Securities Industry Commentator by Bill Singer Esq

February 16, 2022

Lately, FINRA sure as hell seems fascinated with Morgan Stanley's joint production agreements. Morgan Stanley uncovered some questionable conduct and FINRA was well within its rights to impose fines and suspension. Regardless, why is this stuff just popping up now when the underlying misconduct occurred a few years ago? A word to the wise, if you're altering production codes for whatever reason when you're entering trades, the practice is now on FINRA's radar.
Six investment advisers and six broker-dealers settled SEC charges that they had failed to file and deliver Forms CRS to their retail investors by the required deadline and, in some cases, failed to include all required information. As alleged in part in the SEC Release:

On June 5, 2019, the SEC adopted Form CRS and required SEC-registered investment advisers and SEC-registered broker-dealers to file their respective Forms CRS with the SEC, begin delivering them to prospective and new retail investors by June 30, 2020, and deliver them to existing retail investor clients or customers by July 30, 2020. The SEC also required firms to prominently post their current Form CRS on their website, if they had one. According to the SEC's orders, each of the firms charged today missed those regulatory deadlines. In addition, the orders find that certain firms failed to include information and language specifically required for Form CRS.

The SEC's orders find that the investment advisers violated Section 204 of the Investment Advisers Act of 1940 and Advisers Act Rules 204-1 and 204-5, and that the broker-dealers violated Section 17(a)(1) of the Securities Exchange Act of 1934 and Exchange Act Rule 17a-14.  Without admitting or denying the findings, each of the firms agreed to be censured, to cease and desist from violating the charged provisions, and to pay the following civil penalties:

  • Arthur Zaske & Associates, LLC, a Bingham Farms, Michigan-based investment adviser, has agreed to pay a $15,000 civil penalty.
  • Banyan Securities, LLC, a Greenbrae, California-based broker-dealer, has agreed to pay a $10,000 civil penalty.
  • Church, Gregory, Adams Securities Corporation, a Decatur, Georgia-based broker‑dealer, has agreed to pay a $10,000 civil penalty.
  • Gutt Financial Management, LLC, an Atlanta, Georgia-based investment adviser, has agreed to pay a $25,000 civil penalty.
  • Hinsdale Associates, Inc., a Hinsdale, Illinois-based investment adviser, has agreed to pay a $25,000 civil penalty.
  • J.K. Financial Services, Inc., a Norco, California-based broker-dealer, has agreed to pay a $10,000 civil penalty.
  • N.V.N.G. Investments, Inc., a Kalamazoo, Michigan-based investment adviser, has agreed to pay a $15,000 civil penalty.
  • Personal Financial Planning, Inc., a Deerfield, Illinois-based investment adviser, has agreed to pay a $25,000 civil penalty.
  • Stone Run Capital, LLC, a New York, New York-based investment adviser, has agreed to pay a $25,000 civil penalty.
  • The Winning Edge Financial Group, Inc., a Clifton, New Jersey-based broker-dealer, has agreed to pay a $10,000 civil penalty.
  • Wall Street Access, a New York, New York-based broker-dealer, has agreed to pay a $97,523 civil penalty.
  • Watermark Securities, Inc., a New York, New York-based broker-dealer, has agreed to pay a $25,000 civil penalty.

On July 26, 2021, the SEC announced settlements with 27 other financial firms for similar failures to timely file and deliver their Forms CRS to their retail investors. Three other investment advisers subsequently settled with the SEC in separate administrative proceedings:  Disciplined Capital Management LLC; Lexicon Capital Management LP; and Newman Ladd Capital Advisors, LLC. 

Senior Investors / FINRA Adopts Amendments to FINRA Rule 2165 / Effective Date: March 17, 2022 (FINRA Regulatory Notice 22-05 / February 15, 2022)
As set forth in the "Summary" portion of the FINRA Regulatory Notice:

FINRA has adopted amendments to Rule 2165 (Financial Exploitation of Specified Adults) to permit member firms to: (1) place a hold on a securities transaction (in addition to the already-permitted hold on a disbursement of funds or securities) where there is a reasonable belief of financial exploitation; and (2) extend a temporary hold on a disbursement or transaction for an additional 30 business days, beyond the current maximum of 25 business days (for a total of 55 business days), if the member firm has reported the matter to a state regulator or agency, or a court of competent jurisdiction. The amendments to Rule 2165 become effective March 17, 2022.

