Securities Industry Commentator by Bill Singer Esq

March 30, 2022

After a guilty verdict is rendered in a criminal trial, the convicted defendant often battles on via appeals and appeals and appeals. For some, it's about delaying the inevitable incarceration and fines; for others, it's a belief that the law was not followed. More often than not, after years of argument, the guilty verdict is affirmed. In a recent case, a defendant was convicted in 2018 of conspiracy to commit securities fraud and securities fraud but was still pursuing his appeals in 2022. My guess is that we will still be talking about this case in 2023.

In the Matter of Fidelity Transfer Services, Inc. and Ruben Sanchez (Opinion, '34 Act Rel. No. 94545, Invest. Co. Act Rel. No. 34548 / Admin. Proc. File No. 3-19243 / March 29, 2022)
As set forth in part in the SEC Opinion [Ed: footnotes omitted]:

On July 10, 2019, we issued an order instituting administrative proceedings ("OIP") against Fidelity Transfer Services, Inc. ("Fidelity" or the "Firm") and Ruben Sanchez, its only known officer, pursuant to Sections 17A(c) and 21C of the Securities Exchange Act of 1934 and Section 9(b) of the Investment Company Act of 1940. 1 We instituted proceedings to determine whether Fidelity and Sanchez violated Exchange Act provisions relating to the registration of transfer agents and the furnishing of required books and records to Commission staff and, if so, whether remedial action was warranted. The Division of Enforcement subsequently effected service of the OIP on Fidelity but informed us that it was unable to do so with respect to Sanchez, and the matter has since proceeded only as to Fidelity. We sua sponte dismiss this proceeding as to Sanchez. 

After Fidelity did not answer the OIP, we issued an order to show cause why it should not be found in default. Fidelity failed to respond to the show cause order or to the Division's subsequent motion for an order finding it in default and determining the proceeding against it.

We thereafter directed the Division to file a supplemental brief in support of its motion for sanctions. On January 15, 2021, the Division filed a supplemental brief that responded to our order. Fidelity did not respond to the order or to the Division's supplemental brief. We now find Fidelity to be in default, deem the OIP's allegations to be true, revoke Fidelity's registration as a transfer agent, and impose a cease-and-desist order on Fidelity.

Former Comptroller And Compliance Specialist At Investment Adviser Firm Pleads Guilty To Conspiring To Defraud Clients (DOJ Release)
Vania May Bell (the former comptroller and chief compliance officer of registered investment advisor/financial planning firm Executive Compensation Planners, Inc.) ("ECP")) pled guilty in the United States District Court for he Southern District of New York to one count of conspiracy to commit wire fraud. Bell's father,, Hector May (the former President of ECP) pled guilty in a separate case in December 2018, to charges of conspiracy to commit wire fraud and investment advisor fraud; and he was sentenced on July 31, 2019, to thirteen years in prison plus three years of supervised release, and ordered to pay $8,041,233 in restitution and forfeit $11,452,185.  As alleged in part in the DOJ Release:

Beginning in 1982, May was the president of ECP and provided financial advisory services to numerous clients. In 1993, BELL joined ECP, where she held various titles including comptroller and chief compliance officer.  ECP worked with a broker dealer ("Broker Dealer-1"), of which May became a registered representative in 1994.  In its role as a broker dealer, Broker Dealer-1 facilitated the buying and selling of securities for clients of Broker Dealer-1's registered representatives, including clients of May.  Broker Dealer-1 and associated clearing firms maintained securities accounts for ECP's clients and, through those accounts, held ECP's clients' money, executed their securities trades, produced account statements reflecting activity in the clients' accounts, and forwarded these account statements to ECP's clients. 

In order to obtain money from the Victims' securities accounts with Broker Dealer-1, May advised the Victims, among other things, that they should use money from those accounts to have ECP, rather than Broker Dealer-1, purchase bonds on their behalf.  He further represented that by purchasing bonds through ECP directly, the Victims could avoid transaction fees.  Because May lacked the authority to withdraw money directly from the Victims' accounts with Broker Dealer-1, he persuaded the Victims to withdraw the money themselves and to forward that money to an ECP "custodial" account (the "ECP Custodial Account"), so that he could use the money to purchase bonds on their behalf. 

With BELL's assistance, May guided the Victims, first, to withdraw their money from their Broker Dealer-1 accounts, and second, to send that money to the ECP Custodial Account by wire transfer or check.  At times, May falsely represented that the funds being withdrawn from Victims' Broker Dealer-1 accounts were the proceeds of prior bond purchases May had made.  After the Victims sent their money to the ECP Custodial Account, May and BELL did not use the money to purchase bonds.  Instead, BELL and May transferred the money to ECP's "operating" account and spent it on business expenses, personal expenses, and to make payments to certain Victims in order to perpetuate the scheme and conceal the fraud. 

