Securities Industry Commentator by Bill Singer Esq

January 21, 2022

As Woody Allen so famously quipped "I'm not afraid to die, I just don't want to be there when it happens." Ah yes, death is traumatic and inconvenient, especially our own. Be that as it may, a recent FINRA public customer arbitration highlights what happens when a party to a lawsuit dies before the case concludes and a verdict rendered.

Market Order Timeliness / FINRA Reminds Member Firms of Obligation to Execute Marketable Customer Orders Fully and Promptly (FINRA Regulatory Notice 22-04)
As asserted in part in the FINRA Regulatory Notice:

Given that the vast majority of held market orders in NMS stocks are executed within 500 milliseconds following receipt or triggering of the order, FINRA expects firms to regularly evaluate the thresholds they use to generate exceptions as part of their supervisory systems designed to achieve compliance with their "full and prompt" obligations. Firms should modify those thresholds, as appropriate, to reflect current promptness standards for marketable order execution, including the statistics above, other relevant indicators of industry standards, and the firm's own data. . . . 

Federal Reserve Board releases discussion paper that examines pros and cons of a potential U.S. central bank digital currency (Federal Reserve Release)
The Federal Reserve Board released a discussion paper that examines the pros and cons of a potential U.S. central bank digital currency ("CBDC"). See:

Money and Payments: The U.S. Dollar in the Age of Digital Transformation (Federal Reserve / January 2022) 

As set out in part in the Fed's Release"

The paper summarizes the current state of the domestic payments system and discusses the different types of digital payment methods and assets that have emerged in recent years, including stablecoins and other cryptocurrencies. It concludes by examining the potential benefits and risks of a CBDC, and identifies specific policy considerations.

Consumers and businesses have long held and transferred money in digital forms, via bank accounts, online transactions, or payment apps. The forms of money used in those transactions are liabilities of private entities, such as commercial banks. Conversely, a CBDC would be a liability of a central bank, like the Federal Reserve.

While a CBDC could provide a safe, digital payment option for households and businesses as the payments system continues to evolve, and may result in faster payment options between countries, there may also be downsides. They include how to ensure a CBDC would preserve monetary and financial stability as well as complement existing means of payment. Other key policy considerations include how to preserve the privacy of citizens and maintain the ability to combat illicit finance. The paper discusses these and other factors in more detail.
In a 33-count Indictment filed in the United States District Court for the Eastern District of Texas, 
Derek Robert Hamm was charged with wire fraud, money laundering, violations of the Stolen Valor Act, using a fraudulent military discharge certificate, and being a felon in possession of firearms and ammunition. As alleged in part in the DOJ Release:

[H]amm held himself out to be a former member of the Army Special Forces who had served multiple tours of duty in Iraq, Afghanistan, and other countries.  He claimed to have been awarded a Purple Heart, a Silver Star, and a Bronze Star for his service.  In reality, Hamm received none of those awards.  Hamm also falsely claimed to be related to Harold Hamm, the billionaire oilman in Oklahoma, which he claimed gave him access to financial resources and oil industry expertise.

The indictment alleges that Hamm's persona of being a wealthy war hero helped him create an extensive network of friends who introduced him to potential investors. Hamm then defrauded those investors in schemes related to the oil and gas drilling industry.  Hamm did not invest funds as promised.  Instead, once Hamm received investors' funds, he spent the money on lavish personal gifts, including nearly $500,000 on jewelry and vehicles for himself and his family. 

The indictment also alleges that Hamm was a prohibited person in possession of firearms and ammunition.  Hamm was convicted in Smith County in 2020 for theft of property, a state felony.  As a felon, Hamm is prohibited by federal law from owning or possessing firearms or ammunition. Hamm was also convicted in 2005 for assault of a family member, a domestic violence misdemeanor under state law.  According to federal law, Hamm is also prohibited from possessing firearms or ammunition due to his domestic violence conviction.
William Sadleir pled guilty in the United States District Court for the Southern District of New York
to two counts of wire fraud in connection with his participation in two schemes relating to investments made by a publicly-traded closed-end investment fund (the "Fund") in Aviron Pictures, LLC and its affiliated entities (collectively, "Aviron"). The DOJ Release alleges that as of December 2019, the Fund had about $649.1 million in assets. As alleged in part in the DOJ Release:

WILLIAM SADLEIR was the chairman and chief executive officer of Aviron, and oversaw its operations from in or about 2015 until in or about December 2019.  Aviron participated in the distribution of a number of films in the United States, including My All American (2015), Kidnap (2017), The Strangers: Prey at Night (2018), A Private War (2018), Destination Wedding (2018), Serenity (2019), and After (2019).

SADLEIR engaged in two fraudulent schemes relating to an approximately $75 million investment made by the Fund in Aviron.

