Securities Industry Commentator by Bill Singer Esq

May 10, 2022
On Wall Street, the regulated and the regulators each have a role to play in the regulatory scheme. The regulated need to follow the rules. The regulators need to ensure that the rules are followed. Unfortunately, the industry's rulebook isn't so much a single volume as it is a massive encyclopedia with annual yearbook updates -- a reference for those old folks among us who still remember the hard-copy likes of an Encyclopedia Britannica. For regulation to work, there needs to be a sensitivity to the difference between willful and inadvertent noncompliance. Beyond merely imposing fines, Wall Street regulators have an obligation to timely flag oversights and misunderstandings. Unfortunately, on modern day Wall Street, too much of the art of regulation seems mired in gotcha.

Former San Bernardino County Sheriff's Deputy Pleads Guilty to Fraud and Tax Charges in Multimillion-Dollar Investment Swindle (DOJ Release)
Christopher Lloyd Burnell (a former San Bernardino County sheriff's deputy) pled guilty inn the United States District Court for the Central District of California to 11 counts of wire fraud and two counts of filing a false tax return. As alleged in part in the DOJ Release:

[B]urnell falsely claimed to have accumulated tens of millions of dollars from lawsuits he purportedly won against the San Bernardino County Sheriff's Department and Kaiser Permanente; from selling a patent for an air-cooled, bullet-resistant vest to Oakley Inc.; and through investments in small businesses and money-lending opportunities. The scheme began no later than November 2010 and continued until September 2017.

After deceiving victims into believing he was a wealthy businessman, Burnell then induced victims to invest up to hundreds of thousands of dollars at a time with him by offering exclusive investment opportunities that promised rates of returns as high as 100% to be repaid in a few weeks, according to prosecutors' trial memorandum. In some instances, Burnell asked the victim for an initial trial investment with him, during which he would fulfill his promised returns - and gain the victim's trust - only to ask for a larger amount from them.

But these investment opportunities did not exist. Rather, Burnell spent the money on maintaining a life of luxury. Burnell spent victims' money on, among other things, gambling and luxury items, including losing more than $2 million in gambling at the San Manuel Casino in Highland, $500,000 in private jet trips, $70,000 on Louis Vuitton merchandise, and $175,000 on luxury cars and an apartment lease for his then-girlfriends, the trial memorandum states. Burnell continued this investment fraud scheme for years until he could not identify new victims to defraud and the money from his victims ran out.

Burnell caused victim-investors to distribute at least $5,672,380 to him, according to court documents.

As victims began to raise concerns to him about a lack of repayment and defaults, Burnell claimed that his money had been tied up in a trust fund and his remaining assets had been seized by federal authorities. He then cheated some of the victims out of additional funds by falsely claiming he needed loans to pay for his then-wife's cancer treatment, a child custody dispute with his father-in-law, and other personal expenses.

To alleviate victims' concerns, Burnell showed many victims a fabricated Wells Fargo bank statement that said he had more than $150 million in his account that he would use to pay back victims once his funds were no longer tied up. In truth, Burnell had less than $6,500 in that account.

Burnell did not report any of the money he received from victims in 2011 or 2012 on his personal income tax returns that he filed jointly with his then-wife. Instead, Burnell only reported income from gambling winnings in 2011 and 2012 - estimated to be more than $1 million - all of which was purportedly offset by gambling losses.
In a Complaint filed in the United States District Court for the Eastern District of New York, Idris Dayo Mustapha was charged with computer intrusion, securities fraud, money laundering, bank fraud and wire fraud, among other offenses. As alleged in part in the DOJ Release:

[S]tarting in 2011, Mustapha and his co-conspirators engaged in a long-running scheme to steal money through a variety of computer intrusions and frauds.

In one part of the scheme, Mustapha and his co-conspirators allegedly obtained login information for victims' securities brokerage accounts through various methods.  The conspirators then used their access to those accounts to steal money and conduct trades to their own benefit.  Initially, conspirators accessed the victims' brokerage accounts and transferred money from those accounts to other accounts under their control.  After financial institutions began to block those unauthorized transfers, Mustapha and his co-conspirators accessed other victims' brokerage accounts and placed unauthorized stock trades within those accounts while simultaneously trading profitably in the same stocks from accounts that they controlled.  For example, on or about April 16, 2016, Mustapha and a co-conspirator exchanged electronic chat messages in discussing this unauthorized trading.  During the exchange, Mustapha's co-conspirator announced access to the computers of a brokerage firm and questioned whether to engage in unauthorized trading or simply to wire money out of the brokerage account.  Mustapha wrote back: "better to go trade up and down and [] not direct fraud wire." Additionally, as part of the scheme, Mustapha flew to New York in June 2015 and opened an account at a U.S. financial institution in New Jersey; Mustapha and his co-conspirators later transferred approximately $104,000 from a brokerage account used to conduct unauthorized trading to Mustapha's U.S. bank account.

