Securities Industry Commentator by Bill Singer Esq

August 31, 2021

SEC Announces Three Actions Charging Deficient Cybersecurity Procedures (SEC Release)

SEC Obtains Final Judgment Against Broker Charged with Cherry-Picking Scheme (SEC Release)

California-Based Watch Dealer Charged in Insider Trading Scheme (SEC Release)

SEC Charges Investment Professional with IIIegal Trading Scheme (SEC Release)

Former Netflix engineer pleads guilty to insider trading / Provided non-public subscriber information to others and later obtained non-public information to generate more than $1 million in illegal profits from insider trading (DOJ Release)

Greenwich Resident Admits Defrauding Investors of Nearly $1.5 Million (DOJ Release)

Bolton Man Pleads Guilty to Fraud and Tax Offenses (DOJ Release)

Utah Real Estate Developer Pleads Guilty to Wire Fraud and Tax Fraud involving Daufuskie Island Resort (DOJ Release)
In June 2021, in the first iteration of this article, we noted that 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? Then, 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. In August 2021, the SEC asked for additional briefing.
The SEC sanctioned eight firms in three actions for failures in their cybersecurity policies and procedures that resulted in email account takeovers exposing the personal information of thousands of customers and clients at each firm:
  1. Cetera Advisor Networks LLC, 
  2. Cetera Investment Services LLC, 
  3. Cetera Financial Specialists LLC, 
  4. Cetera Advisors LLC, 
  5. Cetera Investment Advisers LLC (collectively #1 - #5, the "Cetera Entities"); 
  6. Cambridge Investment Research Inc. and 
  7. Cambridge Investment Research Advisors Inc. (collectively,#6 - 7, "Cambridge"); and 
  8. KMS Financial Services Inc. (KMS). All were Commission-registered as broker dealers, investment advisory firms, or both.
Without admitting or denying the findings in their respective SEC Orders:
each firm agreed to cease and desist from future violations of the charged provisions, to be censured and to pay a penalty. The Cetera Entities will pay a $300,000 penalty, Cambridge will pay a $250,000 penalty, and KMS will pay a $200,000 penalty.The SEC's Orders against each of the firms finds that they violated Rule 30(a) of Regulation S-P. Additionally, the Order against the Cetera Entities also finds that Cetera Advisors LLC and Cetera Investment Advisers LLC violated Section 206(4) of the Advisers Act and Rule 206(4)-7 in connection with their breach notifications to clients. As alleged in part in the SEC Release:

According to the SEC's order against the Cetera Entities, between November 2017 and June 2020, cloud-based email accounts of over 60 Cetera Entities' personnel were taken over by unauthorized third parties, resulting in the exposure of personally identifying information (PII) of at least 4,388 customers and clients. None of the taken over accounts were protected in a manner consistent with the Cetera Entities' policies. The SEC's order also finds that Cetera Advisors LLC and Cetera Investment Advisers LLC sent breach notifications to the firms' clients that included misleading language suggesting that the notifications were issued much sooner than they actually were after discovery of the incidents.

According to the SEC's order against Cambridge, between January 2018 and July 2021, cloud-based email accounts of over 121 Cambridge representatives were taken over by unauthorized third parties, resulting in the PII exposure of at least 2,177 Cambridge customers and clients. The SEC's order finds that although Cambridge discovered the first email account takeover in January 2018, it failed to adopt and implement firm-wide enhanced security measures for cloud-based email accounts of its representatives until 2021, resulting in the exposure and potential exposure of additional customer and client records and information.