Specifically, in some cases, BELL and May used Victims' funds to make purported bond interest payments to other Victims.  In other cases, May used Victims' funds to make payments to other Victims who wished to withdraw funds from their accounts.  BELL and May also created phony "consolidated" account statements that they issued through ECP and sent to the Victims.  These "consolidated" account statements purported to reflect the Victims' total portfolio balances and included the names of bonds May falsely represented that he purchased for the Victims and the amounts of interest the Victims were supposedly earning on the bonds.  In order to create the phony consolidated account statements, May provided BELL with bond names and false interest earnings, and BELL created ECP computerized account statements and had them distributed to the Victims.

To keep track of the money that the co-conspirators were taking from the Victims, BELL processed the Victims' payments for the purported bonds, entered them in a computerized accounting program, and, through that program, kept track of how BELL and May received and spent the Victims' stolen money.  In this way, from the late 1990's through March 9, 2018, BELL and May induced Victims to forward them more than $11,400,000.
Jason Peltz pled guilty in the United States District Court for the Eastern District of New York
to securities fraud and tax evasion. As alleged in part in the DOJ Release:

In February 2016, Peltz obtained MNPI from an insider at Ferro Corporation ("Ferro") about a potential takeover offer (the "Ferro Takeover Bid"). Peltz used that MNPI to:
  • Profitably trade in Ferro in the brokerage accounts of two co-conspirators,
  • Tip other individuals, each of whom also profitably traded on MNPI about the Ferro Takeover Bid, and
  • Tip a reporter, who wrote an article making public the news of the Ferro Takeover Bid, which resulted in an increase in the price of Ferro's stock.
Peltz and the Ferro insider each received significant financial benefits from other co-conspirators shortly after Peltz traded in those co-conspirators' brokerage accounts, and Peltz continued to receive large payments from co-conspirators, as well as other benefits, as payment for his trading activity. Peltz directed that these payments be made to corporate and nominee bank and credit card accounts, in order to conceal his income from the IRS. Despite receiving such payments, in 2017 Peltz falsely swore under penalty of perjury to the IRS that he had been unemployed since December 2015 and had no income.
Denise Grevas, 60, pled guilty in the United States District Court for the Northern District of Illinois
to securities fraud; and she was sentenced to one year and one day in prison and fined $100,000. As alleged in part in the DOJ Release:

Grevas admitted in a plea agreement that she made $286,960 in illegal profits from the purchase and sale of securities in a Washington state-based pharmaceutical company, which was a target for acquisition and later acquired by a foreign pharmaceutical company that employed Grevas's husband.  Grevas used material, non-public information about the expected acquisition to purchase shares in the Washington company ahead of a public announcement of the acquisition on Sept. 16, 2019.  After the announcement, the Washington company's stock price increased and Grevas sold the shares for the profit.
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 McDermott submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Michael McDermott was first registered in 1996, and by 2014, he was registered with FINRA member firm Wells Fargo Clearing Services, LLC. In accordance with the terms of the AWC, FINRA imposed upon McDermott a three-month suspension from associating with any FINRA member in all capacities. The AWC alleges that "On June 29, 2021, Respondent was granted a discharge in bankruptcy under 11 U.S.C. § 727. Accordingly, no monetary sanctions are being imposed in this matter." As alleged in part in the AWC:

In January 2019, McDermott placed a trade in the account of one of his customers without first obtaining the customer's authorization. The account was fee-based and thus McDermott earned no commission. In March 2019, the customer passed away. Unaware that the customer had died, in April 2019, McDermott placed multiple stop loss orders in the customer's account, several of which were later cancelled and three of which were later executed. 

Therefore, McDermott violated FINRA Rule 2010. 

. . .

On April 8, 2019, McDermott entered a note in the firm's electronic customer note system falsely indicating that he had spoken with the customer in connection with the stop loss orders referenced above. This was not possible as the customer had died in March. On May 15, 2019, after learning of the customer's death, McDermott edited the original note to inaccurately state that McDermott's conversation had occurred in January 2019. 

Therefore, McDermott violated FINRA Rules 2010 and 4511.
Is there a right to have legal counsel appointed in a civil court case? Interesting question and one that often elicits the wrong answer. In today's blog we come across the plight of a public customer Claimant who filed an arbitration claim against a FINRA member firm. Except the firm says she's not a customer and can't compel them to arbitrate. Where did the firm make that argument? In federal court. Which means that the Claimant now has to deal with both her FINRA arbitration and a federal court case. But she's representing herself pro se in the pending court matter, and, she asks the Court for help. Will she get it?
They would like you to believe that there is some super-duper, state-of-the-art regulatory oversight keeping an eye on Wall Street. In case you were wondering, there ain't no such vigilance. The industry sure as hell doesn't want it. The regulators sure seem more interested in self-serving publicity and the appearance of regulation rather than the substance. In the end, the regulation of Wall Street is more about what the public investor is willing to believe. Frankly, don't believe too much. If you pull the curtain back, there's no mighty wizard.