Securities Industry Commentator by Bill Singer Esq

July 21, 2021

Chocolate-Covered Cicadas (Speech by SEC Commissioner Hester M. Peirce)
In a recent regulatory settlement, FINRA patiently presents its case -- and does so in compelling fashion. At issue is the supervision of a member firm's anti-money laundering compliance program and of the marketing of two private placements. FINRA alleges that the firm's CCO/AMLCO came up short. Based upon the allegations in the AWC, FINRA made its case and in a very thorough fashion. An excellent read for industry professionals.
Pursuant to a Plea Agreement entered into in the United States District Court for the Middle District of Florida, Kenneth Murry Rossman pled guilty to conspiracy to commit wire fraud and mail fraud and aiding and assisting in the preparation and filing of a false income tax return. As alleged in part in the DOJ Release:

[R]ossman, a Florida certified public accountant and licensed insurance agent, conspired with Phillip Roy Wasserman, a former lawyer and licensed insurance agent, to defraud elderly victim-investors. The conspirators made false and fraudulent misrepresentations and concealed material information in order to convince elderly victim-investors to put their money into Wasserman's new insurance venture, "FastLife." Some victim-investors were persuaded to liquidate traditional investments, such as annuities, and/or to borrow funds against existing life insurance policies to generate cash to invest in the venture. These victim-investors were not told about surrender fees and other costs associated with the liquidations, and Rossman prepared income tax returns for victim-investors in a manner designed to conceal negative personal tax consequences that resulted from the liquidations from both the victim-investors and the Internal Revenue Service.

Victim-investors' money was used to perpetuate the fraud and for the conspirators' personal enrichment. Wasserman paid Rossman a percentage of the victim-investors' money as compensation for his role in the conspiracy. Wasserman also used victim-investors' money to make payments to earlier victim-investors in the FastLife venture, as well to as victim-investors in his earlier hedge fund and real estate fund ventures. Wasserman spent a significant amount of the victim-investors' money to finance a lavish lifestyle that included luxury residences, high-end vehicles, jet skis, jewelry, personal celebrity entertainment, gambling, retail shopping, home improvements, personal insurance, and many other expenses for his personal benefit and the benefit of family members.

The conspiracy resulted in victim-investors losing more than $6.3 million.

In November 2020, Wasserman was charged in a superseding indictment with filing false income tax returns, tax evasion, conspiracy to commit wire fraud and mail fraud, and substantive counts of wire fraud and mail fraud. His case is currently set for trial in December 2021
 Without admitting or denying the findings in an SEC Order, Tandy Leather Factory Inc. and its former Chief Executive Officer Shannon Greene each consented to cease and desist from further committing or causing these violations and pay civil money penalties of $200,000 and $25,000, respectively.  In accepting Tandy's settlement offer, the SEC took into account remedial actions. The SEC Order finds that Tandy violated, and Greene caused Tandy's violations of, the reporting, record-keeping, and internal controls provisions of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act and Rules 12b-20, 13a-1, 13a-13 and 13a-15(a)-(c) thereunder; and, further, that Greene violated the certification provisions of Exchange Act Rule 13a-14. As alleged in part in the SEC Release:

According to the SEC's order, Tandy's inventory tracking system was incapable of supporting its disclosed inventory accounting methodology because it did not properly maintain historical cost information for its inventory.  Data from this system populated Tandy's financial statements with inaccurate financial information, which in turn impacted the company's calculations for, among other things, inventory, net income, and gross profit for years.  Greene and others at the company were aware of the inventory tracking system's limitations, but did not adequately remedy them, and failed to design and maintain proper accounting controls to reasonably ensure that Tandy's transactions were recorded in accordance with generally accepted accounting principles. Tandy also failed to properly design, maintain, and evaluate its disclosure controls and procedures (DCP) and internal control over financial reporting (ICFR), and Greene failed to properly assess and evaluate the effectiveness of the same. As a result, Greene inaccurately certified that Tandy's DCP and ICFR were properly designed and effective.  On June 22, 2021, Tandy issued restated financial statements for fiscal years 2017 and 2018, each quarter in fiscal year 2018, and the first quarter of fiscal year 2019. 

