Securities Industry Commentator by Bill Singer Esq

January 14, 2022

I'm guessing that there's money to be made in researching and developing vibrating shoes. Many years ago, I had an idea for a vibrating spoon, but, alas, wiser heads prevailed and I was told that I shouldn't be an idiot and put good money into my vibrating spoon because no one in their right mind would ever want to use a vibrating spoon. I gave it some thought and, reluctantly, abandoned my business plan. Then I thought about how there weren't any vibrating forks but, yet again, the naysayers and small minded folks didn't see the brilliance in that retrofit of my spoon idea. Sadly, I abandoned that business plan too. What I never envisioned was inserting a 4 phase randomized program along with a lithium rechargeable power source into my ahead-of-its-times spoon and fork invention!  I'm thinking crowdfunding, no? Maybe a SPAC?? Maybe an NFT??? I may even take a page out of the Good Vibrations Shoes' edgy marketing program. 

Donna Osowitt Steele pled guilty to wire fraud in the United States District Court for the Western District of North Carolina. In a fact pattern that is, at times, jaw-dropping, and, at times, mesmerizing, the DOJ Release alleges in part that:

[F]rom least 2013 to January 2020, the defendant executed an extensive scheme to defraud her employer, identified in court documents as Victim Company A, a privately held U.S. based subsidiary of a foreign company that manufactures carbide products. The owners of Victim Company A and its parent company reside overseas. Court records show that Steele embezzled over $15 million from Victim Company A and used the money to support a business run by her and her family and to fund an extravagant lifestyle.

As Steele admitted in court today, she was employed by Victim Company A from 1999 to January 2020. Initially, Steele worked in the shipping department and was promoted over the next 20 years to various positions within the company, including to the position of Chief Executive Officer (CEO), which she held until she was terminated in January 2020. While serving as Vice President and later as CEO, Steele used her positions to embezzle funds from Victim Company A in a number of ways, including through fraudulent company credit card purchases, company checks, Quickbooks transactions, and wire transfers. For example, filed court documents show that Steele used company credit cards to pay for $6 million in personal expenditures, including to make high-end retail store purchases, to pay for luxury hotel accommodations and event ticket purchases, to buy expensive jewelry, to pay for family weddings, and to make purchases related to Opulence by Steele, a luxury clothing and boutique company the defendant founded in 2013.

In addition to the credit card purchases, Steele admitted to issuing and causing to be issued to herself approximately 98 checks totaling more than $2.8 million from Victim Company A's bank accounts, which Steele deposited into her personal bank account. Furthermore, Steele caused 127 fraudulent and unauthorized wire transfers to be executed as Quickbooks transactions, transferring more than $4.7 million from Victim Company A's bank accounts to her personal bank account. During the same time period, Steele executed at least 117 fraudulent and unauthorized bank wires, totaling more than $2.2 million, from Victim Company A's bank accounts to the defendant's personal bank account, which she then used for her personal benefit, including to fund a personal real estate closing.

According to filed documents, as a result of Steele's embezzlement, Victim Company A experienced several difficulties, including vendors withholding products from the company for non-payment or late payments, customers complaining about being placed on credit holds, notwithstanding timely payments of their bills, employees having their company credit cards declined when they were trying to use them for legitimate business expenses, employees not being paid on time, and/or employees having their insurance cancelled without warning. Steele admitted that, in an effort to hide the fraudulent scheme, she limited communications and interactions between the employees and owners for Victim Company A and monitored communications that did occur, she convinced employees that company owners should be feared, and lied to employees about the true nature of Victim Company A's financial trouble.
Conduent Education Services LLC, f/k/a Xerox Education Services LLC, d/b/a ACS Education Services LLC ("CES"), a contractor that serviced student loans for lenders under the Federal Family Education Loan Program ("FFEL"), entered into a Settlement Agreement whereby the company agreed to pay $7.9  million to resolve allegations that it violated the False Claims Act by submitting or causing the submission of false claims to the Department of Education. Prior to this settlement, CES paid $1.4 million to the Department of Education under a remediation plan to partially resolve the allegations and received a credit for that payment under the settlement agreement. As alleged in part in the DOJ Release:

