Securities Industry Commentator by Bill Singer Esq

July 22, 2021

South Carolina Investment Fund Manager Sentenced to 63 Months in Prison for $20 Million Securities Fraud Scheme (DOJ Release)

Memphis Man Sentenced to Federal Prison for Fraud Scheme Targeting Nonprofits (DOJ Release)

SEC Charges Connecticut Man for Fraud in Hotel Renovation Investment (SEC Release)
A former Wells Fargo employee engaged in negligent conduct when he sought a COVID-related loan from the Small Business Administration. Although the loan was granted, it was never paid. On basketball courts all around the world, that falls under no-harm-no-foul. But FINRA is not a basketball court.
George Heckler, 63, pled guilty in the United States District Court for the District of New Jersey to an Information charging him with one count of securities fraud, and he was sentenced to 63 months in prison plus three years of supervised release and ordered to pay $19.25 million in restitution. As alleged in part in the DOJ Release:

Heckler managed, controlled or was involved with multiple investment funds, including Conestoga Partner Holdings (Conestoga), Cassatt Short Term Trading Fund LP (Cassatt), CV Special Opportunity Fund LP (CVSO), and TA1 LLC (TA1). 

From 2014 to 2018, Heckler misrepresented to investors that he would invest their funds in particular trading strategies. Instead, he diverted their funds out of Cassatt and TA1 for purposes inconsistent with the trading strategies, including to pay out millions of dollars to other investors. Heckler also used investors' funds to cover investment losses suffered by other funds under his management and/or control.

Heckler solicited investments from Victim-1, claiming the investments would be invested in Cassatt, which employed a "first loss" trading strategy intended to protect investors from losses. However, as of December 2013, Cassatt no longer had a brokerage account that was necessary to employ the represented trading strategy. Despite Cassatt no longer having a brokerage account, in 2014, Heckler represented to Victim-1 that Cassatt was still engaged in a first loss trading strategy and solicited Victim-1's investment in Cassatt. In September 2014, Victim-1 invested approximately $9.1 million in Cassatt, relying on Heckler's representation that Victim-1's money would be invested consistent with Cassatt's first loss trading strategy.  Heckler used $4.6 million of Victim-1's investment to repay existing investors and the remainder to satisfy other obligations Heckler owed that were unrelated to Cassatt.

Heckler also approached Victim-2 about the possibility of creating a hedge fund that would deploy capital to first-loss traders, who would serve as the "first loss" protection for investors' capital. In late 2015, Victim-2 formed a hedge fund, utilizing the concept proposed by Heckler (Entity-1). In 2015 and 2016, Entity-1 invested $10.1 million in TA1 via a participation agreement that provided that Entity-1's investment would be used for an "options arbitrage dividend recapture trade," otherwise known as the "skate trade." In fact, none of Entity-1's investment was used for the "skate trade." Entity-1's investment was used for other purposes, including repaying others who had previously invested with Heckler.

Over the course of the scheme, Heckler sent out statements to investors that misled them into believing the value of their investments was increasing, when, in fact, the value was declining. Heckler took approximately $1 million in fees and distributions from the fraudulently obtained investments for his personal use.
Jaime Walsh, 53, pled guilty to an Information in the United States District Court for the Western District of Tennessee to one count of bank fraud and he was sentenced to 78 months in prison plus three years of supervised release, and he was ordered to pay $203,840.70 in restitution and a $241,397.22 money judgment. As alleged in part in the DOJ Release. As alleged in part in the DOJ Release: 

[B]etween June 2013 and March 2019, Walsh defrauded various organizations including charities, churches, nonprofit environmental entities, and the Peace Corps. Walsh would, for example, make an online donation of $4500 to an organization. He would then contact the organization, claiming he intended to donate only $45, and ask for a refund of $4455. The organization would issue the requested refund and Walsh would immediately withdraw the money from his account.

Meanwhile, the original donation made by Walsh would be rejected due to insufficient funds and the targeted organization would suffer a complete loss of the refunded amount. Walsh attempted to defraud victims of $863,736.69. He succeeded in defrauding victims of $241,397.33.
In a Complaint filed in the United States District Court for the District of Connecticut, the SEC charged Rahulkumar "Rahul" M. Patel with violating 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. As alleged in part in the SEC Release:

[P]atel organized a Connecticut company, DNA Lodging East Hartford LLC, to lease, renovate, and reopen a closed hotel located in East Hartford, Connecticut. The complaint alleges that between October and December 2018, Patel raised $2,750,500 from 70 investors he solicited to purchase securities in DNA on an online crowd funding platform. As alleged, Patel provided investors a private placement memorandum stating DNA would use $1,465,000 of the proceeds to acquire a lease in the hotel from the property owner. In fact, the complaint alleges, Patel acquired the lease from the property owner himself for $540,000 and assigned it to DNA for $1,465,000, pocketing the $925,000 difference. The complaint further alleges the documents that Patel provided investors failed to disclose his role in the acquisition of the lease or any compensation he might receive in connection with the lease, although it specifically enumerated other compensation to which he might be entitled. Patel allegedly concealed his actions from investors in DNA by operating behind several companies, including one that he organized under the same name as the property owner and used to interpose himself in the deal to acquire the hotel lease.
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, Timothy Ray Plant submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Timothy Ray Plant was registered with LPL Financial LLC from August 2003 until August 2019. In accordance with the terms of the AWC, FINRA imposed upon Plant a $5,00 fine and a five-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Plant transacted in outside brokerage retirement accounts on three days between 2017 and 2019. In total, he executed 52 trades worth approximately $550,000 across 13 accounts. All of the account holders, some of whom were also LPL customers, had authorized Plant in writing to trade in their retirement accounts. Plant used his own, unique log-on credentials provided by the outside firm to execute the trades and consulted with each customer prior to executing each trade. Plant did not receive compensation for the trades, none of the customers complained, and there were no customer losses.

Plant did not provide written notice to LPL prior to participating in these transactions in
the outside accounts. In addition, when asked on multiple annual firm disclosure forms
whether he had participated in private securities transactions, Plant answered "no."

Therefore, Respondent violated FINRA Rules 3280 and 2010.
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.