In another part of the scheme, Mustapha and his co-conspirators allegedly obtained login information for victims' email accounts and accessed those accounts without authorization to obtain financial and personal identifying information about their victims.  The conspirators then contacted the victims' financial institutions-by phone and by email messages -- requesting that the victims' financial institutions wire money from the victims to overseas bank accounts that the conspirators controlled.  For example, in May 2013, Mustapha and his co-conspirators obtained $50,000 from an investment account that belonged to U.S. victims, and Mustapha directed the transfer of those funds to a series of bank accounts controlled by the conspirators.  In April 2013, Mustapha and his co-conspirators attempted to defraud a victim located in the Eastern District of New York by obtaining control over the victims' email account and using it to send written instructions-which falsely appeared to have been signed by the victim-to transfer $225,000 from one of the victim's accounts, but the victim's financial institution rejected the transfer request. 

As a result of these schemes, Mustapha and his co-conspirators realized financial gains while causing losses of more than $5 million to financial institutions, including brokerage firms.
Florin Vaduva pled guilty in the United States District Court for the District of Maryland to conspiracy to commit bank fraud and wire fraud; and he was ordered to pay at least $1,085,151.42 in restitution.  As alleged in part in the DOJ Release:

[F]rom June 2018 to January 2021, Vaduva, Mateus Vaduva, Nicole Gindac, Daniel Velcu, Marian Unguru, Vali Unguru, and others conspired to steal checks from the U.S. mail intended for religious institutions and deposit the illegally obtained funds into multiple fraudulent bank accounts at various victim financial institutions.  Conspirators, including Vaduva, conducted the thefts by driving to roadside mailboxes of churches and other religious institutions and removing the mail, specifically targeting donation checks.

As part of the scheme to defraud, Vaduva and other co-conspirators fraudulently opened bank accounts at victim financial institutions under false identities.  Conspiracy members often opened fictitious bank accounts with the aid of a conspiracy member that was an employee at one of the victim financial institutions. 

Vaduva and his co-conspirators fraudulently negotiated the stolen checks at the victim financial institutions by depositing the stolen checks into bank accounts by means of ATM transactions.  Subsequently, Vanduva and his co-conspirators withdrew money from the fraudulently opened bank accounts and spent the proceeds using debit cards.

For example, from January 2020 to May 2020, Vaduva deposited or participated in the deposit of at least 49 stolen checks totaling at least $27,508.84 from churches located in Delaware, Florida, Georgia, Indiana, Kentucky, Maryland, North Carolina, South Carolina, and Virginia into five fraudulently opened bank accounts.  The total of stolen checks deposited into those accounts totaled approximately $36,660.91.  Over the course of the conspiracy, conspiracy members received approximately at least $1,085,151.42 from 2,657 stolen checks.  After becoming aware of the investigation, Vaduva fled to the United Kingdom.  He was later apprehended on September 5, 2021 and was extradited to the United States.
After pleading guilty in the United States District Court for the Middle District of Pennsylvania to conspiracy to commit mail and wire fraud, Itcace Abramovici, age 72, was sentenced to 30 months in prison plus one year of supervised release, and ordered to make $461,886.49 in restitution. As alleged in part in the DOJ Release:

[A]bramovici played a leadership role in a Montreal-based telemarketing and money laundering organization that targeted elderly victims in the United States, including those living in central Pennsylvania.  Abramovici and his co-conspirators informed prospective victims that they had won a substantial amount of money in a lottery or sweepstakes and then directed those victims to send money in order to obtain their winnings.  The victims' payments were falsely characterized as taxes, customs fees, processing fees, and legal and insurance fees. None of the victims received any money, and many of their losses were substantial, with more than $460,000 in victim losses being attributed to Abramovici's role in the fraud, and with losses to victims of the broader fraud at more than $1.3 million.  As part of his guilty plea, Abramovici admitted to playing a leadership role in the scheme.  The investigation that led to Abramovici's prosecution identified at least 17 individual victims.
The United States District Court for the Eastern District of Michigan entered a Final Judgment against Steven F. Muntin for defrauding one of his investment advisory clients out of more than $314,000. Without admitting or denying the SEC's allegations, Muntin consented to the entry of a judgment that permanently enjoins him from 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, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and orders him to pay disgorgement of $314,799 plus prejudgment interest of $46,121, and a civil penalty of $258,557. As alleged in part in the SEC Release:

[W]hile working for the registered investment adviser, Muntin also managed certain investments for his clients through his own company, Executive Asset Management, Inc., which was previously registered as an investment adviser with the state of Michigan. As alleged in the complaint, between March 2016 and February 2020, Muntin solicited one of his elderly advisory clients to write checks totaling $305,750 to Executive Asset Management for purported investments in securities. However, according to the complaint, Muntin did not invest the client's money in securities, and instead spent it for his own benefit, including paying his mortgage, real estate taxes, health insurance, boat and car loans, and credit card bills. The complaint further alleged that Muntin also overcharged the client at least $9,000 in assets under management fees.