Loan servicers are required to accurately report the impact of monthly student loan repayments, principal capitalization and other changes to borrower accounts to the Department of Education. The settlement announced today resolves allegations that between 2006 and 2016, CES knowingly failed to make required financial adjustments to borrower accounts and improperly treated some borrowers as eligible for military deferments when they were not, resulting in incorrect reporting to the Department of Education and losses to the United States. CES stopped servicing commercially held federal student loans in September 2019.
Jason McMillan, 46, pled guilty in the United States District Court for the Southern District of Georgia to bank fraud; and he was sentenced to 10 months in prison plus three years of supervised release, ordered to perform 40 hours of community service post-incarceration, and ordered to pay $112,430 in restitution. As alleged in part in the DOJ Release:

McMillan admitted that from July 2009 through April 2019, he knowingly used the identity of another person without their consent in obtaining commercial loans in the amounts of $187,000, $160,000, $157,000 and $250,000 from a Chatham County bank where he worked as its commercial loan officer. McMillan also admitted he obtained these loans under the false pretense that loans would be used for obtaining industrial farm equipment. McMillan admitted he knowingly used approximately $200,271 of these funds for his own personal use. The bank discovered the fraud during an internal investigation., Anthony M. Cottone consented to the entry of the judgment that permanently enjoins him from violating Sections 5(a), 5(c), and 17(a) of the Securities Act, Sections 10(b) and 15(a)(1) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder and to have the court consider the SEC's claims for disgorgement, prejudgment interest, and civil penalties at a later date; and Relief Defendant Botanica Group Holdings, LLC consented to the entry of a judgment that orders it to pay disgorgement and prejudgment interest in amounts to be determined. As alleged in part in the SEC Release:

[F]rom March 23, 2017 to July 31, 2017, Cottone and his now defunct unregistered investment adviser raised approximately $2.76 million from 11 investors in connection with the sale of preferred interests in a private fund through false and misleading representations and material omissions. The complaint alleges Cottone misappropriated at least $134,000 from the fund. The complaint further alleges that Cottone failed to disclose to investors that he used fund assets to pay investors in a prior unrelated securities offering, that he used fund assets to pay his unregistered investment adviser, that he received undisclosed commission payments out of fund assets, that he used fund assets to operate a start-up car dealership he formed and managed, and that he has a prior criminal conviction. In addition to his alleged misrepresentations and omissions, the complaint alleges Cottone sold securities in unregistered transactions and acted as an unregistered broker.
The United States District Court for the Eastern District of New York entered a Final Judgment against the former Chief Financial Officer of Aceto Corporation, Douglas A. Roth, in which he consented to being permanently enjoined from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, to the imposition of Bars upon him from serving as an officer or director of a public company. Previously, the SEC issued an Order suspending Roth from appearing or practicing before the SEC pursuant to Rule 102(e)(2) of the SEC's Rules of Practice. As alleged in part in the SEC Release:

[R]oth, while working as Aceto's CFO, obtained non-public information concerning several negative developments at Aceto. The complaint further alleged that, while in possession of this confidential information, and within days of his March 31, 2018 retirement, Roth sold all of the Aceto shares that vested upon his retirement.

In a parallel criminal action brought by the U.S. Attorney's Office for the Eastern District of New York, Roth pleaded guilty on November 9, 2020, and was sentenced on July 7, 2021 to six months in prison, six months of home incarceration, one year of supervised release, a fine of $150,000, and forfeiture of $147,802.64.
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, Christopher Joseph submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Christopher Joseph was first associated in 2017 with Signator Investors, Inc. and became registered in 2018 with that member firm. In accordance with the terms of the AWC, FINRA found that Joseph violated NASD Rule 2510(b) and FINRA Rules 3280, 3270, and 2010, and imposed upon him a $10,000 fine and a six-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

In May 2018, Joseph signed an employment agreement with another member firm, while he was registered with Signator. The employment agreement was in effect until November 2018, and the firm paid Joseph $31,750.47. Joseph's job responsibilities did not involve the execution of any securities transactions but instead related primarily to managing relationships with current and prospective clients. 

During the entire period that Joseph was registered with FINRA through an association with Signator and Royal Alliance, Joseph was also a founder, owner, and chief operating officer of a company that he formed with his wife to launch a mobile application. Joseph handled various aspects of the business, including working with vendors to develop and market the mobile application. Joseph was issued a company credit card to pay for business expenses, including meals and travel, but did not receive a salary. Joseph did not provide prior written notice to either Signator or Royal Alliance before engaging in the above described outside business activities, and thereby Joseph violated FINRA Rules 3270 and 2010. 
. . .
Beginning in March 2018, Joseph participated in raising money for the mobile application business he started with his wife. Joseph participated in the sales of $462,500 of convertible notes to 15 investors who were friends and family of Joseph and his wife. Joseph assisted with pitching investments to individuals and sending offering documents. Joseph had an ownership interest in this business and was reimbursed for his expenses. 