John F. Casey, 58, the former Chief Financial Officer of the Boston Grand Prix, pled guilty in the United States District Court for the District of Massachusetts to 23 counts of wire fraud, 3 counts of aggravated identity theft, 4 counts of money laundering and 3 counts of filing false tax returns; and he was was sentenced to four years in prison and three years of supervised release, and ordered to pay $1,998,097 in restitution and to forfeit $1,570,399. As alleged in part in the DOJ Release:

Casey became the CFO of the Boston Grand Prix in January 2015. The Boston Grand Prix organization made payments to, or on behalf of, Casey totaling approximately $308,292 in 2015 and $601,073 in 2016 which Casey failed to include in the gross income he claimed on his personal tax returns for those years.

Casey also owned an ice rink in Peabody from October 2013 until he sold it in June 2016. Between October 2014 and October 2016, Casey obtained over $743,000 in funds from equipment financing companies, purportedly for the purchase of equipment for the ice rink, when in fact he no longer owned the rink for four months during this period. In addition, in August 2016, more than two months after he sold the Peabody rink, Casey obtained over $145,000 in small business loans for the rink business. In order to secure the financing, Casey submitted false documents and information including fake invoices for the equipment, bank records purporting to show deposits into Casey's accounts related to the Peabody rink, inflated personal and corporate tax returns and personal financial statements falsely claiming ownership and value of various assets. Casey also submitted a fake Deed of Sale containing a forged signature in support of one of his loan applications. Relying on Casey's false statements, the financing companies provided funding to Casey in amounts and on terms they otherwise would not have made. Most of the funds provided by the victim companies were never repaid.

In addition, between March 2020 and at least May 2021, Casey orchestrated a scheme to fraudulently obtain Economic Injury Disaster Loans and Paycheck Protection Program loans from the SBA and a Massachusetts Sector-Specific Relief Grant - available under the Coronavirus Aid, Relief, and Economic Security Act - by submitting false applications for companies he created and controlled and by improperly using the fraudulently obtained loan and grant funds for personal expenses. Specifically, Casey submitted at least 14 loan applications to the SBA and intermediary lenders which contained false information concerning, among other things, the gross revenues of the companies during the year prior to the COVID-19 pandemic, the average monthly payroll of the companies and the existence of some of the companies.

In the course of his pandemic assistance fraud, Casey stole the identities of two women and used their personal identifying information to file fraudulent applications. Finally, in January 2021, while awaiting trial for the financing fraud scheme, Casey submitted an application for a $70,000 pandemic-related relief grant to the Massachusetts Growth Capital Corporation containing false information about the operating expenses of a company that was not in business in 2019 or 2020. Between April 2020 and April 2021, approximately $676,552 in COVID-19 relief funds was deposited into bank accounts controlled by Casey, and he used the vast majority of the funds for personal expenses, including a three-carat diamond ring which was ordered forfeited, a six-month membership to, private school tuition, residential rent payments, living expenses, payments on personal credit card accounts, restaurant meals, car payments and luxury hotel stays.  

Casey also laundered the proceeds of his fraud schemes and failed to include the income from the Peabody rink fraud scheme on his 2014, 2015 and 2016 personal federal tax returns. 

Bill Singer's Comment: A six-month membership to Not an annual membership. Not a trial membership. But a six-month membership. And this from a guy who engaged in theft for the purpose of buying a three-carat diamond, paying tuition, running up a personal tab for a number of things including luxury hotel stays. Despite all that criminality, Casey was looking for love online. How's that lyric go about lookin' for love in all the wrong places?
Juan Carlos Montalbo, 59, pled guilty in the United States District Court for the Eastern District of California to conspiracy to commit wire fraud; and he was sentenced to two years in prison. Previously, co-defendant Wayne Arthur York II was sentenced to five months' time served, two years of supervised release, and ordered to pay $449,980 in restitution; and co-defendant Marco Antonio Ramirez Zuno was sentenced to two years' time served and ordered to pay $1,108,375 in restitution. As alleged in part in the DOJ Release:

[M]ontalbo, while working in the timeshare industry in Puerto Vallarta, Mexico, would tell timeshare owners that he could guarantee the sale of their existing timeshare vacation rentals, often to pay for other timeshare products Montalbo was attempting to sell them. He and his coconspirators would guarantee the sales and would represent that buyers were already arranged who were ready to pay for the timeshares. In truth, no buyers had actually been arranged. Instead, other coconspirators would convince the victims of the fraud to wire additional money from bank accounts in the United States and Canada to bank accounts in Mexico for alleged up-front payments including taxes, fees, and commissions to make the sale of the timeshare occur. The conspirators would assure victims that the non-existent buyers had already deposited money into trust accounts and that the sellers' up-front fees would be fully reimbursed from those funds after the sale was complete.

