Securities Industry Commentator by Bill Singer Esq

July 19, 2022

















https://www.brokeandbroker.com/6564/easterly-bassinger-sightline/
What happens when you have a FINRA Arbitration Award that combines circular logic with a nested loop and a Mobius strip? Well, you sort of wind up with a Respondent, who, if he were acting as an independent contractor, he would be covered under the Independent Contractor Agreement at issue; however, if he's not acting as an IC, then he's not covered under the IC Agreement because there wasn't any non-IC transaction in which Respondent participated, and, as such, he's not entitled to non-IC commissions for not having participated in any non-IC transactions, which didn't arise anyway.

https://www.justice.gov/usao-ndca/pr/uber-commits-changes-and-pays-millions-resolve-justice-department-lawsuit-overcharging
Uber Technologies Inc. entered into a settlement with the United States Attorney's Office for the Northern District of California resolving allegations that the company had violated the Americans with Disabilities Act ("ADA"). As alleged in part in the DOJ Release:

In November 2021, the department filed a lawsuit alleging that Uber violated Title III of the ADA, which prohibits discrimination by private transportation companies like Uber. According to the complaint, in April 2016, Uber began charging passengers wait time fees in a number of cities, eventually expanding the policy nationwide. The wait time fees started two minutes after the Uber car arrived at the pickup location and were charged until the car began its trip. The department's complaint alleged that Uber violated the ADA by failing to reasonably modify its wait time fee policy for passengers who, because of disability, needed more than two minutes to get in an Uber car. Passengers with disabilities may need additional time to enter a car for various reasons. A passenger may, for example, use a wheelchair or walker that needs to be broken down and stored in the car. Or a passenger who is blind may need additional time to safely walk from the pickup location to the car itself. The department's lawsuit alleged that, even when Uber was aware that passengers' need for additional time was clearly disability-based, Uber started charging a wait time fee at the two-minute mark. 

Under the two-year agreement, Uber has committed to waive wait time fees for all Uber riders who certify that they (or someone they frequently travel with) need more time to get in an Uber car because of a disability. Uber also will ensure that refunds are easily available for anyone who does not have a waiver and is charged a wait time fee because of disability. Uber will advertise the wait time fee waiver program and train its customer service representatives on the waiver program and refund process to ensure that people with disabilities are not charged illegal fees. 
 
Additionally, Uber will credit the accounts of more than 65,000 eligible riders who signed up for the waiver program for double the amount of wait time fees they were ever charged, which could amount to potentially hundreds of thousands or millions of dollars in compensation. Uber will also pay $1,738,500 to more than one thousand riders who complained to Uber about being charged wait time fees because of disability, and $500,000 to other harmed individuals identified by the department.

https://www.justice.gov/usao-edny/pr/oyster-bay-residents-charged-27-million-investment-fraud-scheme-and-selling-foreign
Sherry Xue Li and Lianbo Wang were charged with wire fraud conspiracy, money laundering conspiracy and conspiracy to defraud the United States by obstructing the Federal Election Commission's (FEC) administration of campaign finance laws.  As alleged in part in the DOJ Release:

[L]i and Wang orchestrated a nearly decade-long scheme to defraud investors in a fictitious project to develop, build and operate a private educational institution in Sullivan County, New York, called the "Thompson Education Center" (the TEC Project).  The defendants solicited victim-investors, many of them foreign nationals located outside of the United States, by falsely representing the progress they were making on the TEC Project and its support from government officials, including by sending investors and prospective investors promotional materials that included photographs of Li, the TEC Project's President, with prominent U.S. politicians.  Many foreign national victims were persuaded to invest in the TEC Project by, among other things, the defendants' false assurances that their $500,000 investments would guarantee them lawful permanent residence in the United States through the EB-5 investment visa program administered by the Department of Homeland Security, U.S. Citizenship and Immigration Services (USCIS). 