In one of the schemes (the "Advertising Scheme"), SADLEIR misappropriated millions of dollars in funds from Aviron that had been invested in Aviron by the Fund.  SADLEIR represented to the Fund that this money had been invested by Aviron in pre-paid media credits with the advertising placement company MediaCom Worldwide ("MediaCom"), which is a subsidiary of the advertising and media agency GroupM Worldwide.  Instead, using the bank account for a sham entity he had created, SADLEIR illicitly transferred out of Aviron over $25 million of those funds.  Specifically, SADLEIR created a sham New York-based company called GroupM Media Services, LLC (the "Sham GroupM LLC") designed to appear to be the legitimate entity, GroupM Worldwide, and a corresponding bank account in the name of that sham entity.  SADLEIR then used a significant portion of those illicitly transferred funds for his personal benefit, including to purchase a private residence in Beverly Hills for approximately $14 million.  SADLEIR then falsely represented to the Fund that Aviron had purchased an approximately $27 million balance in pre-paid media credits with MediaCom that were available to promote future Aviron films, and pledged a portion of those credits to the Fund as collateral for additional loans, when in fact the claimed credits did not exist.  As part of these false representations, SADLEIR also created a fake identity of a purported New York-based female employee of the Sham GroupM LLC named "Amanda Stevens" who corresponded with a representative of the Fund, assuring the Fund that Aviron had an approximately $27 million balance in pre-paid media credits with the Sham GroupM LLC.  But SADLEIR himself posed as Amanda Stevens when engaging in email exchanges with a representative from the Fund.

In the other scheme (the "UCC Scheme"), SADLEIR engineered the illicit and fraudulent sale and refinancing of assets worth over $3 million that secured the Fund's loans to Aviron.  The Fund had secured its investment in Aviron by, among other means, obtaining UCC liens in 2017 and 2018 on certain intellectual property and other assets relating to Aviron's films.  In 2019, SADLEIR used the forged signature of one of the Fund's portfolio managers on releases to remove the Fund's UCC liens on certain of these secured assets.  SADLEIR did so in order to sell or refinance the assets without the Fund's consent, thus depriving the Fund of its collateral on outstanding loans.  Aviron ultimately defaulted on those loans.
Mary Kathryn Marr, 41, pled guilty in the United States District Court for the Middle District of Florida to conspiracy to commit money laundering; and she was sentenced to 14 years in prison. The Court entered against Marr a money judgment in the amount of $1.5 million, and ordered her to pay $14,511,754.05 in restitution. As alleged in part in the DOJ Release

[M]arr was the leader of a large, international fraud and money laundering ring that operated out of the United States and abroad. Marr contracted with various international "boiler rooms" to launder fraud proceeds that she and other conspirators had obtained from foreign victims, primarily by selling worthless investments. Marr and her conspirators employed a mass-marketing scam in which high-pressure sales techniques originating out of the boiler rooms were used to defraud individuals who believed that they were investing substantial amounts of money in regulated financial products or markets, particularly shares of stocks. In reality, the investments were a sham and the victims received nothing. The majority of the victims that Marr and her conspirators targeted were located in Australia, New Zealand, the United Kingdom, and countries in Asia.

Marr and her co-conspirator, Michel Marc Chateau, who was charged in the same case, operated a network of funnel bank accounts in the United States in the names of shell companies into which the boiler room agents instructed victims to send their money. In some instances, Marr, using fake personas, spoke with the victims herself to convince the victims to send additional funds based on fraudulent representations and high-pressure tactics. The victims' funds were then laundered through more bank accounts and sent overseas. Marr and Chateau recruited various individuals to open and operate funnel bank accounts in Florida and other states.

Electronic communications obtained during the investigation revealed that Marr had received a set percentage of each victim's wire transfer that had been sent to the bank accounts in the United States. Once the victims' funds had been laundered through Marr's network of bank accounts in the United States, Marr would arrange for most of the funds to be sent back to the boiler rooms and their employees overseas.

In total, Marr and her co-conspirators unlawfully obtained approximately $14.5 million from victims through various boiler room fraud schemes between 2015 and 2018. Including funds that had originated from other funnel accounts, the accounts engaged in money laundering transactions totaling more than $20 million.
Robert Jones pled guilty in the United States District Court for the Southern District of West Virginia to two counts of aggravated identity theft. As alleged in part in the DOJ Release:

[J]ones admitted that an elderly female from Clendenin hired him to do mold remediation and other handyman services at a Clendenin property that belonged to another elderly woman of advanced age. Jones admitted that he obtained blank checks belonging to the elderly homeowner and forged the signature of the woman who hired him. He wrote himself checks in this manner multiple times, in amounts payable of $7,000 and $8,500. Jones then deposited these falsified checks at the Hurricane branch of a local bank, where he had a checking account. Jones admitted that neither woman was aware that he used their personal identifiers in his efforts to obtain money from the bank. As part of his plea agreement, Jones agreed that he owes the bank $25,000 in restitution as a result of his offense and relevant conduct.