According to the SEC's order against KMS, between September 2018 and December 2019, cloud-based email accounts of 15 KMS financial advisers or their assistants were taken over by unauthorized third parties, resulting in the PII exposure of approximately 4,900 KMS customers and clients. The SEC's order further finds that KMS failed to adopt written policies and procedures requiring additional firm-wide security measures until May 2020, and did not fully implement those additional security measures firm-wide until August 2020, placing additional customer and client records and information at risk.
In response to a Complaint filed in the United States District Court for the District of Massachusetts, the Court entered a final consent judgment against Michael A. Bressman whereby he was enjoined from future 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, further, he was ordered to pay disgorgement of $730,923 (Bressman's obligation to pay disgorgement is deemed satisfied by an order in a parallel criminal action. In that parallel federal criminal case which was transferred to District of New Jersey, Bressman was convicted on one count of securities fraud and one count of investment advisor fraud, and he was sentenced to two years in prison plus18 months of supervised release and ordered to pay $793,680 in restitution. As allege3d in part in the DOJ Release, Bressman:

misused his access to an omnibus or "allocation" account to obtain more than $700,000 in illicit trading profits over a six-year period ending in February 2018. The SEC's complaint alleges that Bressman placed trades using the allocation account and then "cherry-picked" profitable trades, which he allocated to his own account and the account of two family members, while allocating unprofitable trades to other customers' accounts.

California-Based Watch Dealer Charged in Insider Trading Scheme (SEC Release), the SEC charged Robert J. Maron with violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder and named as a Relief Defendant Joubin Torkan. In part the SEC Release alleges that:

[M]artha Patricia Bustos, formerly an Illumina accountant, tipped Donald Blakstad in advance of Illumina's October 16, 2016 announcement. Blakstad, in turn, tipped Maron, who purchased Illumina securities and realized more than $1 million in profits. The amended complaint also names Joubin Torkan as a relief defendant, and alleges that Maron gave Torkan $113,833 of Maron's illicit profits. The SEC's initial complaint, filed on July 10, 2019, alleged that Bustos tipped Blakstad about information contained in four Illumina announcements from April 2016 to July 2018, in advance of those announcements.  The initial complaint also alleges that, based on those tips, Blakstad tipped others, purchased Illumina securities, and realized approximately $4 million.

On June 28, 2021, Blakstad was convicted on all counts of conspiracy to commit securities fraud and wire fraud, securities fraud and wire fraud in the parallel criminal proceeding filed by the U.S. Attorney's Office for the Southern District of New York. Bustos pled guilty in June 2019. Both Blakstad and Bustos are awaiting sentencing.

SEC Charges Investment Professional with IIIegal Trading Scheme (SEC Release), the SEC's complaint chargee Guillaume David Boccara with violating the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act, Section 10(b) of the Securities Exchange Act, and Rules 10b-5(a) and (c) thereunder. The Court granted the SEC's request for an asset freeze. As alleged in part in the SEC Release:

[S]ince at least January 2019, defendant Guillaume David Boccara used his access to the family fund's account to make hundreds of illegal trades between the family fund and himself. Boccara's allegedly illegal trades included buying options from the family fund and then selling the same options back at higher prices, buying options from the family fund and then selling those options on the open market for a profit, and selling worthless options to the family fund and pocketing the profit. According to the complaint, between January 2019 and June 2021, Boccara profited by over $500,000 from his illegal trades.
Former Netflix software engineer Sung Mo Jun and his brother, Joon Junm were charged along with two others in the United States District Court for the Western District of Washington connection with insider trading in Netflix securities. The SEC filed a separate civil enforcement action against the defendants, who each entered into settlements with the SEC. AS alleged in part in the DOJ Release:

[F]rom July 2016 to February 2017, Sung Mo Jun was employed by Netflix as a software engineer.  He had access to subscriber data and had been trained by the company that such data was material, non-public information.   Nevertheless, Jun disclosed that information to his brother Joon Jun, and his close friend, Junwoo Chon, 50, of Bellevue, Washington, with the knowledge that the two intended to use the information to profit on the purchase and sale of Netflix securities.  After Chon made significant profits on the securities, he secretly provided Sung Mo Jun with $60,000 in cash as Sung Mo Jun's share of the profits.

After Sung Mo Jun left Netflix, he obtained additional non-public information about subscriber data from another Netflix employee, software engineer Ayden Lee, 33, of San Jose, California.  Jun not only passed that information on to his brother and Chon, he also used it to make his own trades.  Between April 2017 and July 2019, Sung Mo Jun made a profit of $434,086 by trading in Netflix stock and options with this inside information.  Between July 2016 and April 2017, Jun's brother, Joon Jun, made $215,419 and co-conspirator Junwon Chon made $521,400.  All told, the insider trading attributable to Sun Mo Jun in Netflix securities resulted in an illicit gain of $1,170,905.

