Securities Industry Commentator by Bill Singer Esq

June 24, 2022

The Constitution does not confer a right to abortion; Roe and Casey are overruled; and the authority to regulate abortion is returned to the people and their elected representatives.
In today's Guest Blog, industry lawyer Aegis Frumento summons up the Bee Gees when he grouses about how some jive talkin' seemed to have gotten the SEC into a lather. The jive talkers in this regulatory settlement were TradeZero America and its somewhat loquacious Chief Executive Daniel Pippitone. Where the SEC could have reacted with a shrug and a raised eyebrow or two, the regulator chose to focus on what Aegis seems to view as just a lot of hot air -- the blowin' off of some steam. Alas, in the end, this regulatory silliness suggests a variation on the old Bob Dylan tune: It Takes a Lot to Laugh, It Takes the SEC to Cry.
German Nino pled guilty in the United States District Court for the Southern District of New York to wire fraud, and he was sentenced to 78 months in prison.  As alleged in part in the DOJ Release, Nino:

was a financial advisor working at a branch office of UBS Financial Services Inc. in Miami.  Nino oversaw and managed UBS investment accounts for various customers.  From about 2014 to 2020, Nino made 62 unauthorized transfers (totaling close to $6 million) from UBS accounts belonging to three clients.  To accomplish the fraud, Nino concealed important facts from the victims, lied to them, and committed other fraudulent acts.  For example, Nino misrepresenting the true performance, balance, and rate of return of the accounts he managed.  He also forged the signature of his clients on documents purporting to authorize transfers out of the accounts, prepared a fraudulent land purchase contract on which he forged a victim's signature, removed one of the victim's e-mail addresses from the UBS client account profile so that the victim would not receive email notifications about unauthorized transfers, and prepared fraudulent UBS account statements that falsely inflated the balance and value of the victims' accounts.

As set out in court records, Nino spent most of the money he stole from the accounts on funding his own extramarital affairs.  Nino agreed to forfeit his interest in a home in Ave Marie, Florida as part of his sentence.
In response to an Information filed in the United States District Court for the Southern District of New York, Martin Ruiz, 46, pled guilty to investment advisor fraud, and he was sentenced to 72 months in prison and ordered to pay a $10,925,770.09 forfeiture. As alleged in part in the DOJ Release:

From at least in or about March 2011 through in or about the present, RUIZ induced multiple individual investment advisery clients of Carter Bain Wealth Management ("CBWM"), many of whom are elderly, to retain RUIZ and CBWM to advise them on how they should invest their retirement savings.  While ostensibly acting in his fiduciary capacity as their investment adviser, RUIZ instead induced more than a dozen such clients to invest more than $10 million in an investment fund called RAM Fund through the purchase of limited partnership interests.  RUIZ did not disclose to those clients that RUIZ controlled RAM Fund and that he planned to misappropriate their funds.  

In fact, rather than invest the funds in legitimate investment projects and real estate, as he falsely represented to clients, RUIZ misappropriated more than $8 million of client funds from the RAM Fund, transferred those funds through a series of entities RUIZ also controlled, and spent the vast majority of the funds on personal expenses, including the purchase of a home, rent payments on several apartments, and the payment of his personal credit card bills.  In so doing, he violated his fiduciary duty to act in his clients' best interest and avoid self-dealing.  RUIZ also made multiple false statements to the U.S. Securities and Exchange Commission about his companies and investments in order to hide his fraudulent scheme.
Lindsey Allison Kerns, 39, pled guilty in the United States District Court for the Western District of North Carolina to wire fraud and money laundering; and she was sentenced to 45 months in prison plus three years under court supervision and ordered to pay $1,088,554.99 as restitution. As alleged in part in the DOJ Release:

[F]rom December 2018 to April 2020, Kerns owned and operated Home Care Coordinators, LLC, a business that provided home health care in Buncombe and Madison Counties. Beginning in December 2018, Kerns arranged to provide home health care services to two elderly clients, identified in court documents as S.A. and P.R., who were 86 and 90 years old, respectively. The two elderly clients lived in Asheville and were close friends. P.R. also suffered from dementia and was not capable of handling his affairs. S.A. served as P.R.'s power of attorney and managed and controlled P.R.'s finances.

According to court documents, Kerns provided home health care services to S.A. and P.R. all of 2019 and into 2020. During that time, Kerns did not provide S.A. or P.R. with detailed invoices of her home health care services. Instead, Kerns orally informed S.A. on a weekly basis how much money Kerns claimed she was owed for services rendered, and S.A. wrote checks in those amounts from P.R.'s bank accounts. Over the course of the scheme, Kerns defrauded the elderly victims in a number of ways, including by overbilling them for services that were inflated or never provided; double-billing them for other services such as cleaning and moving that were either not provided or were provided by caregivers during hours already billed; and by billing at a higher rate than what Kerns and the victims had agreed upon.

