hundreds of thousands of dollars.  Furthermore, in or about late 2017 and early 2018, Relative-2 and Relative-3 transferred hundreds of thousands of dollars to a Slovenian bank for the benefit of certain relatives of WYGOVSKY's wife.  

In a Complaint filed in SDNY, the SEC alleged that Wygovsky had violated the antifraud provisions of the federal securities laws.  As alleged in part in the SEC Release: 

[F]rom approximately January 2015 through at least April 2021, Wygovsky repeatedly traded in his family members' accounts held at brokerage firms in the United States ahead of large trades that were executed on the same days in the accounts of his employer's advisory clients. On over 600 occasions, Wygovsky allegedly bought or sold a stock for one his relatives' accounts either before the client accounts began executing a large order for the same stock on the same side of the market, or during the time period when tranches of such a large order were being executed.  Then, typically before the client accounts completed their executions, Wygovsky allegedly closed out the just-established positions in his relatives' accounts, nearly always at a profit.
In an Application filed in the United States District Court for the District of Nevada, the SEC alleged that Shawn F. Hackman had violated a September 10, 2002 SEC Order that suspended him from appearing or practicing before the SEC as an attorney after he was disbarred by the Supreme Court of Nevada. As alleged in part in the SEC Release:

[H]ackman violated the order by (1) drafting and providing legal advice on SEC filings made by scores of companies, and (2) directly communicating with SEC staff on substantive legal issues concerning SEC filings. The SEC's Application further alleges that Hackman earned more than $800,000 for work that violated his suspension order. The SEC seeks a federal court order requiring him to comply with the suspension order and to disgorge all profits earned in violation of that order.

In addition to the charges against Hackman, the Commission instituted administrative proceedings against Elaine A. Dowling, Esq. and Harold P. Gewerter, Esq., pursuant to Section 4C of the Securities Exchange of Act of 1934 and Rule 102(e) of the Commission's Rules of Practice. The administrative proceedings allege that Dowling and Gewerter engaged in improper professional conduct by allowing and enabling Hackman to appear and practice before the SEC in violation of his suspension (and his Nevada disbarment) while they employed Hackman as a purported "paralegal." Gewerter consented to the entry of an order denying him the privilege of appearing or practicing before the Commission. A hearing will be scheduled before an administrative law judge in the proceeding against Dowling.

In a Complaint filed in the United States District Court for the Central District of California, the SEC charged  Lambert Vander Tuig, Ben Schactschneider, Capital Development Resources f/k/a Biosynetics, and Biosynetics Management with violations of the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act  and Rule 10b-5 thereunder, and the securities registration provisions of Section 5 of the Securities Act. Galileo Labs, Inc. was named as a Relief Defendant. As alleged in part in the SEC Release:

[F]rom January 2018 until the present, Ben Schachtschneider and securities fraud recidivist Lambert Vander Tuig defrauded investors by using false statements and other deceptive conduct, such as aliases, to sell purported private placement investments in Biosynetics. The complaint alleges that Vander Tuig and Schachtschneider represented that investor funds would be used for research and development. As alleged, they also falsely described Biosynetics as an established pharmaceutical or nutraceutical company and told multiple investors that Biosynetics had agreements with large retailers to sell Biosynetics' sleep-aid product, when in fact no such agreements exist or existed. The complaint further alleges that Vander Tuig, Schachtschneider, and others raised at least $763,500 in the fraudulent and unregistered offerings from at least 28 investors, including a retired firefighter, a retired military officer, and multiple small business owners. In addition, most investor funds were allegedly misappropriated and used for bank withdrawals, personal expenses, payments to cold-callers working at Vander Tuig's direction, and various unrelated entities. According to the complaint, Schachtschneider and Vander Tuig personally received a combined $107,000 of investor funds.
In a 13-count Indictment filed in the United States District Court for the District of  South Carolina, 
Fabian Gray, a/k/a Mike Taylor;  Avia Reid; Khalelah Powell,; and Romaine Gordon were charged with conspiracy to commit wire fraud, wire fraud, mail fraud, and conspiracy to commit money laundering. As alleged in part in the DOJ Release:

[S]ince June 2015, the four defendants knowingly, willfully, and intentionally conspired to defraud victims by use of telemarketing.  Namely, it is alleged that the defendants and their co-conspirators falsely informed more than 100 victims, most of them elderly, that the victims had won large awards of money and then convinced the victims that they had to pay fees in advance in order to receive their awards.

