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Securities Industry Commentator by Bill Singer Esq

March 3, 2022










http://www.brokeandbroker.com/6316/finra-loan-awc/
A close friend of yours is in a bind and needs a few thousand bucks for home renovations. You lend him the money.  As it turns out, you're a stockbroker. Happily, your friend fully repays you. Some of the repayment comes from the friend's brokerage account and some comes from his bank account. No one's complaining. Everyone's happy. That is, until FINRA pokes its nose into the loan.

Without admitting or denying the findings in an SEC Order,  registered investment adviser City National Rochdale, LLC ("CNR") agreed to cease and desist from committing or causing any future violations of these provisions; be censured; provide notice of the settlement to affected advisory clients; retain an independent compliance consultant; and pay disgorgement, prejudgment interest, and a civil penalty totaling $30,361,803 that will be distributed to investors through a Fair Fund. The SEC Order found that CNR violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. As alleged in part in the SEC Release:

[F]rom at least 2016 through 2019, CNR, which has discretionary authority over client accounts, failed to inform its clients of its practice of investing their assets in proprietary mutual funds that generate fees for CNR and its affiliates, rather than in competitor funds whose fees may be lower. Additionally, the SEC's Order finds that from at least 2016 until 2019, CNR failed to inform some prospective clients that they could invest in CNR's proprietary funds at lower cost. Clients who opened accounts with certain CNR affiliates did not pay annual marketing or distribution fees, known as 12b-1 fees, but most clients who invested with CNR through their own financial advisors did.

  In a FINRA Arbitration Statement of Claim filed in October 2020 and as amended, associated person Claimant Olson asserted fraudulent inducement; tortious interference with prospective economic advantage; and defamation on the Form U5 in connection with his employment and termination thereof by Respondent Wells Fargo Advisors. As of the hearing, Claimant sought $250,000 to $750,000 in compensatory damages on his fraud  claim; $250,000 to $1,750,000 on his defamation claim; $250,000 in punitive damages on his fraud claim; and $250,000 in punitive damages on his defamation claim. Respondent Wells Fargo generally denied the allegations, asserted affirmative defenses, and filed a Counterclaim asserting breach of contract relating to the Wells Fargo Agreement Regarding Trade Secrets, Confidential Information, Non-Solicitation, and Assignment of Inventions ( and sums allegedly due by Claimant to Respondent pursuant to a Promissory Note. As of the hearing, Respondent sought $367,372.78 in compensatory damages on the Note and $200,000 to $300,0900 on the violations of the Agreement.
  The FINRA Arbitration Panel found Respondent Wells Fargo liable to and ordered it to pay to Claimant Olson $700,000 in fraud compensatory damages, $700,000 in defamation compensatory damages, $200,000 in punitive fraud damages "based upon intentional omission of highly material information in the recruitment of Claimant which omissions were intended to deceive and did in fact deceive Claimant," and $200,000 in punitive defamation damages "based upon the vindictive and defamatory nature of Respondent's filing of the amended U5 for Claimant." Also, the Panel awarded to Claimant interest and $600 in reimbursed filing fees. Pointedly, as to the punitive defamation award, the Panel recommended the expungement of the defamatory information and found that:

[I]n the process of filing that amended U5, WFA failed to follow filing requirements outlined in FINRA's requirements and guidelines and acted inconsistently with earlier and later more egregious takings of WFA's highly confidential non-protocol customer information by other terminated financial advisors. The Panel concludes that, under all of the evidence and reasonable inferences therefrom, the filing of and the information in the amended U5 was both vindictive and defamatory in nature causing material and continuing harm to Claimant's reputation and career as a financial advisor.

 The FINRA Arbitration Panel found Claimant Olson liable to and ordered him to pay to Respondent Wells Fargo $367,372.78 on the Promissory Note claim.
  The Panel ordered that its Awards be set-off, which resulted in a Net Award to Claimant Olson of $1,032,627.22.
Bill Singer's Comment: All of which prompts me to ask -- to wonder, to muse -- whether FINRA will rouse itself to take some meaningful, proportionate, regulatory action against Wells Fargo, even if the response is undertaken grudgingly and the sanctions tepid. After all, it was less than a month ago when both FINRA and Wells Fargo suffered this black eye:

Court Finds FINRA Arbitration Process Not Fundamentally Fair (BrokeAndBroker.com Blog /  February 4, 2022)
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."

