The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

February 9, 2022















http://www.brokeandbroker.com/6278/finra-rifkind-arbitration/
The nice thing about saying nothing is that it makes it difficult to put words in your mouth. All of which may be a commendable way to keep the peace. When it comes to judge's ruling on matters of fact and law, biting one's tongue fails to develop a useful record on appeal. A decision is supposed to resolve the dispute, not leave the allegations suspended in the air and open to further interpretation. A recent FINRA customer arbitration shows what happens when arbitrators take "summary" too literally.

https://www.justice.gov/usao-sdny/pr/five-defendants-charged-84-million-boiler-room-fraud-and-money-laundering-scheme
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SEC Charges Six U.S. Citizens in Connection with Overseas Boiler-Room Schemes (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25326.htm

In an Indictment filed in the United States District Court for the Southern District of New York
https://www.justice.gov/usao-sdny/press-release/file/1470416/download, Robert Lenard Booth a/k/a "Trevor Nicholas," Michael D'Urso, Alyssa D'Urso, Jay Garnock, and Antonella Chiaramonte were charged with one count of conspiracy to commit securities fraud and operate unlicensed money transmitting businesses, one count of conspiracy to commit wire fraud, and one count of conspiracy to commit money laundering. Further, Michael D'Urso was charged with three counts, and Alyssa D'Urso, Garnock, and Chiaramonte with one count each, of operating an unlicensed money transmitting business. As alleged in part in the DOJ Release:

Beginning in at least June 2019 and lasting through August 2021, ROBERT LENARD BOOTH, a/k/a "Trevor Nicholas," MICHAEL D'URSO, ALYSSA D'URSO, JAY GARNOCK, and ANTONELLA CHIARAMONTE participated in a sophisticated international mass-marketing investment fraud scheme to defraud investors from around the world of millions of dollars, and to launder the fraud proceeds and distribute those proceeds among the conspirators.

BOOTH ran a boiler room operation in Thailand that lied to investors and told them the boiler room was in fact a Manhattan-based investment firm. BOOTH and his co-conspirators propped up their lies with fake identities and false and misleading webpages, email addresses, and phone numbers. While purporting to sell investors from around the world securities in privately held and publicly traded American companies, BOOTH stole more than $1 million from victim-investors, depriving them of their savings.

MICHAEL D'URSO, ALYSSA D'URSO, GARNOCK, and CHIARAMONTE (the "D'URSO Crew") ran a network of shell companies and associated bank accounts in New York. Using these shell companies, the D'URSO Crew partnered with multiple boiler rooms, including BOOTH's, to receive the stolen "investment" funds from victims and then launder the money and distribute it to the various conspirators. All told, the D'URSO Crew used its shell companies to receive more than $8.4 million that was stolen from victims of the scheme. They then used their shell companies to launder more than $4.6 million of the stolen money and send it back overseas.

In a Complaint filed in the United States District Court for the Southern District of New York
https://www.sec.gov/litigation/complaints/2022/comp25326.pdf, the SEC charged Booth, Michael D'Urso, and Daniel T. Wellcome with violating 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 also charged Alyssa D'Urso, Chiaramonte, and Garnock with violating and aiding and abetting those provisions. Finally, the SEC Complaint charges Booth with violating the broker registration provisions of Section 15(a) of the Exchange Act, and charges D'Urso and Wellcome with aiding and abetting Booth's registration violations. As alleged in part in the SEC Release:

[I]n 2019 and 2020, several overseas boiler rooms defrauded their victims by selling fake investments that purportedly traded on U.S. exchanges. Most victims were foreign investors and were retirees or nearing retirement. The complaint alleges that Booth's boiler room brought in at least $700,000 from 10 investors. According to the complaint, Wellcome, who then lived in the Philippines, acted as the intermediary between the boiler rooms and D'Urso, who used his daughter, Alyssa D'Urso, and Chiaramonte and Garnock, as nominees to open and manage bank accounts in New York for fake companies that D'Urso created. The boiler rooms allegedly told their victims to wire their investment funds to D'Urso's fake companies, as instructed by Wellcome and D'Urso. When investor money was received into the accounts, D'Urso allegedly skimmed a portion of the victims' funds for himself, Wellcome, and his nominees, and wired the rest back overseas to the boiler rooms.