David Forte, John Younis, and Gregory Manning were charged in the United States District Court for the District of Massachusetts with one count of conspiracy to commit securities fraud. As alleged in part in the DOJ Release:

[B]eginning in or around June 22, 2016, Forte - an officer with the Needham Police Department - obtained material non-public information from a close relative who is a senior executive at Analog Devices, Inc. (Analog), a Norwood-based semiconductor company, about Analog's planned acquisition of Linear Technology Corp. (Linear), a semiconductor company based in Milpitas, Calif. Forte allegedly passed the information to two close friends, Manning and Younis, who purchased shares of Linear stock in the week leading up to the public announcement of the acquisition on July 26, 2016. Younis also allegedly purchased call options -which are a bet that the price of a stock will increase prior to the expiration of the option - and tipped a business associate to purchase Linear shares as well. After the deal was announced, Manning, Younis and Younis' associate allegedly sold their Linear securities at a profit, and Manning paid Forte a kickback in appreciation for Forte's stock tip.

In a Complaint filed in the United States District Court for the District of Massachusetts, the SEC charged David P. Forte, Gregory P. Manning and John D. Younis with violating Section 10(b) of the Securities Exchange Act of and Rule 10b-5 thereunder. As alleged in part in the SEC Release:

[D]avid P. Forte obtained material, non public information about the impending merger of Analog Devices and Linear Technology from his brother, an Analog Devices executive. The complaint alleges that Forte then tipped his friends, Gregory P. Manning and John D. Younis, who purchased Linear securities, including call options, in advance of the July 26, 2016 announcement. The complaint also alleges that Younis recommended Linear to a business associate, who purchased Linear stock before the announcement.
In a Complaint filed in the United States District Court for the Northern District of Texas, the SEC charged charges Phillip W. Offill, Jr. and Justin W. Herman with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rules 10b-5(a) and (c) thereunder and Sections 17(a)(1) and (a)(3) of the Securities Act. As alleged in part in the SEC Release:

[W]ithin months of being released from federal prison on a previous penny stock fraud conviction, Offill (using the alias "Jim Jimerson") started a new penny stock scheme to misappropriate millions of shares of a publicly-traded microcap company. Over the next year, Offill and Herman allegedly fabricated a series of fraudulent documents, agreements, and transactions to cause the issuance and transfer of millions of shares of stock to Herman and an associate for the purpose of selling them to the public. According to the complaint, the stock that defendants misappropriated belonged to the former controlling shareholder of the microcap company, who never authorized any of the transactions. The complaint alleges that Offill and Herman then directed the sale of the microcap company's stock into the market, in return for approximately $1.4 million in trading proceeds, which Offill and Herman shared.

Offill was convicted of securities fraud and other crimes in 2010, for which he was sentenced to 96 months in prison. See United States v. Offill, No. 1:09-CR-00134-001 (E.D. Va.). In addition, the SEC previously charged Offill with securities registration violations for his roles in two other microcap frauds, where it obtained penny stock bars and other relief against him. See SEC v. Offill, et al., No. 3:07-CV-1643-D (N.D. Tex.) and SEC v. Fisher, et al., No. 2:07-CV-12552 (E.D. Mich.).
The United States District Court for the Northern District of Georgia entered final judgment against:
  • Peter Baker ordering him to pay a civil penalty of $585,141; 
  • Elizabeth Oharriz ordering her to pay a civil penalty of $390,094;
  • Baker and Oharriz permanently enjoining them violating the federal securities laws, and ordering them to pay jointly and severally disgorgement totaling $502,934 plus prejudgment interest of $78,466; and
  • Oharriz and her companies ordering them to pay jointly and severally disgorgement totaling $798,464 plus prejudgment interest of $124,574.
As alleged in part in the SEC Release:

[B]aker and codefendant Elizabeth Oharriz engaged in a scheme to sell fictitious prime bank instruments to investors, misrepresenting the instruments as legitimate and claiming that investors would earn substantial profits. As alleged in the complaint, Baker and Oharriz defrauded five groups of investors out of over $2 million and attempted to prevent investors from uncovering the fraud by providing them with fabricated bank documents.

