Securities Industry Commentator by Bill Singer Esq

December 8, 2021

FINRA Appoints Bill St. Louis Executive Vice President of National Cause and Financial Crimes Detection Program (FINRA Release)
The allegations in Matthew McLeod's lawsuit against his former employer BTIG are lurid, and whether damages should be awarded will be determined by a trier of fact -- but will that trier be a FINRA arbitration panel or a court? McLeod sued in state court, but BTIG argued that the proper forum for the dispute was before a FINRA arbitration panel. BTIG lost its motion to compel arbitration, and, as such, McLeod's lawsuit moves forward in the California court system.

Kris Bortnovsky, a/k/a "Kris Bort" and Ryan Shapiro were charged in the United States District Court for the Southern District of Florida with one count each of conspiracy to commit securities fraud. As alleged in part in the DOJ Release:

[F]rom at least August 2017 to November 2021, Bortnovsky, a financial services professional for more than 20 years, and Shapiro, an entrepreneur and founder of two privately held companies, conspired to trade in the stocks of certain publicly traded companies, including At Home Group, Inc., Aphria, Inc., DSW, Inc., and Rite Aid Corp., among others, based on material nonpublic information (MNPI) regarding the earnings results and merger-and-acquisition activity of those companies. In many instances, Bortnovsky and Shapiro allegedly obtained the information from a co-conspirator who was a relative of one or more officers or directors of these companies, or of companies involved in proposed acquisitions of the companies. In other instances, Bortnovsky shared MNPI that he had obtained with Shapiro and their co-conspirator.
In an Indictment filed in the United States District Courtfor the Southern District of New York, Adedayo Ilori and Chris Recamier were charged with (1) major fraud against the United States; (2) conspiracy to commit wire and bank fraud; (3) wire fraud; (4) bank fraud; (5) aggravated identity theft; and (6) conspiracy to commit money laundering. As alleged in part in the DOJ Release [Ed: references below to Paycheck Protection Program ("PPP"), the Economic Injury Disaster Loan ("EIDL") Program, and the Small Business Administration ("SBA"):

The Coronavirus Aid, Relief, and Economic Security ("CARES") Act is a federal law enacted on March 29, 2020, designed to provide emergency financial assistance to the millions of Americans who are suffering the economic effects caused by the COVID-19 pandemic.  One source of relief provided by the CARES Act was the authorization of hundreds of billions of dollars in forgivable loans to small businesses for job retention and certain other expenses through the SBA's PPP.  Pursuant to the CARES Act, the amount of PPP funds a business is eligible to receive is determined by the number of employees employed by the business and its average payroll costs.  Businesses applying for a PPP loan must provide documentation to confirm that they have previously paid employees the compensation represented in the loan application.  The CARES Act also expanded the separate EIDL Program, which provides small businesses with low-interest loans of up to $2 million that can provide vital economic support to help overcome the temporary loss of revenue they are experiencing due to COVID-19.  To qualify for an EIDL loan under the CARES Act, the applicant must have suffered "substantial economic injury" from COVID-19.

From at least in or about August 2020 through at least in or about October 2021, ILORI and RECAMIER, prepared to apply, and applied for numerous PPP and EIDL loans.  In applying for these loans, ILORI and RECAMIER claimed stolen identities of third parties.  In the role of these assumed identities, ILORI and RECAMIER claimed full control of a number of companies, which they purported, cumulatively, employed more than 200 people and paid more than $3.2 million in monthly wages.  In reality, they did not operate these companies.  In submitting these applications ILORI and RECAMIER, among other things, submitted falsified tax documents that were never actually filed with the Internal Revenue Service.

ILORI and RECAMIER attempted to obtain over approximately $7.5 million in PPP and EIDL program funds, and successfully obtained more than $1 million as a result of their scheme.  ILORI and RECAMIER transferred the majority of these funds toward (1) cryptocurrency investments, (2) the purchase of stocks, (3) cash withdrawals, and (4) personal expenses.  The investment accounts were also opened by ILORI and RECAMIER in the stolen identities of third parties.