SEC Issues Proposal to Reduce Risks in Clearance and Settlement (SEC Release)
https://www.sec.gov/news/press-release/2022-21
The SEC proposed rule changes to reduce risks in the clearance and settlement of securities
https://www.sec.gov/rules/proposed/2022/34-94196.pdf, including by shortening the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (T+2) to one business day after the trade date (T+1). As alleged in part in the SEC Release:

In addition to shortening the standard settlement cycle, the proposal includes rules directed at broker-dealers and registered investment advisers to shorten the process of confirming and affirming the trade information necessary to prepare a transaction for settlement so that it can be completed by the end of trade date. Further, the proposal includes a new requirement to facilitate straight-through processing, which would apply to certain types of clearing agencies that provide central matching services. Central matching service providers help facilitate the processing of institutional trades between broker-dealers and their institutional customers. The proposed rule would require new policies and procedures directed to straight-through processing and require an annual report on progress with the process.





https://www.sec.gov/news/press-release/2022-19
The SEC proposed new rules and amendments under the Investment Advisers Act of 1940 to enhance the regulation of private fund advisers and to protect private fund investors by increasing transparency, competition, and efficiency in the $18-trillion marketplace. As set forth in part in the SEC Release:

The proposed rules would increase transparency by requiring registered private fund advisers to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance.

Additionally, the proposed rules would prohibit private fund advisers, including those that are not registered with the SEC, from providing certain types of preferential treatment to investors in their funds and all other preferential treatment unless it is disclosed to current and prospective investors.

The proposed changes also would create new requirements for private fund advisers related to fund audits, books and records, and adviser-led secondary transactions.

The proposals also would prohibit all private fund advisers from engaging in several activities, including seeking reimbursement, indemnification, exculpation, or limitation of liability for certain activity; charging certain fees and expenses to a private fund or its portfolio investments, such as fees for unperformed services and fees associated with an examination or investigation of the adviser; reducing the amount of an adviser clawback by the amount of certain taxes; charging fees or expenses related to a portfolio investment on a non-pro rata basis; and borrowing or receiving an extension of credit from a private fund client.

In addition, the SEC proposed amendments to the Advisers Act compliance rule that would require all registered advisers, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.





The proposed rules would require advisers and funds to adopt and implement written cybersecurity policies and procedures designed to address cybersecurity risks that could harm advisory clients and fund investors. The proposed rules also would require advisers to report significant cybersecurity incidents affecting the adviser or its fund or private fund clients to the Commission on a new confidential form. 

To further help protect investors in connection with cybersecurity incidents, the proposal would require advisers and funds to publicly disclose cybersecurity risks and significant cybersecurity incidents that occurred in the last two fiscal years in their brochures and registration statements.

Additionally, the proposal would set forth new recordkeeping requirements for advisers and funds that are designed to improve the availability of cybersecurity-related information and help facilitate the Commission's inspection and enforcement capabilities.




https://www.justice.gov/opa/pr/two-arrested-alleged-conspiracy-launder-45-billion-stolen-cryptocurrency
In a Complaint filed in the United States District Court for the District of Columbia
https://www.justice.gov/opa/press-release/file/1470181/download and Statement of Facts
https://www.justice.gov/opa/press-release/file/1470186/download, Ilya Lichtenstein and his wife, Heather Morgan, were charged with conspiracy to commit money laundering and conspiracy to defraud the United States. As alleged in part in the DOJ Release:

[L]ichtenstein and Morgan allegedly conspired to launder the proceeds of 119,754 bitcoin that were stolen from Bitfinex's platform after a hacker breached Bitfinex's systems and initiated more than 2,000 unauthorized transactions. Those unauthorized transactions sent the stolen bitcoin to a digital wallet under Lichtenstein's control. Over the last five years, approximately 25,000 of those stolen bitcoin were transferred out of Lichtenstein's wallet via a complicated money laundering process that ended with some of the stolen funds being deposited into financial accounts controlled by Lichtenstein and Morgan. The remainder of the stolen funds, comprising more than 94,000 bitcoin, remained in the wallet used to receive and store the illegal proceeds from the hack. After the execution of court-authorized search warrants of online accounts controlled by Lichtenstein and Morgan, special agents obtained access to files within an online account controlled by Lichtenstein. Those files contained the private keys required to access the digital wallet that directly received the funds stolen from Bitfinex, and allowed special agents to lawfully seize and recover more than 94,000 bitcoin that had been stolen from Bitfinex. The recovered bitcoin was valued at over $3.6 billion at the time of seizure.

. . .

The criminal complaint alleges that Lichtenstein and Morgan employed numerous sophisticated laundering techniques, including using fictitious identities to set up online accounts; utilizing computer programs to automate transactions, a laundering technique that allows for many transactions to take place in a short period of time; depositing the stolen funds into accounts at a variety of virtual currency exchanges and darknet markets and then withdrawing the funds, which obfuscates the trail of the transaction history by breaking up the fund flow; converting bitcoin to other forms of virtual currency, including anonymity-enhanced virtual currency (AEC), in a practice known as "chain hopping"; and using U.S.-based business accounts to legitimize their banking activity.