The SEC's complaint charged Baker, Oharriz, Baker's company Prestige Global Trading, LLC, and Oharriz's companies, Diversified Consulting & Logistics, Inc. and Sienna Business Group, Inc., with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also charged Baker and Oharriz with violating the registration provisions of Section 15(a) of the Exchange Act. On January 5, 2021, the court granted the SEC's motion for summary judgment against Baker, reserving the determinations of penalties or other relief for a later date. Oharriz and her companies previously entered into a bifurcated settlement, agreeing to be permanently enjoined from violations of the charged provisions with relief to be determined by the court at a later date.
In a Complaint filed in the United States District Court for the District of Colorado, the SEC charged Paul A. Garcia with violating Sections 17(a)(1) and (a)(3) of the Securities Act, and Section 10(b) of the Securities Exchange Act and Rules 10b-5(a) and (c) thereunder; and also named Office Guru Franchise Group, Inc., a company purportedly controlled by Garcia, as a Relief Defendant. As alleged in part in the SEC Release:

[F]rom August through October 2019, Gold Hawgs raised $400,000 from 16 investors for the creation of a new cryptocurrency. The SEC's complaint further alleges that Gold Hawgs touted large potential returns for investors after the completion of its initial coin offering, but the business failed before reaching that stage. Instead of using all of the investor funds to develop Gold Hawgs' business, Garcia, the chief financial officer and a 50% owner of the company, allegedly stole approximately $123,000 of the money raised from investors by transferring the funds to another company that he controlled; he then allegedly used the money to pay for various personal and business expenses unrelated to Gold Hawgs.
The SEC issued three Whistleblower Orders, which, as set forth in part in the SEC Release:

In the first order, the SEC issued an award of approximately $37 million to two joint whistleblowers who provided key evidence that contributed to the success of the covered action.   The whistleblowers also provided ongoing assistance and helped the staff identify additional information that advanced the investigation. 

In the second order, the SEC issued approximately $1.8 million to a whistleblower who provided important, new information that prompted Commission staff to open an investigation into the misconduct. The whistleblower continued to assist the staff by providing interviews and additional documents.

In the third order, the SEC awarded approximately $1.5 million to a whistleblower who provided new information that shaped staff's investigative strategy and significantly contributed to the success of the covered action.  The whistleblower also provided substantial and ongoing assistance by helping the Commission staff identify issues.
The United States District Court for the Eastern District of Kentucky entered a Consent Order for permanent injunction, restitution, and disgorgement against William S. Evans III (d/b/a Turning Point Investments) and Evans' wife, Frances Evans. The Consent Order requires that Evans pay restitution of $16,934,773.40, and Evans and his wife to disgorge $10,040,418.44; and, further, imposes permanent trading and registration bans. As alleged in part in the CFTC Release:

[S]ince approximately September 2018, Evans solicited and accepted at least $10.6 million from participants with numerous misrepresentations, including that he would use their funds to trade commodity futures, when in fact Evans misappropriated the funds for his personal use and to pay participants in a Ponzi-like scheme. He also misrepresented his fee structure and the likelihood of profits and risks. The order also states that Evans acted in a capacity requiring him to register with the CFTC as a Commodity Pool Operator, but Evans was not registered, as required.
In accordance with the terms of an AWC settlement, FINRA fined Credit Suisse Securities $9 million for failing to comply with securities laws and rules designed to protect investors, including the Securities and Exchange Commission's "Customer Protection Rule" and FINRA rules requiring firms to disclose potential conflicts of interest when issuing research reports. As part of the settlement, FINRA also required Credit Suisse to certify that it has implemented supervisory systems and procedures reasonably designed to comply with the Customer Protection Rule and other requirements. As alleged in part in the FINRA Release:

FINRA found that Credit Suisse violated the Customer Protection Rule in two ways. First, the firm failed to maintain possession or control of billions of dollars of fully paid and excess margin securities it carried for customers, as required. Second, on numerous occasions, the firm failed to accurately calculate its required customer reserve-that is, the amount of cash or securities the firm was required to maintain in a special reserve bank account.

In addition, from 2006 through 2017, FINRA found Credit Suisse issued more than 20,000 research reports that contained inaccurate disclosures about potential conflicts of interest. FINRA also found that the firm issued more than 6,000 research reports that omitted required disclosures. Credit Suisse's disclosures omitted that the company that was the subject of the research report had been a client of the firm during the prior 12 months; or that the firm expected to receive investment banking compensation from the subject company within the next three months.

Additionally, FINRA found that Credit Suisse failed to preserve more than 18.6 billion records in a non-erasable and non-writable format, as required.

In settling this matter, Credit Suisse accepted and consented to the entry of FINRA's findings without admitting or denying them.
In a sign of the times, a recent FINRA dispute between two former associated persons prompted a Stipulated Award. In furtherance of the parties' settlement, the Respondent was directed to immediately delink, unfriend, or disconnect from any connection with any Restricted Client on any social media platform, and to remain delinked, unfriended or disconnected for about a year. Additionally, Respondent was enjoined from communicating with, contacting, responding, "liking," "linking," commenting, giving a "thumbs up," reacting, or accepting any invitation to connect or communicate with any Restricted Client on any social media platform for about a year. All of which comes off as a modern-day Wall Street version of a time-out. Is this a wave of things to come? Who knows -- but now that it's out there, the genie is out of the bottle.