Sung Mo Jun also obtained insider information from a "tipper" he knew at another tech company, and shared this information with his brother and Chon.  Their profits from trading on that inside information was less than $2,000.

Joon Jun is responsible for illicit profits of $1,106.208.  Chon is responsible for illicit profits of $1,642,855, and Lee is connected to illicit profits of $453,465.

Chon pleaded guilty August 18, 2021. Lee is the last to have a plea hearing, which is not yet scheduled.
Samuel Klein pled guilty in the United States District Court for the District of Connecticut to one count of interstate transportation of property taken by fraud and one count of money laundering; and he agreed to pay $1,497,797.52 in restitution. As alleged in part in the DOJ Release:

[K]lein controlled several different entities, including Visual Group LLC; O.S. Management, LLC; KF Pecksland LLC; Four Pines Holdings, LLC; and Payton Lane NH, Inc.  In 2018, Klein made false representations to a victim investor, including that the victim's funds would be invested in distressed debt, when Klein knew that all of the investment funds would not be used for the stated purposes.  Based on these false representations, the victim investor wrote a check in the amount of $200,000 to Visual Group LLC for the purpose of making a purported investment in distressed debt.  Klein caused the check to be transported from New York to Connecticut and deposited into a bank account in the name of Visual Group LLC.  Klein subsequently solicited and received approximately $50,000 in additional funds from the victim investor.

The investigation further revealed that, from approximately July 2016 through at least June 2019, Klein defrauded three additional victim investors of a total of more than $1.2 million by making multiple false statements and misrepresentations.

Klein knew that all of the funds solicited from the victim investors would not be used for his stated purposes, and instead would be utilized by Klein for personal and other expenditures.

Bolton Man Pleads Guilty to Fraud and Tax Offenses (DOJ Release)
Mark Pagani pled guilty in the United States District Court for the District of Connecticut to one count of conspiracy to commit wire fraud, and one count of tax evasion, and he agreed to pay $1,055,092.50 in restitution and $181,702 in taxes to the Internal Revenue Service. This plea constitutes Pagani's third federal conviction. As alleged in part in the DOJ Release;

[F]rom 2013 to at least August 2015, Pagani conspired with another person ("K.S."), who is now deceased, to defraud a victim investor of more than $1 million.  K.S. arranged investment deals with the victim, including the purported acquisition of mortgages on properties.  Pagani drafted documents to memorialize certain investment deals, accepted funds from the victim and held the funds in accounts he controlled, and he transferred funds to entities controlled by K.S. and others.  By the time the victim investor made a third investment, which was to acquire mortgages on properties in Springfield, Massachusetts, and Middletown, Connecticut, Pagani knew that the first two investments had not occurred, and that the third investment was not legitimate.  In association with the third investment, the victim wired more than $1.3 million to an account Pagani controlled.  These funds were comingled with other funds, which Pagani sent a portion of to an entity for the benefit of K.S.  In order to conceal the fraud and to create the appearance that it was a legitimate investment, Pagani wired false interest payments to the victim.

In addition, for the 2014 through 2017 tax years, Pagani paid for personal and other expenses using his law firm account and underreported his income on his federal tax returns, resulting in a tax loss of $181,702.  Pagani was previously a practicing attorney with a law office in Wethersfield.

Utah Real Estate Developer Pleads Guilty to Wire Fraud and Tax Fraud involving Daufuskie Island Resort (DOJ Release)
James Thomas Bramlette pled guilty in the United States District Court for the District of South Carolina to wire fraud and tax fraud. As alleged in part in the DOJ Release:

[B]ramlette was a real estate developer in Salt Lake City, Utah.  In 2011, he borrowed $17.5 million from a Dutch investor to purchase the resort out of bankruptcy.  This loan was a short-term bridge loan with high interest rates.  Bramlette did not put any of his own money into the purchase.  Bramlette thought he could resale the resort soon after the sale, but his attempts to refinance or sell the resort failed repeatedly throughout the case. 