ILORI committed these offenses while facing charges in a separate case filed in the Southern District of New York involving fraud, identity theft, and money laundering in United States v. Ilori, 20 Cr 378 (LJL).  As part of that case, ILORI pled guilty on April 8, 2021, to conspiracy to commit mail and wire fraud and conspiracy to commit money laundering, and is currently awaiting sentencing.      
The United States District  Court for the Northern District of Illinois entered a Consent Order resolving CFTC charges that Roman Banoczay Jr., as an agent of Roman Banoczay Sr. and their company, BAZUR Spol. S.R.O., engaged in spoofing and in a manipulative and deceptive scheme to defraud in the Chicago Mercantile Exchange ("CME") crude oil futures market in violation of the Commodity Exchange Act and CFTC regulations. The Consent Order imposes a $750,000 civil monetary penalty against Banoczay Jr., prohibits all three defendants from trading in commodity interests and registering with the CFTC in any capacity for two years, and requires them to cease and desist from violating the CEA's prohibitions on spoofing and manipulative and deceptive schemes to defraud. As alleged in part in the CFTC Release:

[D]uring a four-week period in early 2018, Banoczay Jr., on his own behalf and on behalf of Banoczay Sr. and BAZUR, repeatedly engaged in manipulative or deceptive acts and practices by spoofing (bidding or offering with the intent to cancel the bid or offer before execution) while placing orders for and trading crude oil futures contracts on the CME's exchanges. Banoczay Jr. placed thousands of orders with the intent to cancel them in order to send false signals of increased buying or selling interest designed to trick market participants into executing the orders that he wanted filled. Although Banoczay Jr. was the only individual who placed and canceled these spoof orders, the court found that Banoczay Sr. and BAZUR are vicariously liable for Banoczay Jr.'s violations because Banoczay Jr. served as their agent and committed these violations within the scope of his agency. Banoczay Jr. was previously the subject of a disciplinary action brought by the CME Group, Inc. for the same underlying conduct (see Notice of Disciplinary Action NYMEX 18-0877-BC (eff. Mar. 23, 2020)).
The United States District Court for the Southern District of New York entered a Default Judgment against Shamoon Omer Rafiq a/k/a Shamoon Rafiq, Omer Rafiq, and Omar Rafiq that permanently enjoins him from violating the antifraud provisions of  Section 17(a) of the Securities Act and orders him to pay a $195,047 penalty. As alleged in part in the SEC Release:

[S]ince July 2020, Rafiq sought to defraud investors out of millions of dollars by offering to sell them securities purporting to represent Rafiq's ownership in an SPV (special purpose vehicle) Fund that, Rafiq claimed, held pre-IPO shares of a well-known company. The complaint alleges that, as part of his sales pitch, Rafiq falsely claimed that the SPV Fund was controlled by a well-known European investment firm run by a prominent family, and that Rafiq was a close associate of the firm and its members. As the complaint further alleges, however, the SPV Fund did not exist, and Rafiq had no connection to, or association with the investment firm or its family owners.
In an Indictment filed in the United States District Court for the Western District of Texas, 
Juan Carlos Martinez Cecias Rodriguez ("Martinez") and Karina Hernandez are charged with one count of conspiracy to commit wire fraud, four counts of wire fraud, and four counts of encouraging and inducing illegal immigration for private gain. As alleged in part in the DOJ Release, Martinez:

is the owner of Mobile Coatings Management (MCM) and part owner and president of Uberwurx, doing business as RhinoPro, a spray-on truck bedliner and truck accessory company.  Karina Hernandez, 41, is part owner of Texas Franchise and Business Consulting (TFBC). TFBC mainly targets and markets to Mexican nationals interested in starting businesses in Texas.

Martinez marketed himself and Uberwurx as providing a mechanism for investors to gain E-2 visas for legal entry into the U.S. An E-2 visa is reserved for foreign entrepreneurs that allows them to work inside of the U.S. based on a substantial investment in a bona fide enterprise.

Martinez worked with Hernandez to market and sell the Uberwurx franchise to Mexican national investors but failed to make many guaranteed payments to investors. Martinez's company, MCM, managed the Uberwurx franchises instead of the investors doing so in violation of E2 visa requirements. Martinez instructed investors to omit from their E2 visa applications the fact that MCM managed the franchises.

Martinez and Hernandez perpetrated this scheme on at least 120 different investors between January 2017 and December 2021 with a loss of more than $30 million.
Matthew O. Clason, 40, pled guilty in the United States District Court for the District of Connecticut to one count of wire fraud, and he was sentenced to 30 months in prison plus two years of supervised release, and ordered to pay $639,580 in restitution. As alleged in part in the DOJ Release:

[C]lason was an investment advisor and a registered representative of Lincoln Financial Advisors Corporation, and then LPL Financial LLC.  Beginning in approximately 2015, Clason provided investment services to a 73-year-old Connecticut resident ("the victim").  The victim had at least five investments accounts with Clason and, in January 2018, Clason and the victim opened a joint bank account.  From 2018 to August 2020, Clason transferred more than $668,000 from the victim's investment accounts into the joint bank account and, without the victim's knowledge or authorization, withdrew more than $621,000 in cash from the bank account for his personal use.  Clason also transferred $5,000 directly from the joint bank account to his personal bank account, and made two transfers from the joint bank account to pay his personal credit card.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-93726; Whistleblower Award Proc. File No. 2022-20)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award to a Claimant of over $4.9 million. The Commission ordered that CRS' recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

[(1)] Claimant quickly reported to the Commission that the defendants may have been misusing proceeds from a securities offering upon learning of the suspected misconduct; (2) Claimant's information enabled Commission staff to more quickly and efficiently develop a case theory, subpoena important documents, investigate and establish the defendants' misuse of offering proceeds, which ultimately became an important part of the Commission's case against the defendants; (3) Claimant provided additional assistance to Commission staff by participating in two interviews and providing financial documents relating to the misuse of offering proceeds; and (4) Claimant's information and assistance helped the Commission bring the Covered Action and return millions of dollars to harmed investors.
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, Wells Fargo Clearing Services, LLC ("WFCS") and Wells Fargo Advisors Financial Network, LLC ("WFAFN") submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that WFCS has been a FINRA member firm since 1987 with about 22,000 registered representatives at 5,700 branches and that WFAFN has been a member since 1983 with about 1,300 reps at 500 branches.  As alleged in part in the "Overview" portion of the AWC:

From 2003 to August 2020, the firms failed to store approximately 13 million records related to their customer identification program-an integral part of an anti-money laundering program-in the required WORM format. The firms first became aware of the issue in November 2016, prior to the execution of the December 2016 AWC, while efforts to remediate their books and records violations were underway, and before they provided to FINRA the certification pursuant to the December 2016 AWC. The firms did not advise FINRA of the issue when it was discovered, and failed to take steps to fix and remediate this deficiency, or report it to FINRA, for more than three years thereafter. 

As alleged in part in the "Sanctions Consideration" portion of the AWC:

In determining the appropriate sanctions in this matter, FINRA considered, among other factors, that the firms (i) identified the CIP-related WORM issue in November 2016 while they were finalizing the December 2016 AWC with FINRA, but did not advise FINRA of the issue at that time; and (ii) did not inform FINRA of the CIP-related WORM violation, or remediate it, for more than three years after its discovery. 

B. Respondents also consent to the imposition of the following sanctions: 
    • a censure; and 
    • a $2,250,000 fine (to be paid jointly and severally). . . .
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, Bradley S. Lay submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Bradley S. Lay entered the industry in 2003, and from February 20143 until September 2019, he was registered with Raymond James & Associates, Inc. In accordance with the terms of the AWC, FINRA found that Lay violated FINRA Rule 2010, and imposed upon him a $7,500 fine and a two-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

From June 12, 2019, through July 16, 2019, on seven occasions in three separate customers' accounts, Lay purchased and sold securities totaling approximately $184,000, without receiving express authorization from his customers prior to execution, earning $180 in commissions. Instead, despite the absence of signed, written trading authorization forms, Lay relied on authorization he received from each customer's respective spouse to execute the trades. Likewise, without prior express authorization, Lay effected two additional securities transactions in a fourth customer's account totaling approximately $104,000, earning $87 in commissions. Lay also entered and subsequently deleted inaccurate notes into RJA's client relationship management system in connection with these two transactions, indicating that he spoke with the fourth customer prior to entering the trades in her account when he did not actually speak with her until several days after execution. 

Therefore, Lay violated FINRA Rule 2010.
FINRA appointed Bill St. Louis to Executive Vice President and Head of its National Cause and Financial Crimes Detection Program.  As set forth in part in the FINRA Release:

Prior to his role as Firm Group Leader, St. Louis was the Senior Vice President and Regional Director of FINRA's Northeast Region from 2019 to 2020 and Director of FINRA's New York District Office from 2014 to 2019. He also worked in FINRA's Enforcement department after joining FINRA in 1998, holding several roles, including serving as the Regional Chief Counsel for FINRA's North Region. St. Louis earned an undergraduate degree from Baruch College and a law degree from New York University School of Law. Prior to law school, he worked for a New York-based broker-dealer in its compliance department.

No Show Respondent in FINRA  Arbitration Prompts No Explanation in Award ( Blog)
When the best that you can say about a FINRA Arbitration Award is that you don't know where to begin, that's not a good thing. Sadly, when it comes to a recent public customer's arbitration against a no-show Respondent, I don't know where to begin.