https://www.sec.gov/litigation/litreleases/2022/lr25339.htm
In a Complaint filed in the United States District Court for the Eastern District of New York
https://www.sec.gov/litigation/complaints/2022/comp25339.pdf, the SEC charged Joseph Orazio DeGregorio with violations of the antifraud provisions of the federal securities laws. DeGregorio has agreed to settle with the SEC and be enjoined from future violations of the charged provisions. A parallel criminal action was filed against DeGregorio. As alleged in part in the SEC Release:, DeGregorio:

solicited $1.2 million dollars from four investors, ages 78 to 94, by claiming that he would invest their funds in two private companies and in a promissory note with a guaranteed 13% annual return. According to the complaint, the promissory note was fake, and the private companies - which did not carry out any real business activities - were created by DeGregorio to facilitate his fraud. As alleged, DeGregorio stole most of the investors' money, and used a portion of the funds to repay investors in a Ponzi-like fashion.

In a Complaint filed in the United States District Court for the Southern District of Iowa
https://www.sec.gov/litigation/complaints/2022/comp25340.pdf, the SEC charged Cambridge Investment Research Advisors, Inc. ("CIRA") with violating Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder; and the Complaint also names Cambridge Investment Research, Inc. as a Relief Defendant. As alleged in part in the SEC Release:

[S]ince at least 2014, CIRA repeatedly breached its fiduciary duty to advisory clients by failing to disclose material conflicts of interest. In particular, the complaint alleges that CIRA invested client assets in certain mutual funds and money market sweep funds that generated millions of dollars in revenue sharing payments to an affiliated broker-dealer, Cambridge Investment Research, Inc., instead of lower-cost share classes and investment options that would have yielded less or no revenue sharing. These undisclosed investment practices, the complaint alleges, also allowed CIRA to avoid paying millions of dollars in transaction fees. In addition, according to the complaint, CIRA converted hundreds of accounts to its more expensive wrap account program without adequate disclosure and without analyzing whether doing so was in its clients' best interests. The complaint further alleges that CIRA failed to disclose that its investment adviser representatives received compensation in the form of forgivable loans in exchange for meeting certain criteria such as maintaining certain asset levels and tenure with CIRA.

In an Indictment filed in the United States District Court for the Eastern District of New York, Stephen Burton and James Wellesley were charged with fraud conspiracy, wire fraud and money laundering conspiracy. As alleged in part in the DOJ Release:

[F]rom at least June 2017 and continuing through February of 2019, the defendants posed as executives of a company called Bordeaux Cellars.  The defendants solicited investors, including residents of the Eastern District of New York, at investor conferences held in the United States and overseas.  The defendants claimed to investors that Bordeaux Cellars brokered loans between investors and high-net-worth wine collectors that would be fully collateralized by high-value collections of wine.  The defendants promised that investors would receive regular interest payments from the borrowers, and that Bordeaux Cellars would keep custody of the wine pledged as collateral while the loans were outstanding.  As alleged, these representations were false, the "high-net-worth wine collectors" did not actually exist and Bordeaux Cellars did not maintain custody of the wine purportedly securing the loans.  Instead, the defendants used incoming loan proceeds to make fraudulent interest payments to investors and for their own personal expenses.  Burton is a fugitive. Anyone with information related to his whereabouts is asked to contact the FBI by calling 1-800-CALL-FBI or by visiting tips.fbi.gov

https://www.justice.gov/usao-wdtx/pr/man-indicted-frac-sand-ponzi-scheme
In an Indictment filed in the United States District Court for the Western District of Texas, Marco Perez, Jr., a/k/a Sully Perez (the founder and director of Permian Basin Proppants, Inc. ("PBP")) was charged with 12 counts of Wire Fraud and 6 counts of Engaging in Monetary Transactions in Property Derived from Specified Unlawful Activity. As alleged in part in the DOJ Release:

[B]etween 2017 and 2022, Perez allegedly used PBP to perpetuate a Ponzi scheme by soliciting investor money based on misrepresentations.  During this time, Perez took in over $11 million through the scheme.  He used most of the funds for his own personal benefit, buying luxury vehicles, property and vacations.