According to court documents, from December 2018 through April 2020, Kerns directed S.A. to pay, and did receive, $1,465,546.99 for home health care and other services allegedly rendered by Kerns to the victims. The actual fair market value of the services provided to the victims by Kerns was $376,992. Kerns thereby overcharged S.A. and P.R. $1,088,554.99 for services that were never provided.

Kerns used the money she swindled from the victims to purchase vehicles and ATVs, to buy luxury retail items, and to pay for hotel stays and vacation rentals.

According to court records, when Kerns learned she was being investigated by the FBI and IRS, she made a number of false statements to federal agents related to her business activities. For example, Kerns lied about issuing IRS Form 1099s to her employees, lied about purchases she made using the victims' money, and lied about additional income she received from another client. In addition, after Kerns was served with a grand jury subpoena requiring her to produce certain business records, Kerns fabricated such records and generated false invoices based on the amounts she believed she had received from S.A. and P.R. rather than providing invoices for actual services rendered.
The United States District Court for the Southern District of New York preliminarily enjoined StraightPath Venture Partners LLC, StraightPath Management LLC, Brian K. Martinsen, Michael A. Castillero, Francine A. Lanaia, and Eric D. Lachow from violating Sections 5(a), 5(c) and 17(a) of the Securities Act, Sections 10(b) and 15(a) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2), 206(3), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Also, SDNY appointed a receiver over StraightPath Venture Partners LLC, StraightPath Management LLC, and the SP Ventures Partners Funds that Defendants managed and advised. Further, SDNY required that Martinsen, Castillero, and Lanaia pay more than $15 million into the receivership estate and continued a freeze over their real estate holdings. As alleged in part in the SEC Release:

[D]efendants conducted a fraudulent $410 million offering in violation of the securities and broker-dealer registration provisions identified above. Among other things, Defendants allegedly sold pre-Initial Public Offering (IPO) shares they did not own, pocketed undisclosed fees, and commingled investor funds, resulting in Ponzi scheme-like payments.
A CFTC Order requires Starberry Limited to pay a $1,376,206.81 civil monetary penalty and cease and desist from violating Section 4d(a)(1) of the Commodity Exchange Act (CEA), 7 U.S.C. § 6d(a)(1); and, further, Starberry agrees to disgorge $1,376,206.81 in commission and fees it unlawfully earned by acting as a futures commission merchant. As alleged in part in the CFTC Release:

The order specifically finds that from February 28, 2020 through March 17, 2020, while not registered in any capacity, Starberry accepted more than $400 million from a foreign customer and deposited that money in Starberry's proprietary trading account. Starberry then executed more than 12,500 NYMEX WTI trades in March 2020, which resulted in more than $86 million in profits for the foreign customer and $1,376,206.81 in commission and fees for Starberry.

The order recognizes respondent's substantial cooperation in the form of a substantially reduced penalty.
Without admitting or denying the charges in a FINRA Acceptance, Waiver & Consent settlement, National Securities Corporation ("NSC") consented to a $4.77 million disgorgement in net profits the firm received for underwriting 10 public offerings in which NSC attempted to artificially influence the market for the offered securities; and, further, agreed to pay over $625,000 in restitution for failing to disclose material information to customers who purchased GPB Capital Holdings, LLC private placements, and a $3.6 million fine for this misconduct and various other supervisory and operational violations. The AWC asserts that NSC has been a FINRA member since 1947 with about 574 reps at 119 branches. As alleged in part in the FINRA Press Release:

FINRA found that between June 2016 and December 2018, NSC, while acting as an underwriter for three initial public offerings and seven follow-on offerings, violated Rule 101 of Regulation M under the Securities Exchange Act of 1934 by unlawfully inducing or attempting to induce certain customers to purchase stock in the aftermarket of the offerings prior to their completion.

Rule 101 prohibits underwriters, during a restricted period, from attempting to induce any person to bid for or purchase any offered security in the aftermarket.

FINRA found that NSC violated Regulation M in connection with 10 offerings by engaging in some combination of the following misconduct during each offering's restricted period:

  • Expressly conditioning allocations on a branch manager's or representative's agreement to buy a specific number of shares in the aftermarket for the branch's or representative's customers (known as "tie-in agreements");
  • Agreeing to solicit customers who received allocations to purchase additional shares in the immediate aftermarket; and
  • Threatening to reduce allocations to representatives who would not agree to solicit their customers to participate in the aftermarket.

NSC's conduct was aimed at artificially stimulating demand and supporting the price of the offered securities, which tended to be thinly traded, in the immediate aftermarket. The aftermarket performance of NSC's underwritten offerings was important to the firm's reputation and ability to generate future investment banking revenue.