In addition to the Dutch loan, Bramlette and a co-defendant raised more than $10 million from individual investors by issuing promissory notes with high interest rates.  The promissory notes were not secured by the resort.  Most of the investors resided in the West.

The investment in the resort was difficult from the start.  Bramlette could not make the mortgage payments to the Dutch lender, which led to a $27 million foreclosure judgment in 2014.  Bramlette lost further control of the resort in October 2014 when he pledged ownership of the property to secure a separate $700,000 loan, which he later defaulted on.

Bramlette and his co-defendant struggled every month to raise money from new investors to pay the Dutch lender not to foreclose, to pay previous investors, and to pay employees, utilities, and taxes at the resort.  From 2013 through 2017, Bramlette repeatedly told investors that the resort was on the cusp of being refinanced by a private equity firm.  While several firms considered investing in the resort, none of these deals came to fruition.

After he lost control of Melrose Resort in late 2014, Bramlette was allowed to remain as manager of the resort due to his operational knowledge of the property.  Part of his duties as manager included paying the property taxes for Melrose Resort. 

Concerning the wire fraud charge, in September 2016, Melrose Resort owed $502,759 in past due property taxes to the Beaufort County Treasurer's Office.  As a result of this tax delinquency, the Beaufort County Treasurer's Office notified Bramlette that Melrose Resort would be auctioned at a tax sale if the property taxes were not paid. 

On September 20, 2016, an employee of Bramlette emailed this notice and stated that "we have a week from this Friday, September 30th, 2016 to pay these taxes, which total $502,759.40 or the properties go up for sale on Monday, October 3, 2016."

It was part of the scheme to defraud that, in order to prevent the resort from being sold at this tax sale, Bramlette created a fake wire receipt that falsely represented that Melrose Resort had wired $502,759 to the Beaufort County Treasurer's Office to pay the property taxes.  In reality, Melrose Resort had only $121.07 in its bank account at this time, and these funds were not wired as Bramlette represented.

It was further part of the scheme that Bramlette emailed the fraudulent wire receipt to one of his employees, and he caused this employee to send the fraudulent wire receipt to the Beaufort County Treasurer's Office, in order to have Melrose Resort removed from the tax sale.  After receiving the fraudulent wire receipt, the Beaufort County Treasurer's Office removed Melrose Resort from the tax sale. 

As to tax fraud charge, Bramlette was required to collect and pay over federal payroll taxes from the wages of all employees at Melrose Resort.  Bramlette collected payroll taxes from the Melrose employees, but he failed to turn over these taxes to the IRS.  In total, Bramlette collected but failed to turn over to the IRS approximately $1 million in payroll taxes.

In addition to the fraud above, Bramlette used at least $1.8 million from investors for personal use, which was not disclosed to investors.  Bramlette lived a lavish lifestyle, and he spent money on himself even when he failed to pay employees, vendors, and subcontractors.  The accountant at his company urged Bramlette to draw a salary and not use investor money for personal use.  Bramlette ignored this advice and failed to report this income to the IRS or even file income tax returns.

In the Matter of the Arbitration Between Evan K. Halperin Revocable Living Trust, Claimant, v. Charles Schwab & Co., Inc., Respondent (FINRA Arbitration Award 19-03738)
In an Amended FINRA Arbitration Statement of Claim filed in January 2020, public customer Claimant Halperin asserted breach of contract; deceit, intentional misrepresentation and failure to disclose; untrue or misleading public statements; violation of California's Unfair Competition Law; negligence, violation of the Securities Exchange Act of 1934; and violation of FINRA Rules. The causes of action allegedly related to Claimant's online trading in options. Respondent Schwab generally denied the allegations and asserted various affirmative defenses. The FINRA Arbitration Panel denied Claimant's claims but found Claimant liable to and ordered payment to Respondent Schwab of $100,000 in attorneys fees and $42,750.22 in costs. OUCH!!!