According to the indictment, Perez offered victims the opportunity to fund or invest in PBP transactions.  However, the representations Perez allegedly made were based on false and misleading promises, such as promising victims that their investments would be used to purchase frac sand at a discount and then be resold at a profit to fracking operations in and around the Permian Basin. Investors also were promised they would receive back their entire investment plus an additional return.  Perez rarely used the investment money to purchase frac sand or complete promised transactions. Instead, he is accused of diverting significant amounts of investor money to pay for his personal expenses and to keep the scheme running, such as by making payments to prior PBP investors.

https://www.justice.gov/Usao-wdmi/pr/2022_0228_Boden
Christopher Allan Boden, a/k/a "Captain," 46; Daniel Reynold DeJager, a/k/a "Daniel Miester" and "Danichi," 35; and Leesa Beth Vogt, a/k/a "Lis Bokt," and "Moose," 37, pled guilty in the United States District Court for the Western District of Michigan to, respectively, 
  • (Boden) operating an unlicensed money transmitting business, money laundering, and structuring deposits to evade financial institution reporting requirements; 
  • (DeJager) conspiracy to operate an unlicensed money transmitting business and money laundering; and 
  • (Vogt) structuring while operating the unlicensed money transmitting business. 
The Defendants were sentenced as follows:
  • Boden: 30 months in custody and ordered to pay $75,000 and forfeit bitcoin, among other penalties.  
  • DeJager: 10 months in custody for his role in the scheme and was ordered to pay $25,000
  • Vogt: four years of probation and ordered to pay $62,711 to the government.  In total, the defendants forfeited and were ordered to pay more than $200,000 in bitcoin and U.S. currency.
As alleged in part in the DOJ Release:

[B]oden, DeJager, and Vogt operated an unlicensed money transmitting business at The Geek Group, a registered non-profit entity, between March 2017 and December 2018, when federal agents searched the business.  After the search, Boden, who was president of The Geek Group, and Vogt, its executive director, decided to close the business.  DeJager purchased bitcoin from registered exchanges, often laundered it, and then sent it to Boden to sell.  Boden and other staff at The Geek Group, including Vogt, would sell bitcoin to customers.  Boden, Vogt, and others then "structured" deposits of the cash proceeds to avoid detection of their operation and to purchase more bitcoin.  The defendants sold more than $740,000 in bitcoin.  Boden's customers included drug dealers, and he held himself out to be a money launderer, explaining to prospective customers that "people buy from" him because he sold "clean" bitcoin, not "dirty" bitcoin that could be traced.  Boden boasted that he did not collect certain information required to be collected by a federal law that prevents money laundering, commonly known as "know your customer" information. 

In connection with sentencing, DeJager explained to the Court that he and Boden started selling bitcoin because of their "anarchy streak": they were drawn to "[t]he possibility of making a lot of money while deposing government controlled currency with one that was anonymous."  Boden acknowledged to the Court that they "mixed" bitcoin to thwart anti-money-laundering controls put in place by licensed cryptocurrency exchanges: they knew licensed exchanges would not sell them bitcoin if the exchanges discovered Boden's customers were doing "something . . . illegal with it." 

Boden also solicited an undercover agent to collect a bitcoin debt that had purportedly accrued to $500,000 by using violence if necessary.  Boden delivered a dossier with information on the debtor to the agent and said, among other things: "If all I wanted to do was f*** him up, his head in burlap is easy to do.  I want my money.  I don't give a f*** about him; I don't give a f*** about his family.  I want my money."  And: "What happens to him, I don't give a sh** . . . [Y]ou kill him, he ain't gonna pay me.  And, and I don't need him dead; he's dumb. . . . How you handle this, this is your world.  I care that I get my money back.  Beyond that, it's whatever's most efficient for you."  Boden told the agent, who he thought was a cocaine dealer, that a drug dealer was his "exact favorite kind of client."  Boden also said, "I want to get your world working on bitcoin."

https://www.justice.gov/usao-mdpa/pr/new-york-man-sentenced-12-years-imprisonment-13-million-fraud-scheme
Horace Henry, 45, pled guilty in the United States District Court for the Middle District of Pennsylvania to conspiracy to commit mail fraud and aggravated identity theft; and he was sentenced to 12 years in prison plus three years of supervised release and ordered to pay $705,803 in restitution. As alleged in part in the DOJ Release:

[H]enry and his co-conspirators executed a scheme to defraud Sprint through fraudulent cell phone service contracts that were created using the stolen personal identification information of 390 identity theft victims, resulting in bogus orders for 1,630 iPhone XR cell phones.  According to evidence presented at the sentencing, as a result of the fraud scheme approximately 892 iPhones were shipped to locations throughout the United States, including Centre, Northumberland, Montour, and Mifflin Counties.  The fraud and identity theft scheme caused Sprint to incur actual and attempted losses totaling approximately $1,338,247.  Henry and his co-defendants used shipment tracking numbers to determine when packages containing iPhones were scheduled for delivery, traveled from New York to the individual victims' residences in Pennsylvania and other states, and retrieved the packages at the delivery locations, or directly from delivery persons using counterfeit identification documents bearing the personal identification information of the individual victims and photos of the conspirators.