Manhattan Investment Fund Manager Sentenced To 5 Years In Prison For Securities Fraud And Misappropriation Scheme (DOJ Release)
Donald LaGuardia, 54, was the Chief Executive Officer/ Co-Founder of investment firm L-R Managers, LLC, which managed the LR Global Frontier Master Fund and two related feeder funds (collectively, the "Frontier Funds"), and LaGuardia was found guilty of securities fraud, investment adviser fraud, and wire fraud after a bench trial in the United States District Court for the Southern District of New York. LaGuardia was sentenced to 60 months in prison plus three years of supervised release, and ordered to forfeit $2,571,500 and pay restitution to victims in the amount of $4,039,872.46. As alleged in part in the DOJ Release:

From in or about 2013 through in or about 2017, LAGUARDIA solicited approximately $6.4 million from investors for Frontier Funds, which had a stated focus on investments in "frontier" markets in Latin America, Central and Eastern Europe, the Middle East, Africa, and Asia.  Contrary to LAGUARDIA's representations, and in breach of his duties to investors in the Frontier Funds, LAGUARDIA misappropriated investors' money to finance L-R Managers' payroll, pay rent for its office space on Park Avenue in Manhattan, and pay hundreds of thousands of dollars in charges on the firm's credit card, among other unauthorized expenses.  Hundreds of thousands of dollars went to the benefit of LAGUARDIA personally.

In one example, in 2013, LAGUARDIA solicited an $800,000 investment in the Frontier Funds from an investor ("Investor-1").  Upon receipt of Investor-1's money, an L-R Managers employee sent an email to LAGUARDIA and another person asking for approval to forward the $800,000 to the Frontier Funds.  LAGUARDIA responded, "Dont [sic] wire anything yet!"  LAGUARDIA then caused approximately $390,000 of Investor-1's investment never to be transmitted to the Frontier Funds, but instead to be used to pay himself approximately $52,000 and for various other personal and business expenses.

By September 2015, L-R Managers faced substantial financial difficulties.  On September 1, 2015, an L-R Managers principal sent an email to LAGUARDIA and others at the firm stating that it would be "ethically troubling to accept money into the [Frontier Funds] when [L-R Managers] can no longer support . . . payroll and mission critical services."  Nevertheless, just a few days later, a new investor solicited by LAGUARDIA ("Investor-2") made a $2 million investment into the Frontier Funds.  Prior to this investment, LAGUARDIA concealed his firm's near insolvency from Investor-2 and did not disclose that the Frontier Funds had been paying substantial expenses for L-R Managers, contrary to the representations in the funds' offering documents.  LAGUARDIA then proceeded, over the course of several months, to use a substantial portion of Investor-2's investment in the Frontier Funds to continue paying himself and subsidizing his firm's business expenses.

Colorado CEO and Fund Manager Arrested for $10 Million Securities Fraud Scheme (DOJ Release)
Samuel J. Mancini was charged in the United States District Court for the District of New Jersey with securities fraud, wire fraud, and money laundering. As alleged in part in the DOJ Release:

From at least February 2020 through July 2021, Mancini orchestrated an investment fraud scheme and fraudulently obtained more than approximately $10 million from victims. Mancini managed and controlled Outdoor Capital Partners LLC (OCP), which he purported to be a venture capital and private equity firm. OCP served as the managing director of OCP Italia Fund LLC (OCP Italia), a private investment fund.

Mancini promised investors that he was raising $20 million, including $5 million of his own money, for OCP Italia to invest solely in acquiring controlling interests in three Italian cycling companies. Mancini represented to investors that the acquisitions would take place soon after the fund closed and promised investors approximately 70 percent of OCP Italia's operating profits.

Mancini repeatedly misrepresented his finances and his contribution to OCP Italia.  Mancini also misrepresented OCP Italia's ability to close on the acquisitions. To date, OCP Italia has not acquired any of the Italian cycling companies. Instead, Mancini defaulted on contracts, diverted investor funds out of OCP Italia, and, in certain instances, paid investor funds to other investors seeking redemption.

Mancini also misled investors about his educational background by representing himself as a graduate of a prestigious military academy when, in fact, Mancini had failed to graduate from the academy due to an ethical violation, a fact he failed to disclose to investors. 

When confronted with requests for transparency and redemptions by certain investors in OCP Italia, Mancini failed to honor the redemption requests, made misrepresentations about his inability to honor the redemption requests, misstated and omitted material facts, and provided certain investors with forged, modified, or otherwise fraudulent documentation.

Order Determining Whistleblower Award Claim ('34 Act Release No. 34-92456; Whistleblower Award Proc. File No. 2021-75)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award of over $2.9 million to Claimant. The Commission ordered that Claimant's application be approved. The Order asserts in part that the SEC:

considered that (i) Enforcement staff was unaware of the misconduct until Claimant submitted the tip, (ii) Claimant's documents and assistance allowed the staff to conserve considerable resources, (iii) the charges brought by the Commission were based in significant part on conduct that was the subject of the information provided by Claimant, (iv) Claimant suffered significant personal and professional hardships, and (v) Claimant unreasonably delayed reporting to the Commission while investors continued to be harmed.