Bill Singer's Comment: As I sit home trying to wait out the Covid pandemic, I binge watch House Hunters International and Mexico Life, and gnaw at the bit as I await the chance to fly to Cabo or Puerto Vallarta or Cancun and buy my retirement home. Alas, it will likely never happen but it's still fun to dream. All that aside, did I miss the episode(s) about the Mexican timeshare fraud? I saw all the stuff about the sunny Gulf and the soft-sand beaches and the ripe avocados and the tasty shrimp and the tequila and the tequila and the tequila (did I mention the tequila?) -- oh, and let's not forget all the margaritas!

On Monday, the Securities and Exchange Commission took another step to promote transparency in our markets. The public now has access to critical information about security-based swap transactions, including the key economic terms, price, and notional value. This development strengthens post-trade transparency and efficiency in the security-based swaps market, which historically has operated in the dark.

The 2008 financial crisis had many chapters, but a form of security-based swaps - credit default swaps, particularly those used in the mortgage market - played a lead role throughout the story. Under Title VII the Dodd-Frank Act, Congress determined that the security-based swap markets would benefit from more transparency, which would promote more efficient markets and lower risks.

As the collapse of the family office Archegos Capital Management last March showed, security-based swaps continue to have an important impact on our markets. Total return swaps, a type of security-based swaps, contributed to the transmission of risk during the firm's failure last year.

Thus, this week's milestone builds on additional work the SEC completed in the fall with respect to security-based swaps. In November, security-based swap dealers and major security-based swap participants started registering with the Commission, and market participants started reporting post-trade transaction data to the SEC and, under appropriate circumstances, other regulators. In December, the Commission proposed a rule to require public reporting of certain information relating to large security-based swap positions.

Altogether, these new requirements will greatly enhance post-trade transparency in the security-based swaps market on a transaction-by-transaction basis.

I'd like to thank the SEC's staff on the work they've done in standing up the Commission's security-based swap regime. I continue to be impressed by the dedication the staff has brought to this work.

In a FINRA Arbitration Statement of Claim filed in April 2020 and as amended, the public customer Claimants asserted fraud; breach of fiduciary duty; negligence; strict liability; and failure to supervise. The FINRA Award characterizes the causes of action as relating "to investments in an allegedly risky private placement, while taking a 7% commission." Initially, Claimants sought at least $1.16 million in compensatory damages, punitive damages, interest, fees, and costs. Respondents generally denied the allegations and asserted affirmative defenses. Claimants Wolf, Cameron, Grigg and Vacirca dismissed their claims with prejudice prior to the evidentiary hearing. The FINRA Arbitration Panel found Respondents jointly and severally liable and ordered them to pay compensatory damages as follows:

a. Claimant Reilly: $80,000.00
b. Claimant Ande: $32,000.00
c. Claimant Freshwater: $160,000.00
d. Claimant Rothstein: $80,000.00
e. Claimant Hieronymus: $80,000.00
f. Claimant Hassett: $80,000.00

Additionally the FINRA Arbitration Panel awarded interest on the compensatory damages, $130.65 in costs, and $600 as reimbursement for the filing fee.
Try as it might, wish as it might, Robinhood just can't seem to stay out of the press these days. In today's news, an unhappy Robinhood customer sued the brokerage firm in court despite the existence of a mandatory arbitration provision in the New Account Agreement. On top of that, with the ongoing COVID pandemic, it appeared that the customer was in no position to travel out of state, as would have been mandated by the arbitration provision.
Albert Einstein famously quipped that "Life is just like a game, First you have to learn rules of the game, And then play it better than anyone else." Those are sage words for Wall Street's regulators as they attempt to run their newfangled gamification ball into the end zone. Of course, there are still some quarterbacks who will come to the line of scrimmage, opt not to run the coach's play, and audible. Sometimes that's a gutsy call. Other times, not a smart play.