Frequently Asked Questions Regarding FINRA Rules Relating to Financial Exploitation of Senior Investors (FINRA FAQ)
https://www.finra.org/rules-guidance/guidance/faqs/frequently-asked-questions-regarding-finra-rules-relating-financial-exploitation-seniors
FINRA has posted a series of frequently asked questions concerning FINRA Rule 216: Financial Exploitation of Specified Adults. As set forth in part in the FINRA FAQ:

[R]ule 2165 permits a member to place a temporary hold on a securities transaction or disbursement of funds or securities from the account of a Specified Adult customer when the firm reasonably believes that financial exploitation of that adult has occurred, is occurring, has been attempted or will be attempted. FINRA Rule 4512 (Customer Account Information) requires members to make reasonable efforts to obtain the name of and contact information for a trusted contact person ("trusted contact") for a customer's account.

FINRA Fines and Suspends Rep In Tequila Fraud
In the Matter of Michael Mandel, Respondent (FINRA AWC 021070900301)
https://www.finra.org/sites/default/files/fda_documents/2021070900301
%20Michael%20Mandel%20CRD%204939165%20AWC%20jlg.pdf
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, Michael Mandel submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Michael Mandel was first registered in 2005, and bet3een August 2008 and December 2015, he was registered with Royal Alliance Associates, Inc.; and, from December 2015 to February 11, 2022, with LPL Financial LLC. In accordance with the terms of the AWC, FINRA found that Mandel violated NASD Rule 3040 (for conduct prior to September 21, 2015), FINRA Rule 3280 (for conduct on and after September 21, 2015), and FINRA Rule 2010; and the regulator imposed upon him a $5,000 fine, a $5,635.35 disgorgement, and a seven-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Mandel participated in private securities transactions by soliciting 18 investors, seven of whom were firm customers, to invest a total of approximately $815,000 in a tequila production company. Starting in approximately May 2014, and continuing until at least October 2016, Mandel invited investors to promotional events for the company, introduced them to the company's founder, and provided investors with documents regarding the opportunity to invest. Mandel received $5,635.35 from the tequila company and expected to receive a portion of the founder's equity in the company. 

During the relevant period, Royal Alliance Associates, Inc. and LPL each prohibited registered representatives from participating in private securities transactions. Mandel did not provide written notice to either firm prior to participating in the transactions, nor did he receive approval from either firm to participate in the transactions. Additionally, Mandel falsely stated on LPL's 2016 annual compliance questionnaire that he had not participated in private securities transactions outside of the firm. 

On November 15, 2021, the founder of the tequila company pled guilty to charges that he made false and misleading statements to investors in the tequila company and misused investor funds.3 On February 17, 2021, the SEC filed a complaint in the United States District Court for the Southern District of New York against the founder, alleging that he made material misrepresentations to investors in the tequila company and misappropriated investors' funds for personal use. The U.S. District Court issued a judgment against the founder and enjoined him from further violations of the securities laws on December 3, 2021.4 
= = = = =
Footnote 3: United States v. Cimino, Case No. 7:21-cr-334 (S.D.N.Y.).
Footnote 4:  SEC v. Cimino, Case No. 21-cv-1375 (S.D.N.Y.). 

As PUBLISHED In "SECURITIES INDUSTRY COMMENTATOR" (November 16, 2021) at

https://www.justice.gov/usao-sdny/pr/hudson-valley-tequila-producer-pleads-guilty-securities-fraud-scheme
Joseph Cimino pled guilty in the United States District Court for the Southern District of New York to an Information https://www.justice.gov/usao-sdny/press-release/file/1448046/download charging him with one count of securities fraud and one count of wire fraud. As alleged in part in the DOJ Release:

[F]rom in or about 2014 to 2018, CIMINO raised approximately $935,000 from at least 25 investors based on fraudulent representations.  To attract investors, CIMINO falsely inflated the amount of capital that he had raised from prior investors, and falsely described as investors several individuals who, in fact, had not contributed any funds.  CIMINO also falsely inflated his company's sales.  For example, in July 2017, CIMINO claimed in an investor report that year-to-date sales totaled 3,410 cases of tequila, when the actual sales totaled only 350 cases.  Similarly, in October 2017, CIMINO falsely claimed that year-to-date sales totaled 6,035 cases, which was approximately five times the actual total.  CIMINO further claimed in October 2017 that his company would receive reimbursement for 800 cases of tequila supposedly destroyed at a Puerto Rican warehouse as a result of Hurricane Maria.  In reality, no inventory was destroyed in the hurricane, and the company lacked insurance.