The settlement resolves multiple other charges against NSC, including that the firm:

  • Between April 2018 and July 2018, negligently omitted to tell investors in two offerings related to GPB Capital about delays in the issuer's required public filings, including audited financial statements-for which FINRA has ordered the firm to pay restitution of more than $625,000 to those customers;
  • Between January 2005 and April 2020, failed to obtain locates for over 33,000 short sale transactions as required by Rule 203(b)(1) of Regulation SHO under the Exchange Act;
  • Between September 2013 and May 2017, failed to reasonably supervise one of its representatives by failing to respond to multiple red flags that he was falsifying information about customers' assets and suitability information in order to avoid NSC's limits on concentration levels that applied to his non-traded real estate investment trust recommendations; and
  • Made inaccurate representations to FINRA concerning the sales of stock warrants it received in connection with an October 2019 public offering.
OTC Options Reporting / FINRA Requests Comment on Proposed Trade Reporting Requirements for Over-The-Counter Options Transaction (FINRA Regulatory Notice 22-14)
As set forth in part under the "Summary" portion of the FINRA Regulatory Notice:

FINRA is soliciting comment on a proposal to establish a new trade reporting requirement for transactions in over-the-counter options on securities with terms that are identical or substantially similar to listed options. FINRA is proposing to require firms to report this information to FINRA on a daily basis (end-of-day) for regulatory purposes only.

As is further asserted in the Notice:

Based on FINRA's analysis, a significant amount of firm trading occurs in OTC options with terms that are substantially similar to listed options. While FINRA does not currently have access to a data source specifically for transactions in OTC options, firms currently are required to report OTC and listed large options positions to FINRA pursuant to Rule 2360 (Options) (the large options positions reporting (LOPR) or LOPR rule). Using LOPR data, FINRA is able to infer the net notional amount of OTC options trading that occurred on a given day. Based on these calculations, FINRA believes that the notional amount of OTC options trading activity is significant. However, LOPR information is limited in many respects and does not identify a number of critical data elements that would be helpful for surveillance purposes, such as the price and time of individual transactions.
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, Kenneth Lawrence Spielman submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Kenneth Lawrence Spielman was first registered in 1994, and by 2018, he was registered with LPL Financial LLC. In accordance with the terms of the AWC, FINRA imposed upon Spielman a $2,500 fine and a one-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

In May 2018, Spielman incorporated a company in New York for the purpose of purchasing a marina. He acted as the company's Secretary and Treasurer; In those capacities, Spielman assisted with the company's operations. 

In June 2018, Spielman, along with several other individuals, purchased a marina in New York through the company. After purchasing the marina, Spielman, participated in operating the marina. Spielman expected compensation as a result of sharing the profits from operating the marina and, eventually, selling it. 

In June 2018, after forming the company and purchasing the marina, Spielman requested approval from LPL to participate in these outside business activities. LPL did not initially approve Spielman's outside business activities and requested that Spielman provide additional information. Spielman did not provide the information requested until November 2018 but continued to participate in his unapproved outside business activities prior to submitting the information. LPL ultimately approved Spielman's outside business activities involving the marina. 

Therefore, Spielman violated FINRA Rules 3270 and 2010.
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, James Patrick Norris submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that James Patrick Norris was first registered in 1984, and by 2011, he was registered with Cambridge Investment Research, Inc.. In accordance with the terms of the AWC, FINRA imposed upon Norris a $2,500 fine and a one-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Cambridge Investment Research's written procedures permitted registered persons to borrow money from or lend money to firm customers in limited circumstances and only with the firm's prior approval. However, from December 2015 to November 2018, Norris made two private mortgage loans in the total amount of $174,533 to two individuals who were his customers at Cambridge Investment Research. While the loans were documented through loan agreements, were commercially reasonable, and recorded with the county clerk, Norris did not seek or obtain preapproval from Cambridge Investment Research for either of the two loans. 

Norris therefore violated FINRA Rules 3240 and 2010. Blog publisher Bill Singer is a fairly dyspeptic fellow. Most days, he's in a bad mood. Other days, he's in a worse mood. As to trying to get to Bill on a "good" day, don't waste your time. Ain't gonna happen. As to why Bill is such a dour countenance, consider the recent seven-year saga involving the burning question of when is a suspension not a suspension. The quick answer is when FINRA orders a suspension but decides not to impose the suspension because the self-regulatory-organization also imposed a Bar. The old suspension of disbelief!

( Blog)
In today's featured FINRA intra-industry arbitration, we got a little bit of sumthin' for everyone. We got JP Morgan. We got about $13 million in damages or more than $10 million or not less than $8 million. We got allegations of lying and spoliating evidence. We got motions about an expert witness' expertise. We got motions about sanctions for alleged false testimony. We got that rare finding of perjury with the result of sanctions. We got an award of damages but as to how the arbitrators calculated it and for what, we don't got jack.

122 Days And Counting For FINRA's Independent Review Of Its Arbitration Selection Process ( Blog)
On February 18, 2022, FINRA announced that it had hired a law firm to conduct an independent review of how FINRA Dispute Resolution Services complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge. Four months have passed. Not a sound. Not a peep. On the other hand, brick by brick, a lovely stonewall seems to be getting built.