SEC Obtains Final Judgment Against Indianapolis-Area Resident for Offering Fraud (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25324.htm
   The United States District Court for the Southern District of Indiana entered a final consent judgment against George S. Blankenbaker and his companies: StarGrower Commercial Bridge Loan Fund 1 LLC, StarGrower Asset Management LLC, and Blankenbaker Investments Fund 17  LLC, whereby they were enjoined from violating Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Further, as to violations of the registration provisions of Section 5 of the Securities Act, Blankenbaker, StarGrower Commercial, and StarGrower Asset consented to an injunction. Blankenbaker was ordered to pay disgorgement and prejudgment interest totaling $1,920,130, with this disgorgement obligation offset by the $1,180,503.92 order of restitution entered in a criminal case filed against him under United States v. George Blankenbaker, No. 1:21-cr-102-SEB-TAB (S.D. Ind., Mar. 31, 2021), leaving a remainder of $739,626.08 for Blankenbaker to disgorge. Further, the Court imposed an officer-and-director bar against Blankenbaker. Blankenbaker's companies were ordered to pay disgorgement and prejudgment interest totaling $5,199,808.02 on a joint-and-several basis. The companies consented to entry of the order without admitting or denying the allegations in the SEC's complaint.  
   In a related SEC administrative proceeding, Blankenbaker agreed to the issuance of an SEC order permanently barring him from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or national recognized statistical rating organization. 
   In the parallel criminal action, Blankenbaker pled guilty to charges of wire fraud and money laundering, and was sentenced to 60 months in prison plus three years of supervised release, in addition to the restitution order.  As alleged in part in the SEC Release:

[B]etween August 2016 and May 2019, Blankenbaker and his companies, StarGrower Commercial Bridge Loan Fund 1 LLC, StarGrower Asset Management LLC, and Blankenbaker Investments Fund 17 LLC, falsely told investors that their money would be used to make short-term loans to food exporters in Asia, and that the investments were secured by shipping containers holding the food products. In fact, the complaint alleges, Blankenbaker misused at least $8.1 million of their money, including by directing at least $4 million to hemp companies, using at least $965,000 in new investor funds to make Ponzi-style payments to prior investors, and misappropriating at least $1.7 million in investor funds for his own personal benefit. The complaint also alleges that, as result of Blankenbaker's fraud, investors lost at least $8.1 million.

Customer Advisory: Avoid Forex, Precious Metals, and Digital Asset Romance Scams (CFTC Release)
https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/CustomerAdvisory_RomanceScam.html
As set forth in the preamble to the CFTC Release:

The Commodity Futures Trading Commission advises the public to avoid offers to trade foreign currency contracts (forex), precious metal contracts, and digital assets with people they meet through dating apps or social media, even if the relationship has been building for weeks or months.

Romance scams can target people of any age, including individuals who are comfortable using online dating apps and trading forex, precious metals, and digital assets. The CFTC has received complaints about frauds that originated on dating apps and social media platforms. In many cases, the victims believed they were in romantic relationships that had formed over several weeks. These frauds are often conducted by people and entities outside the United States and use unregistered trading websites or third-party trading software.

Pointedly, the CFTC Release offers this excellent list of warnings:

Dating App Fraud: 10 Ways to Protect Yourself and Your Money

1.Keep conversations on the dating or social media platforms. Many platforms utilize harmful language filters that can detect fraud. Fraudsters want to quickly move conversations to private messaging apps to avoid detection.

2. Screen capture the love interest's profile picture or other pictures and use reverse image searches to see if they have been used in other scams or by other people.

3. If contacts refuse to meet or video chat, that should be a red flag. Try other ways to verify their identities in real-time. For example, ask the person to send a selfie holding a piece of paper with your name and date next to his or her face.

4. Check to be sure the people or firms you trade with are registered with federal or state authorities. Relying on registration alone won't protect you from fraud, but most scams involve unregistered entities, people, and products. Learn more, visit cftc.gov/check.
  • For forex trading, check with the National Futures Association, nfa.futures.org/basicnet.

  • For virtual currency, see if the platform is registered as a money service business with the Financial Crimes Enforcement Network (fincen.gov/msb-registrant-search) or with your state using the Nationwide Multistate Licensing System (csbs.org/nationwide-multistate-licensing-system).
5. Never make payments or give sensitive information to anyone you've only met online.

