Securities Industry Commentator by Bill Singer Esq

April 25, 2022*trade-hillow-trust/
A Trustee opened an E*Trade account by providing his name and his social security number but also checking off the type of account as "Trust." What does that make the account? An Individual account? A Trust account? A failed account? When E*Trade got sued in state court by the customers, the Trustee argued that he had never executed any account agreement in his role as a Trustee but only in a "personal capacity." Will a federal court force the Trust into mandatory FINRA arbitration?
Nestor Concepcion, 26, pled guilty in the United States District Court for the District of Rhode Island
to conspiracy to commit bank fraud and three counts of bank fraud; and he was sentenced to 16 months in prison plus three years of supervised release and ordered to pay $33,645 in restitution. As alleged in part in the DOJ Release:

[B]eginning in October 2020, while on federal supervised release, having been convicted of bank fraud and sentenced in 2019 for participating in a similar conspiracy, Nestor Concepcion, 26, arranged for and coordinated the deposit of multiple counterfeit checks with an intended loss to banks totaling $71,717.77.

Two Men Are Facing Federal Charges In Connection With Multi-Million Dollar Investment Scheme (DOJ Release)
In an Indictment filed in the United States District Court for the Western District of North Carolina
Marlin Hershey and Dana Bradley were charged with mail and wire fraud conspiracy, mail fraud, securities fraud, and money laundering conspiracy. As alleged in part in the DOJ Release:

[F]rom approximately 2009 to 2021, Hershey and Bradley induced dozens of victims to invest millions of dollars in unregistered securities offerings, promoted by the defendants through Performance Holdings and other entities controlled by the defendants and other individuals, including Performance Retire on Rentals, LLC, Distressed Lending Fund, LCC, Moteng Funding, LLC and Southeast Lot Acquisitions, LLC, among others.

The indictment alleges that the investment materials Hershey and Bradley provided to victim investors in connection with these securities offerings contained false and/or misleading statements and failed to disclose material information. For example, the indictment alleges that the offering materials failed to disclose that the defendants received commissions based on the amount of investments they sold, and often provided investors with offering materials that represented the opposite - that nobody would be paid a commission in connection with the investments. In fact, the indictment alleges, the defendants received commissions that were typically 10% of an investor's initial investment and often received an additional commission when an investor extended an investment. In this manner, Hershey and Bradley were paid millions of dollars in undisclosed commissions from the sale of securities. In addition to the commissions, the indictment also alleges that the defendants received regular undisclosed "management" fees from the various entities.

According to allegations in the indictment, as part of the scheme, Hershey and Bradley also failed to disclose to investors other material information, including negative information about the defendants' backgrounds and the financial woes faced by some of the entities for which they were soliciting investments. To the contrary, because the defendants often solicited the same group of investors to invest in the various projects, the defendants took steps to conceal such financial difficulties by making undisclosed loans to various entities so that the entities could, in turn, make their required interest payments to investors. The indictment also alleges that Hershey and Bradley solicited new investors and, contrary to representations they made to the investors, used the new investors' money to repay the loans and previous investors. The defendants also allegedly sent to investors periodic reports about the status of the investments that failed to include material negative information.

According to the indictment, in 2019, investors learned that several of the projects in which they had invested were in financial distress and could no longer meet their obligations to investors, which totaled several million dollars. 

Matthew White, 29, pled guilty in the United States District Court for the Western District of Washington to wire fraud, and he was sentenced to 30 months in prison. As alleged in part in the DOJ Release:

[B]etween 2011 and 2018, White solicited funds from investors in Florida and Washington State.  White represented that he would use the money to successfully trade in futures contracts first under his own name, and later under the name of his company, M.W. Global Futures LLC, of which he was the sole member.  White claimed to have expertise as a commodities trader, with special training.  He also claimed to be a member of the Chicago Board of Trade.  All of these claims were false.

White provided promotional materials that claimed his trading would provide a high return on investment.  In October 2017, he sent one elderly investor a brochure claiming a return on investment in excess of 16% annually.   Once he got their funds, White sent investors statements purporting to show substantial trading activity and profits.  The statements also showed White's commissions, which were allegedly tied to the level of profits.  White sent some of these fictitious statements via email, constituting wire fraud.  Very little of the money was actually traded in investment accounts, and the investments that were traded resulted in losses.

