Securities Industry Commentator by Bill Singer Esq

October 5, 2021

FINRA NAC Affirms OHO But Eliminates Heightened Supervision ( Blog)
Zachary Joseph Horwitz, 34, pled guilty in the United States District Court for the Central District of California to securities fraud. As alleged in part in the DOJ Release:

Over the course of about five years, Horwitz used his company - 1inMM Capital LLC, which purported to be a film distribution company - to solicit investors with false claims their money would be used to purchase regional distribution rights to films and then would generate profits by licensing the rights to online platforms such as Netflix and HBO.

The scheme began in 2014, when groups of private investors began entering into hundreds of six- and 12-month promissory notes with 1inMM Capital based on Horwitz's statements. The funds supplied under each note were supposed to provide money for 1inMM Capital to acquire the rights to a specific film. The promissory notes guaranteed a specified payment on a specified maturity date, as well as the specified amount to be paid at maturity, which included investment returns ranging from 25 percent to 45 percent.

. . .

Instead of using the funds to acquire films and arrange distribution deals, Horwitz operated 1inMM Capital as a Ponzi scheme, using victims' money to repay earlier investors and to fund his own lifestyle, including the purchase of his $6 million Beverlywood residence.

Investors started to complain after 1inMM Capital began defaulting on notes in 2019, court documents states. In response, Horwitz "falsely reassured investors that any missed payments on promissory notes were caused by the actions of the online streaming platforms, and that payment on the notes would resume," he admitted in the plea agreement. To support these false claims, Horwitz sent the investors emails and text messages he falsely claimed had been sent to him by representatives of the online streaming platforms.

Horwitz defrauded five major groups of private investors, but these entities derived funds from more than 250 sub-investors. By late 2019, 1inMM Capital began defaulting on all of its outstanding promissory notes, according to the plea agreement, in which Horwitz admits that he owes investors more than $230 million and that his scheme has caused substantial financial hardship to at least five investors.
Thomas Lanzana, 54, pled guilty in the United States District Court for the District of New Jersey to wire fraud, and he was sentenced to 36 months in prison plus three years of supervised release. As alleged in part in the DOJ Release:

Lanzana fraudulently solicited approximately $900,000 from at least 20 customers to invest in what he claimed were highly successful, algorithm-based trading pools in foreign currency derivatives ("forex") and other financial instruments.

To maintain the victims' trust, Lanzana sent false account statements to his customers, posted false monthly account statements to his companies' websites showing balances and trading activity for forex trading accounts that did not exist, and generated and sent false tax documents to customers reporting earnings that did not exist.

Lanzana misappropriated hundreds of thousands of dollars in investor funds, using some to repay earlier investors in the manner of a Ponzi scheme, and to pay for his personal expenses, including purchases on, payments to a luxury car dealer and a jewelry retailer, and golf expenses.
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, Merrill Lynch, Pierce, Fenner & Smith Incorporated submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Merrill Lynch, Pierce, Fenner & Smith Incorporated became a FINRA member firm in 1937 and employs about 31,000 registered representatives at 4,000 branches. The AWC imposes upon Merrill Lynch a Censure, $1.5 million fine, and an undertaking to certify that its supervisory systems and written procedures are reasonably designed to achieve compliance with MSRB Rules G-17 and -27, and that the revised written supervisory procedures are distributed to all personnel charged with MSRB Rule G-17 and G-27 and '34 Act Rule 15c4-4(d)(4) compliance.  As alleged in part in the AWC under "Overview" [Ed: footnotes omitted]:

From February 2015 through June 2021, Merrill violated Municipal Securities Rulemaking Board (MSRB) Rule G-27 by failing to establish and maintain a supervisory system, including written procedures, reasonably designed to address short positions in municipal securities and their effects on customers who hold them. By failing to take prompt steps to bring short positions in municipal securities within its control within 30 days, Merrill also violated Exchange Act Rule 15c3-3(d)(4) and FINRA Rule 2010. 

By failing to provide its customers with notice clearly identifying their receipt of substitute interest payments, and the potential tax liability resulting from these payments, Merrill violated MSRB Rule G-17 during the same time period.
FINRA's NAC affirmed an OHO Decision's findings that Respondent had engaged in undisclosed PSTs, made false statements to his employer, and willfully caused the employer to file a misleading initial Form U4 and four misleading amendments. The NAC affirmed all OHO sanctions but eliminated the heightened supervision requirement.