6. Before making any investment, get a second opinion. Talk it over with a financial advisor, trusted friend, or family member.

7. Don't trade in markets or products you don't fully understand.

8. Never pay more money to get your money back. If you suspect fraud, report it immediately to the Internet Crime Complaint Center, ic3.gov, or cftc.gov/complaint.

9. Learn more about romance scams at consumer.ftc.gov or other reliable websites.

10. Learn more about spotting and avoiding forex, precious metals, or digital asset frauds, and stay current on developing trends, visit cftc.gov/LearnAndProtect.

https://www.cftc.gov/PressRoom/PressReleases/8493-22
https://www.cftc.gov/media/6961/enfwtradecomplaint020722/download, the CFTC charged The W Trade Group LLC, Larry Ramos Mendoza, and Joseph Carvajales with fraud and misappropriation of over $19 million involving futures, forex and options. As alleged in part in the CFTC Release:

The complaint alleges that W Trade Group LLC, acting under Ramos' control, operated a long-running scheme from approximately June 2013 through June 2020 that defrauded futures, forex, and options customers. W Trade Group and Ramos are alleged to have misappropriated more than $19 million from at least 220 customers. In order to further this scheme, W Trade Group and Ramos allegedly sent false account statements to customers electronically showing purported profits and trading activity, when in fact none existed. 

The complaint also states that Carvajales, in conjunction with W Trade Group and Ramos, fraudulently solicited customers for the fraudulent scheme by making false claims such as the existence of a sophisticated trading algorithm, and limited downside risk. 

https://www.cftc.gov/PressRoom/PressReleases/8491-22
The Commodity Futures Trading Commission, the Consumer Financial Protection Bureau (CFPB), the Department of Homeland Security's U.S. Immigration and Customs Enforcement (ICE), the U.S. Postal Inspection Service, and the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) have launched Dating or Defrauding?, a national awareness effort to alert the public to romance scams that target victims largely through dating apps or social media. As alleged in part in the CFTC Release:

Romance scams are not new, but with the proliferation of online dating apps, social media, and even messaging apps, new types of scams are emerging that target new audiences and have drained victims of millions of dollars. According to the Federal Trade Commission (FTC), 2020 was a record year for romance scams. Consumer reports to the FTC indicate that the number of romance scam complaints continued to increase through 2021. A year-over-year comparison through the third quarter showed a 48 percent increase in reported romance frauds.

The joint federal agencies' initiative shows the public how to recognize the scams before they give any money or assets and provides steps to take if they are victimized. Over the coming weeks, the interagency Dating or Defrauding? awareness campaign will reach the public via social media, local and national media outreach, and public-private partnerships to encourage them to be vigilant when making online love connections.

In a FINRA Arbitration Statement of Claim filed in October 2019, associated person Claimant Luckett asserted that the:

[F]orm U5 filed by JPMS, as part of registration records maintained by the Central Registration Depository ("CRD"), is defamatory and asserted the following causes of action: invasion of privacy: false light, tortious interference with prospective business expectancies, and breach of implied covenant of good faith and fair dealing. The causes of action related to events occurring after the conclusion of Claimant's employment with JPMS.

Respondents generally denied the allegations and asserted affirmative defenses. The FINRA Arbitration Award states that:

At the hearing and in Claimant's Itemization of Damages exhibit, Claimant requested damages of $5,585,353.00, exclusive of interest and costs, including compensatory damages of $3,689,015.00, punitive damages of $500,000.00, and attorneys' fees of $1,396,338.00. Alternatively, Claimant requested damages of $4,402,769.00 exclusive of interest and costs, including compensatory damages of $2,802,077.00, punitive damages of $500,000.00, and attorneys' fees of $1,100,692.00. Claimant withdrew the request for attorneys' fees on the record. 

The FINRA Arbitration Panel found Respondent JPMS liable and ordered the firm to pay to Claimant Luckett $1.4 million in compensatory damages and $600 in reimbursed filing fees. In granting expungement to Claimant, the Panel recommended the expungement of:

[T]he Termination Explanation in Section 3 of Dustin Blake Luckett's (CRD Number 5126374) Form U5 filed by J.P. Morgan Securities LLC on June 29, 2017 and maintained by CRD. The Reason for Termination shall remain the same and the Termination Explanation shall be replaced with the following language: "Non-investment related. After a dispute about a clerical process, RR became disillusioned with the company's atmosphere requiring separation of his at-will employment." This directive shall apply to all references to the Termination Explanation. 