CIMINO also misused a substantial portion of investor money that was intended to fund the operations of his tequila business for personal expenses.  For example, from 2014 to 2018, CIMINO transferred approximately $472,000 of investor money to his personal bank account in order to subsidize his food, entertainment, and other living expenses.

 
https://www.finra.org/sites/default/files/fda_documents/2021070239501
%20Jayanth%20Hebbar%20CRD%205244889%20AWC%20jlg.pdf
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, Jayanth Hebbar submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Jayanth Hebbar was first registered in August 2018 with Jefferies LLC, where he was a Vice President, Fixed Income Technology and a Senior Software Developer. In accordance with the terms of the AWC, FINRA found that Hebbar violated FINRA Rules 3210 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:

From August 2018 through December 2020, Hebbar did not obtain Jefferies' prior written consent before opening, or continuing to maintain, at least 11 outside brokerage accounts in which Hebbar could effect securities transactions and had a beneficial interest. Prior to his association with Jefferies in August 2018, Hebbar had opened or otherwise established nine outside brokerage accounts. Hebbar disclosed one of those nine accounts on the Jefferies New Hire Compliance Questionnaire in August 2018. Hebbar did not obtain Jefferies' written consent to maintain the remaining eight of those accounts within 30 calendar days of becoming associated with Jefferies or at any other time. Hebbar also opened three outside brokerage accounts after his association with Jefferies without obtaining Jefferies' prior written consent to open the accounts. On account opening forms for one of the accounts, Hebbar misrepresented his employer and occupation and failed to disclose his association with Jefferies. Finally, for 10 of the 11 undisclosed outside brokerage accounts, Hebbar did not notify in writing the financial institutions at which he held the accounts that he was associated with Jefferies. 

Additionally, from August 2018 through December 2020, Hebbar engaged in thousands of transactions in several of the undisclosed outside brokerage accounts. Hebbar executed trades in approximately 56 securities on Jefferies' Expanded Watch List and in approximately 14 securities on Jefferies' Restricted List. By trading in securities on Jefferies' Expanded Watch and Restricted Lists, Hebbar violated firm policies. Hebbar further violated Jefferies' policies by not pre-clearing transactions in the undisclosed outside brokerage accounts and not adhering to required holding periods. 

Hebbar also signed and submitted compliance questionnaires while associated with Jefferies. On the questionnaires, Hebbar disclosed one brokerage account held at another FINRA member firm but did not disclose the existence of the other outside brokerage accounts. Instead, Hebbar improperly attested he had disclosed all outside employee and employee-related accounts. 

http://www.brokeandbroker.com/6324/nyppex-allen-finra-nyag/
Every so often, we are confronted with what I call the "three-handed dilemma" -- you know, when you start with "on the one hand," and then go to "on the other hand," and then find yourself compelled to note another "on the other hand." In an unfolding drama involving a private equity fund manager, the New York State Attorney General, a FINRA registered person, and FINRA, we are quickly running out of hands. On the one hand, we started with the NYAG's victory in a private-equity-fund fraud case. On the other hand, the defendants have appealed the court Order in the NYAG's case. On the other hand, FINRA stepped into the fray with some apparent justification but not without some questionable conduct of its own. Which then prompted a series of on the other hands when FINRA found itself in state court and then federal court and then back in state court. 

http://www.brokeandbroker.com/6315/warfield-icon-finra/
Let's assume that you just got called into your boss' office and fired. You're angry. The termination was garbage and undertaken in bad faith, or so you say. As you simmer in anger, you dial a lawyer, pay her retainer, and find yourself before a FINRA Arbitration Panel seeking damages for "wrongful termination." Your former employer says you're an at-will employee, and, further, that you and your lawyer are morons because, obviously, you can't wrongfully terminate someone who's an at-will employee. Cleverly, your lawyer argues to the arbitrators that an at-will employee can't be forced to litigate an employment dispute before a FINRA Arbitration Panel; and, since we're all arguing before such a panel, my client was not an at-will employee and, as such, he was wrongfully terminated! Read today's blog to see how the case fared.

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