SEC Obtains Final Judgment Against Pharmaceutical Company Founder Charged with Insider Trading (SEC Release)
The United States District Court for the Southern District of New York entered a Final Consent Judgment against Sepehr Sarshar (a founder and former board member of Auspex Pharmaceuticals, Inc.) who was charged with insider trading ahead of a tender offer The Judgment permanently enjoins Sarshar from violating Section 14(e) of the Securities Exchange Act of 1934 and Rule 14e-3 thereunder, and orders him to pay a civil penalty in the amount of $56,222. As alleged in part in the SEC Release:

[S]arshar communicated material nonpublic information to his friends and family and/or caused them to trade prior to the March 2015 public announcement that Teva Pharmaceutical Industries Ltd. had commenced a tender offer to acquire Auspex. The complaint alleges that in February and March of 2015, Sarshar learned through his position on Auspex's board of directors that Teva and other pharmaceutical companies were interested in acquiring Auspex, and that Auspex's board and management were taking active steps to facilitate a sale of the company. According to the complaint, Sarshar communicated material nonpublic information regarding the highly confidential tender offer process to numerous friends and family, and caused them to trade in Auspex stock ahead of the tender offer announcement, at the expense of other Auspex shareholders.

In a Complaint filed in the United States District Court for the Central District of California, the SEC charged TKO Farms, Inc., Agravitae, Inc., Kenneth Dewayne Owen, Reynaldo Aguilar, James Brian Blaylock, Ross Gregory Erskine, and the Estate of Gilbert Allan Penhollow with violations of the registration provisions of Section 5 of the Securities Act and the broker-dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act. Additionally, TKO Farms, Agravitae, and Owen were further charged with violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. As alleged in part in the SEC Release:

[B]etween May 2017 and March 2021, TKO Farms and Agravitae raised nearly $20 million from investors through offerings of their securities. The SEC alleges that Owen, who had a history of criminal convictions, regulatory actions, government liens, and a bankruptcy, possessed undisclosed de facto control over both companies and, acting on the two companies' behalf, directly or indirectly recruited and engaged Aguilar, Blaylock, Erskine, and Penhollow, none of whom were registered as a broker or dealer, to solicit investors for the securities offerings. As further alleged, defendants TKO Farms, Agravitae, and Owen misrepresented Owen's history and control over the two companies and the use of investor funds.
In a Complaint filed in the United States District Court for the Eastern District of California, the CFTC charged Eshaq M. Nawabi, Nawabi Enterprises, and Hyperion Consulting Inc. with fraud and misappropriation related to an off-exchange foreign currency (forex) trading scheme in which they solicited funds totaling at least $543,000 from at least seven investors. The Court entered a Statutory Restraining Order against the defendants, freezing their assets and permitting the CFTC immediate access to their books and records. In addition, the court scheduled a Preliminary Injunction hearing for May 11, 2022.  As alleged in part in the CFTC Release:

According to the complaint, from approximately October 2019 through the present, the defendants solicited and pooled hundreds of thousands of dollars from at least seven pool participants for the purported purpose of trading forex. To persuade the pool participants to send them money, the defendants made fraudulent and material misrepresentations and omissions including they had historically made large profits, between 8 to 25% per month, for themselves and pool participants from trading forex; (2) pool participants would realize profits of 8 to 25% per month on their funds with minimal risk; (3) the defendants would trade forex with the funds the pool participants deposited; and (4) upon request, pool participants could withdraw their funds at any time. 

Instead of trading pool participant funds as promised, the defendants misappropriated their money for Nawabi's own personal benefit as well as to pay other pool participants in a Ponzi-like scheme. To conceal their misappropriation, the defendants created and issued false account statements that misrepresented trading returns purportedly earned by pool participants. When pool participants requested return of their funds, the defendants either ignored their requests, provided bogus promises and excuses, or engaged in conduct designed to delay payouts to Pool Participants for as long as possible.
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, Erin Bridget Settle submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Erin Bridget Settle was first registered in 2018 with GWFS Equities, Inc. In accordance with the terms of the AWC, FINRA imposed upon Settle a $5,000 deferred fine and an 18-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

On March 17, 2021, Settle took the Series 66 Investment Advisor examination. Prior to the examination, Settle attested that she had read and would abide by the FINRA Qualification Examinations Rules of Conduct, which among other things, prohibits the use or attempted use of "personal notes and study materials" during the examination. The Rules of Conduct also require candidates to "store all personal items in the locker provided by the test vendor prior to entering the test room." Prior to starting the examination, Settle placed her personal notes and study materials in the restroom instead of the locker. During an approximately ten-minute unscheduled break, Settle went to the restroom where she had access to and possessed the personal notes and study materials she had placed there. These materials contained exam-related content. Therefore, Settle violated FINRA Rules 1210.05 and 2010.
Your broker-dealer just fired you. You're angry because they sandbagged you and it was a set-up, or so you say. All of which prompts you to dial a lawyer, pay a hefty retainer, and, maybe in a year (if you're lucky), you'll find yourself before a FINRA Arbitration Panel asking for damages for "wrongful termination." Your former employer says that you and your lawyer are morons because you're a terminable-at-will employee, and, duh, you can't wrongfully terminate someone who's an at-will employee. In response, your lawyer points out to the FINRA arbitrators that we're all sitting in an arbitration hearing room because the former employee was forced by the former employer and industry rules to arbitrate his employment disputes: There's nothing at-will about any employment subject to mandatory arbitration. Read today's blog to see how such a case fared.