The Panel further recommends the expungement of all references to Occurrence Number 1940121 from the registration records maintained by the CRD for Dustin Blake Luckett. Any "Yes" answers should be changed to "No," as applicable. 

The Panel recommends expungement based on the defamatory nature of the information. The above recommendations are made with the understanding that the registration records are not automatically amended. Dustin Blake Luckett must forward a copy of this Award to FINRA's Credentialing, Registration, Education and Disclosure Department for review.

https://www.sec.gov/litigation/litreleases/2022/lr25325.htm
In a Complaint filed in the United States District Court for the Central District of California
https://www.sec.gov/litigation/complaints/2022/comp25325.pdf, the SEC charged Michael M. Beck a/k/a @BigMoneyMike6 with violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Helen P. Robinson was named as a Relief Defendant. In part the SEC Release alleges that:

[S]ince at least February 2017, Beck engaged in scalping of eight different penny stocks - recommending a stock without disclosing his intent to sell the stock, and then selling it at inflated prices to generate profits. According to the complaint, Beck repeatedly purchased blocks of penny stock shares and then tweeted that he would soon be issuing a new stock recommendation to his millions of followers and the public at large. As alleged, Beck's tweets encouraged readers to join "TeamBillionaire" so that they could receive the recommendation by email. The complaint further alleges that, a few days before Beck publicly tweeted a recommendation, he typically emailed it to TeamBillionaire members or had third parties post favorable commentary about the stock on investor message boards. As alleged, Beck then typically began to sell his shares, and shares owned by his mother, relief defendant Helen Robinson, before tweeting the recommendation publicly and typically sold additional shares after tweeting positively about the stock. The complaint alleges that Beck failed to disclose his plans to sell, or his ongoing selling, of shares in any of the tweets, emails, or message board posts, and that he obtained approximately $870,000 in total proceeds from his scalping activities.

https://www.finra.org/sites/default/files/fda_documents/2018057883102
%20William%20Nicholas%20Athas%20CRD%203165470%20Order%20Accepting%20Offer%20jlg.pdf
In response to the filing of a Complaint on January 18, 2022, by the Financial Industry Regulatory Authority's ("FINRA's") Department of Enforcement, Respondent William Nicholas Athas submitted an Offer of Settlement dated February 1, 2022, which the regulator accepted.  Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, settling Respondent Athas consented to the entry of findings and violations and to the imposition of the sanctions; and, accordingly FINRA imposed upon Athas a Bar from associating with any FINRA member in all capacities. As set forth in the Order's "Summary":

From December 2014 through April 2020, Respondent William Nicholas Athas, while associated with K.C. Ward Financial (CRD No. 145135) and Worden Capital Management LLC (CRD No. 148366), churned and excessively traded nine accounts of seven different customers. During this period, Athas-who exercised de facto control over each of these accounts- continuously executed short-term equities trades in the accounts, holding stocks for an average of approximately 20 days. When combined with his customary high commissions on each trade- 2% to 3% on both buy and sells-and the use of margin in some accounts, Athas' trading resulted in cost-to-equity ratios ranging from approximately 56% to 246%, and turnover rates ranging from approximately 17 to 75. Athas' churning and excessive trading caused these customers to pay approximately $1.6 million in commissions and other trading costs and to suffer approximately $1.1 million in losses. Conversely, Athas generated commissions of approximately $1.5 million for himself and his firms. By churning and excessively trading the nine accounts, Athas willfully violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and he also violated FINRA Rules 2111, 2020, and 2010. 

Athas also failed to have a reasonable basis to believe that his recommended trading strategy was suitable for at least some customers. When recommending trades, Athas failed to consider how the cumulative costs associated with his frequent, high-commission trading, often on margin, would impact the ability of his customers to earn a profit. As a result, Athas also failed to fulfill his reasonable basis suitability obligations, in violation of FINRA Rules 2111 and 2010.

http://www.brokeandbroker.com/6265/finra-wells-fargo-arbitration/
You know those days when you just want to pull the covers over your head and not get out of bed? Well, FINRA had one of those days. As to what caused all of FINRA's anxiety, let's start with these words in a court's order about a FINRA public customer arbitration hearing: "The transcripts satisfy the Investors' burden of proving the fraud on the panel by clear and convincing evidence. The audio tapes, which were not available to the Investors until after the close of the hearing, confirm that Wells Fargo' s key witness used the delay caused by the medical emergency to materially change his testimony and offer perjured testimony in direct contravention of the earlier testimony. In addition, counsel for Wells Fargo inserted himself as a fact witness and purported to testify to the Panel himself to support the changed story."

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