The indictment further alleges that the defendants and their co-conspirators sent communications purported to be from a genuine sweepstakes company, financial institutions, and even federal agencies that discussed the purported cash awards, designed to hide the true nature of the conspiracy and to convince victims of the authenticity of the winnings and fees.  The defendants then allegedly instructed how and whom the bogus fees and taxes were to be sent.  After receiving the victims' money through prepaid cards, money orders, cash, personal checks and wire transfers, the defendants in turn wire transferred and carried to co-conspirators in Jamaica and elsewhere.

It is alleged in the indictment that at least $665,000 was stolen in the scheme.

SEC Obtains Penalty, Injunctions, and Bars Against CEO of Las Vegas Company (SEC Release)
As alleged in part in the SEC Release:

According to the SEC's complaint, filed in September 2016, Scott Fraser, who was a major shareholder in Las Vegas-based penny stock issuer Empowered Products Inc., also ran Contrarian Press, a newsletter publishing business. Fraser and Contrarian Press allegedly coordinated three promotional campaigns touting Empowered Products' stock while concealing their involvement. The SEC alleged that in one of the campaigns, Fraser authored and published the articles in Contrarian Press newsletters using the "Charlie Buck" pseudonym, and in the other two campaigns, Fraser and Contrarian Press hired other promoters to disseminate the promotions to their respective subscriber lists in exchange for fees. According to the complaint, the promotional publications failed to disclose that Empowered Products and Fraser approved and paid for the advertisements.

The final judgment against Fraser, entered on July 1, 2021, by the U.S. District Court for the Southern District of New York, enjoins Fraser from violating the anti-touting provisions of Section 17(b) of the Securities Act of 1933 and the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and orders him to pay a civil penalty of $125,000. The judgment also bars Fraser from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act, and bars him from participating in the offer of any penny stock.

The SEC dismissed the action against Contrarian Press, LLC, which is now defunct. Yeung, who the SEC alleged coordinated one of the promotional campaigns on behalf of Contrarian Press, consented to a final judgment entered on August 28, 2019, enjoining him from violating Section 17(b) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, ordered disgorgement and prejudgment interest totaling $38,276, and a civil penalty of $75,000, as well as barring Yeung from participating in the offer of any penny stock.
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, Michael Thomas Carl submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Michael Thomas Carl was first registered in 1998 and by 2010 he was registered with Charles Schwab & Co.. In accordance with the terms of the AWC, FINRA found that Carl violated FINRA Rules 3270 and 2010, and  imposed upon him a Bar from associating with any FINRA member in all capacities.  As alleged in part in the FINRA AWC:

In November 2018, Carl submitted to Schwab an invoice he altered and an email he fabricated in order to cause Schwab to pay $15,000 to a vendor, purportedly for consulting services provided to a Schwab advisor client (Client 1) and pursuant to Client 1's expense agreement with the firm. In fact, no such services had been provided to Client 1. Carl wanted Schwab to pay the vendor for services it had provided to another Schwab client (Client 2), which did not have an expense agreement with the firm. Schwab paid the invoice in December 2018. 

Similarly, in March 2019, Carl submitted to Schwab two more altered invoices and accompanying fabricated emails to cause Schwab to pay approximately $4,000 to another vendor-again purportedly for services provided to Client 1. Again, no such services had been provided to Client 1. Carl wanted Schwab to pay the vendor for services provided to a different Schwab client (Client 3), which did not have an expense agreement with the firm. The firm paid the invoice in April 2019.
. . .

Beginning in 2014, Carl was one of the principals of a holding company (Holdings), which he used to rent his family's vacation property. By March 2016, Carl began using Holdings to provide consulting services to investment advisors, including clients of Schwab. In March 2016, Carl solicited one of Schwab's advisory clients (Client 4) to enter into a contract with Holdings. Client 4 agreed to pay Holdings a minimum quarterly fee to locate, hire, and pay vendors and professionals that Client 4 needed. Part of the services Holdings agreed to provide was obtaining the best custodian for Client 4-a conflict of interest in that Carl's job at Schwab entailed, in part, attracting advisory clients to Schwab's custodial services. 

Similarly, in March 2019, Carl solicited another Schwab client (Client 5) to contract with Holdings. The proposed agreement, which was never executed, contained a confidentiality provision prohibiting it from being disclosed to Schwab and conditioned favorable Schwab pricing if Client 5 were to become a Holdings client. 