In the Matter of Precision Securities LLC, Respondent (FINRA AWC 2020067467601)
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, Precision Securities LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Precision Securities LLC has been a FINRA member since 2000 and employs 30 registered representatives at three branches. In accordance with the terms of the AWC, FINRA imposed on Precision Securities LLC. a Censure and $350,000 fine and an undertaking to retain an Independent Consultant. As alleged in part in the AWC's "Overview":

From January 2017 through December 2018, Precision Securities failed to develop and implement an anti-money laundering (AML) program reasonably designed to achieve and monitor the firm's compliance with the Bank Secrecy Act and the implementing regulations thereunder. In particular, the firm did not establish and implement policies and procedures tailored to the firm's CenterPoint business, which could be reasonably expected to detect and cause the reporting of suspicious activity in domestic and foreign-based retail accounts. As a result, the firm violated FINRA Rules 3310(a) and 2010. 

As further alleged in part in the AWC:

For example, during 2017 and 2018, the firm failed to detect, investigate and respond to suspicious trading by multiple customers based in China. Two of these accounts alone generated over 33,000 orders and traded over $200 million in securities over three months. Nearly all of the trades related to low-volume securities and presented red flags of attempts to manipulate prices. 

One customer deposited $77,000 and traded more than $195 million in numerous low-volume stocks over two months. The customer entered a significant number of order cancelations, which the firm never detected and which is an indicator of potential market manipulation. The customer also traded in a pattern of buy orders at incrementally higher prices and sell orders at incrementally lower prices, which is an indicator of manipulative trading strategies designed to influence the price of a security. The customer also engaged in trading that did not appear to make economic sense by buying at high prices and selling at low prices and selling short low and buying back higher. Another customer also entered a significant number of cancelations in one day of trading, which the firm never detected, and traded high volumes of low-volume stocks. The firm failed to respond reasonably to these red flags.
Sometimes you got dramatic foreshadowing. Sometimes you got "ominous." Sometimes dramatic foreshadowing and ominous come together and it's very, very clear that someone in a position of authority is sending a clear message of intention:

Various market events over the decades - from Long-Term Capital Management in 1998 to AIG in 2008 to Archegos in 2021 - remind us that we need to consider using all of our authority if we are to meet our obligations under the Dodd-Frank Act.

Thus, I've asked staff to consider ways we can continue to increase transparency and reduce risk through our unused authorities, particularly with regard to security-based SEFs and position reporting. I've also asked staff to make recommendations on proposed rules for the Commission's consideration on the anti-fraud and anti-manipulation mandate from Dodd-Frank, as now included in Section 9(j) of the Exchange Act.

Before I conclude, I'd briefly like to discuss the intersection of security-based swaps and financial technology, including with respect to crypto assets. There are initiatives by a number of platforms to offer crypto tokens or other products that are priced off of the value of securities and operate like derivatives.

Make no mistake: It doesn't matter whether it's a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These platforms - whether in the decentralized or centralized finance space - are implicated by the securities laws and must work within our securities regime.

If these products are security-based swaps, the other rules I've mentioned earlier, such as the trade reporting rules, will apply to them. Then, any offer or sale to retail participants must be registered under the Securities Act of 1933 and effected on a national securities exchange.

We've brought some cases involving retail offerings of security-based swaps; unfortunately, there may be more.

We will continue to use all of the tools in our enforcement toolkit to ensure that investors are protected in cases like these.

Chocolate-Covered Cicadas (Speech by SEC Commissioner Hester M. Peirce)
In her remarks to the Brookings Institution, Commissioner presented ten theses about the emerging regulatory framework for ESG, and sums up her thoughts as follows [Ed: footnotes omitted]:

Front and center on our current regulatory agenda is whether and how we will move toward a more prescriptive ESG disclosure framework. So, in addition to making my way through swarms of cicadas, this summer I have been wading through the many comment letters we received in response to an Ides of March request for comment on climate change and other ESG disclosures by then Acting Chair, Allison Herren Lee. Although it was not a Commission request, I have learned much from these thoughtful comments as I contemplate the SEC's role in ESG disclosures. Vigorous debate is going to be essential to any work that we do in this area, and to that end, I want to present ten theses for your consideration and our discussion this afternoon. I will lay these theses out without much sugar-coating precisely to spark a textured conversation about the complexities and consequences of a potential ESG rulemaking.

. . .

[R]ather than embarking on a prescriptive ESG rule that departs from and undermines our agency's limited, but important, role, we could work within our existing regulatory framework. We could put out updated guidance to help issuers think through how the existing disclosure regime already reaches many ESG topics and to address frequently asked questions that arise in connection with the application of the existing disclosure regime. We also might consider whether we can give any Commission-level comfort about forward-looking statements along the lines of what former Chairman Clayton, Corporation Finance Director Bill Hinman, and Office of Municipal Disclosure Director Rebecca Olsen did in connection with COVID-19. Finally, we can work with investment advisers using ESG strategies and products to ensure that investors understand what that adviser's brand of ESG means in theory and practice. I am looking forward to hearing other suggestions in the discussion that follows.