Joseph did not provide prior written notice of his participation in these private securities transactions to either of his member firms, and thereby Joseph violated FINRA Rules 3280 and 2010.
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, Joel Kichline submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Joel Kichline was first registered in 1985 and by May 2009, he was registered with Raymond James & Associates, Inc. In accordance with the terms of the AWC, FINRA found that Kichline violated NASD Rule 2510(b) and FINRA Rules 3260(b) and 2010, and imposed upon him a $5,000 fine and a one-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

From January 1, 2019, through July 9, 2020, Kichline exercised discretion on 1,519 occasions in five customers' accounts. Although the customers gave Kichline oral discretion to purchase or sell securities, none of the customers provided prior written authorization for Kichline to exercise discretion in their accounts. Additionally, Raymond James did not accept any of the customer accounts as discretionary accounts. 

In the Matter of the Arbitration Between Steven Swanson, Claimant, v. Infinity Financial Services, Respondent (FINRA Arbitration Award 20-04065)
In a FINRA Arbitration Statement of Claim filed in December 2020, public customer Claimant Swanson asserted:

negligence; professional negligence; violations of law; unsuitable recommendations; negligent supervision; breach of contract; breach of fiduciary duty; and breach of securities industry rules and regulations. The causes of action relate to Sierra Income real estate investment trust.

Claimant Swanson sought $35,000 in compensatory damages, punitive damages, rescission, costs, fees, and interest. Respondent Infinity Financial Services generally denied the allegations and asserted affirmative defenses. In November 2021, Claimant filed a a notice of voluntary dismissal with prejudice. In December 2021, Respondent filed a Motion for Attorneys' Fees and Costs, which the sole FINRA Arbitrator granted for:

failure to comply with the FINRA discovery procedures and continuing to pursue the claim after it was apparent there were no reasonable grounds for doing so.

Accordingly, the Arbitrator found Claimant Swanson liable to and ordered him to pay to Respondent Infinity $15,000 in attorneys' fees and $168.07 in costs.

Bill Singer's Comment: As I regularly warn my clients, among the consequences of starting any lawsuit is that you may not retain the ability to simply end it -- there are always consequences to filing a Complaint in court or in arbitration. Among the consequences that I raise is getting hit with sanctions such as costs and fees. The insult added to public customer Swanson's alleged injuries is that his lawsuit for $35,000-plus evaporates but he then gets tagged with over $15,000 in fees and costs.
As set forth in the preamble of the FINRA Press Release:

Gerri Walsh, FINRA's Senior Vice President of Investor Education and President of the FINRA Investor Education Foundation, testified in front of the Senate Special Committee on Aging.

The hearing entitled, "Financial Literacy: Addressing the Unique Just-in-Time Decisions Older Americans and People with Disabilities Face," examined financial literacy and education on decisions for which people often seek information and support at the time of making the decision. The hearing also covered data and trends regarding financial literacy among older adults.

FINRA Mulls A Defaulted Bond's Worth ( Blog)
In a recent regulatory settlement, FINRA charged an industry respondent with violating FINRA Rule 3220's limit of a $100 gift. You'd think that with such a hard dollar amount that the published regulatory settlement would have alleged the value of the cited gift. Making matters worse, the gift in question involved a defaulted bond. How much is a defaulted bond worth? According to the settlement: "still well beyond the gift limit allowed by FINRA Rule 3220." That's a ridiculous allegation to be found in a final, FINRA, regulatory, settlement document -- "well beyond?" Are you serious? What's next? Charging folks with "a lot" or "often?"
Once, a long time ago, four bad guys chased one good-guy Deputy. At high noon, with only himself to serve as prosecutor, judge, and jury, Marshall Will Kane stood alone against Frank Miller, Ben Miller, Jack Colby, and Jim Pierce. By himself, Marshall Kane battled for truth, justice, and the FINRA way of life -- or something like that. In 2022 Covid America, everything is reversed. Four guys in white hats chasing one guy in a black hat, and the bad guy skedaddled outta town last year.