Of the $1.29 million, White repaid approximately $425,000 as redemptions and purported profits during the scheme.  In November 2018, White was contacted by investigators from the Commodity Futures Trading Commission.  He then repaid an additional $602,000 to two victims.  White owes the remaining $281,970 in restitution to his victims.  According to White's defense counsel, he is paying $80,000 towards that restitution amount today, before his prison term.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-94789; Whistleblower Award Proc. File No. 2022-53)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending an Award of about $6,000,000 to Claimant 1 (described as "joint claimants") and Claimant 2 (also described as "joint claimants"). CRS recommended the denial of an Award to another Claimant.
The SEC adopted CRS' recommendation. The Order asserts that [Ed: footnote omitted]:

[C]laimant 1 provided staff with key documents that led the staff to seek additional documents from the respondent, which formed the core of the Commission's case. Claimant 1 also provided ongoing assistance to the staff as the investigation progressed, providing documents and information to assist the staff's understanding of the respondent's business practices. With regard to Claimant 2, we considered that Claimant 2's information provided valuable first-hand accounts of the respondent's wrongdoing, and that Claimant 2 was familiar with the respondent's systems and business processes. Claimant 2 was also interviewed by the staff and provided continuing assistance, including on-the-record testimony. 

 As further noted in the SEC Order: 

Unless Claimant 1 or Claimant 2, within ten (10) calendar days of the issuance of this Order, makes a joint request, in writing, for a different allocation of the award, the Office of the Whistleblower is directed to pay each member of Claimant 1 individually one-half of their joint award and to pay each member of Claimant 2 individually one-third of their joint award.
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, Philip Marchese submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Philip Marchese was first registered in 2011, and by August 2017, he was registered with Spartan Capital Securities, LLC. In accordance with the terms of the AWC, FINRA found that Marchese violated FINRA Rules 2111 and 2010, and the regulator imposed upon him a $50,000 partial restitution and a 12-month suspension from associating with any FINRA member in all capacities. As alleged in part in the FINRA AWC:

From September 2017 through November 2019, Marchese engaged in quantitatively unsuitable trading in four customer accounts. Marchese recommended high frequency trading in the four customer accounts. Marchese's customers routinely followed his recommendations and, as a result, Marchese exercised de facto control over the four customers' accounts.

Marchese's trading resulted in high turnover rates and cost-to-equity ratios as well as significant losses, as set forth below. 

1. From August 2017 to November 2019, Marchese effected 148 transactions in Customer A's account, resulting in an annualized turnover rate of 18.9 and an annualized cost-to-equity ratio of 62%. Marchese's trading in Customer A's account generated total trading costs of$143,237, including $132,121 in commissions, and caused $159,460 in realized losses. 

2. From October 2018 to October 2019, Marchese effected 17 transactions in Customer B's account, resulting in an annualized turnover rate of 6. 76 and an annualized cost-to-equity ratio of 42%. Marchese's trading in Customer B's account generated total trading costs of $4,607, including $3,405 in commissions, and caused $23,202 in realized losses. 

3. From Septe1:11ber 2017 to March 2019, Marchese effected 87 transactions in Customer C's account, resulting in an annualized turnover rate of 31.87 and an annualized cost-to-equity ratio of 161 %. Marchese' s trading in Customer C's account generated total trading costs of $66,335, including $59,859 in commissions, and caused $22,508 in realized losses. 

4. From April 2018 to September 2019, Marchese effected 44 transactions in Customer D's account, resulting in an annualized turnover rate of37.23 and an annua)jzed cost-to-equity ratio of 196%. Marchese's trading in Customer D's account generated total trading costs of $30,466, including $27,307 in commissions, and caused $41,157 in realized losses. 

Marchese's trading in these four customers' accounts was excessive and unsuitable given the customers' investment profiles. As a result of Marchese's excessive trading, the customers suffered collective realized losses of $246,327 while paying total trading costs of $244,645, including commissions of $222,692.