Carl was compensated for his work for Holdings, including receiving more than $40,000 from 2016 through 2018. Carl failed to provide written notice to Schwab of Holdings at any time, including beginning in 2016, when Holdings began providing consulting services. In addition, Carl falsely answered "no" when asked on multiple annual firm compliance questionnaires if he had a disclosable outside business activity, including whether he had received compensation or had a reasonable expectation of compensation through a business activity outside of the firm.
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, Christopher G. Orlando submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Christopher G. Orlando was first registered in 2002, and between July 2015 and November 2016,he was registered with former FINRA member firm Legend Securities, Inc., and, thereafter, between November 2016 and December 2019 with Worden Capital Management LLC. In accordance with the terms of the AWC, FINRA found that Orlando violated FINRA Rules 2111 and 2010, and imposed upon him a Bar from associating with any FINRA member in all capacities.  As alleged in part in the FINRA AWC:

During the relevant period, Orlando engaged in quantitatively unsuitable trading in 13 customer accounts held by a total of 12 customers (one customer held two accounts). Orlando recommended high frequency trading in the 13 customer accounts, and he often recommended the sale of one security and the simultaneous investment of the sale proceeds into a new security within short time periods. Orlando's customers routinely followed his recommendations and, as a result, Orlando exercised de facto control over the customers' accounts. 
. . .
Orlando's trading in these customers' accounts was excessive and unsuitable given the customers' investment profiles. As a result of Orlando's excessive trading, the customers suffered collective realized losses of $483,680, while paying total trading costs of $581,216, including commissions of $496,872. 

Texas Stops Fraudulent Private Equity Scheme (TSSB Release)
The Texas State Securities Board entered an Emergency Cease and Desist Order against Prestige Equity and others. As alleged in part in the TSSB Release:

[T]he parties are claiming investors become limited partners in the private equity fund and their principal is used for a variety of purposes - such as creating secured, high-interest asset-backed small business loans and investing in real estate.  These transactions purportedly generate sufficient revenue that ensures Prestige Equity can guarantee payment of 12% annual returns to investors. 

According to the order, it's actually a fraudulent scheme.  Although Prestige Equity is telling investors they will become limited partners in the private equity fund, investors do not actually purchase limited partnership interests.  According to the order, investors execute a contract that simply provides they open accounts at Prestige Equity - not that they purchase limited partnership interests in any type of fund.   

The parties are also telling potential investors the company was founded in Dallas in 2001 - and providing investors with an address for its headquarters.  According to the order, however, the parties did not organize Prestige Equity at any time prior to 2021 and it does not maintain an office at the address provided to investors.  The promoter is concealing its real location, according to the action.
Sponsored research. An interesting idea. Your public company can't attract research. Could be you're a hidden gem that no one's found. Could be that you're a hot, wet, steamy mess that no one wants to bother with. Lots of possibilities. One solution is that you pay someone to write about your business. For some struggling companies, that may be the only way to kick-start interest in their stock. For other companies, well, how should I put it -- maybe it's a way to generate a little bit of pump and whole lot of dump. All depends on who's paying and who's getting paid. Be that as it may, a recent SEC regulatory settlement sheds some light on sponsored research.
Just going by the recently published SEC Order settling the federal regulator's case against Neovest, Inc., you'd think that the show of hands was five in favor and none against. As in unanimous. But it wasn't. It seems to have been a Majority Decision. Which is okay. But "okay" doesn't mean that you avoid all reference to any Dissent in the Order. Publishing a Dissent as a standalone document sort of defeats the purpose -- and sure as hell screws up the context. Wall Street regulation should not operate part in the light and part in the dark. It's difficult for those of us who practice law in this area to divine the messages hidden in a regulatory penumbra. It's even more difficult for those who are not lawyers and regulated by the SEC.
Way back in pre-Covid 2017, a disgruntled Schwab customer filed a FINRA Arbitration Statement of Claim complaining about the release of his records to the IRS. Then the dispute wound up in federal court. Then back in arbitration -- sort of. Then back in federal court. Four year after the hostilities began, we're in 2021, and we got Zoom arbitrations, but the customer doesn't want to argue his case via Zoom. He says that's not what he bargained for way back when things started. Now, we got Zoom regulatory hearings. We got Zoom court proceedings. So -- who's zooming whom? whistleblower agreement/
A decade ago, the Dodd-Frank Wall Street Reform and Consumer Protection Act launched Wall Street's federal whistleblower program. A keystone of the Act was that it prohibited efforts to impede communications by tipsters to the SEC. Confidentiality agreements that enabled employers to threaten reprisals against employees who contacted the SEC were deemed a prohibited practice. Some companies got the message. Others not quite so.