As alleged, instead Li, Wang and other members of the conspiracy siphoned off the money they fraudulently obtained from investors by transferring the funds through bank accounts held in the names of various companies that Li had created.  Once the funds were in those accounts, Li and Wang used the funds to pay for numerous personal expenses including clothing and accessories, jewelry, housing, vacation travel, upscale dining, and political contributions to prominent politicians.  The portion of the invested capital Li and Wang actually spent on the TEC Project was used merely to create and perpetuate the fiction that the TEC Project was a viable development project that was actually under construction.  For example, Li and Wang hired contractors, engineers and other professionals to create architectural drawings and plans and perform minor work on or around the development site, which Li and Wang showed to potential investors to mislead them into believing the TEC Project had a realistic probability of completion and of delivering the returns on investment that the conspirators promised their investors.

As of July 2022, more than 150 investors have invested at least $27 million in the TEC Project, including approximately $16.5 million from EB-5 investors who were promised a green card in return for their investment, and approximately $11 million from stock investors who were promised that an IPO would take place.  As of March 2022, Li, Wang, and their co-conspirators have misappropriated and laundered at least $2 million in TEC Project investor funds.  During this same period, Li, Wang and their co-conspirators spent at least an additional $2.5 million dollars in investor funds on various personal expenses with no clear business purpose, none of which was reported as income to the Internal Revenue Service by Li or Wang.  To date, no EB-5 investor in the TEC Project has received a temporary or permanent green card and the TEC Project has not made an IPO or been listed on any stock exchange.

Selling Access to U.S. Politicians

In furtherance of their scheme, Li and Wang also acted as "straw donors" for foreign nationals to unlawfully contribute to campaigns supporting U.S. politicians and political committees.  Among other things, Li and Wang promised foreign nationals access to U.S. political events and politicians in exchange for a fee.  Li and Wang used the money they received from foreign nationals to fund political contributions, and falsely identified themselves and other U.S. citizens as the contributors of the funds, in violation of the Federal Election Campaign Act (FECA) and FEC regulations.  In some cases, Li and Wang used TEC investors' investment funds to make the political contributions which they used to gain access to the political events, where Li and Wang took photographs with elected officials.  Li and Wang would then use the photographs as a marketing tool in soliciting investments from foreign nationals in the TEC Project.   

For example, as alleged in the complaint, Li and Wang charged twelve foreign nationals $93,000 per person for admission to a June 28, 2017 fundraising event (the June 28, 2017 Fundraiser) with the then-President of the United States.  Li and Wang used the funds that they collected from the foreign nationals to unlawfully make $600,000 in political contributions in their own names-$270,500 from Li and $329,500 from Wang-to the joint fundraising committee hosting the June 28, 2017 Fundraiser.  Li, Wang and their foreign national guests attended the June 28, 2017 Fundraiser and took photographs with the then-President of the United States.  Li and Wang later used a photograph of Li and the President taken at the fundraiser to solicit investment in the TEC Project.

https://www.justice.gov/usao-md/pr/serial-identity-theft-scammer-sentenced-six-years-federal-prison-bank-fraud
Jason Evans, 48, pled guilty in the United States District Court for the District of Maryland to bank fraud, aggravated identity theft, and for violating the conditions of his supervised release; and he was sentenced six years in prison plus four years of supervised release, and ordered to pay $124,837.79 in restitution. As alleged in part in the DOJ Release:

[B]eginning in January 2018, Evans was on supervised release from a prior federal fraud and identity theft conviction.  Despite this, from June 2019 to August 2019, Evans used the identities of multiple victims to fraudulently obtain funds from financial institutions in the form of credit card accounts and cash advances.

For example, Evans submitted a fraudulent credit card application to a financial institution (financial institution 1) by using the name and personal identifying information of Victim 1.  Financial institution 1 subsequently approved the fraudulent application and established a credit card account in Victim 1's name and mailed the card to an address controlled by Evans.  Additionally, in June 2019, Evans used a counterfeit Pennsylvania driver's license in the name of Victim 1 to obtain a cash advance of $14,400 from financial institution 1.

In July 2019, Evans used a counterfeit license with the identifying information of Victim 1 and his picture to purchase nine smartphones from an Annapolis, Maryland smartphone store.  Evans charged $12,114.74 using a credit card in Victim 1's name and identity.  In total, Evans attempted to obtain at least $65,000 under Victim 1's and other victims' identities.

Keller Man Sentenced to 14 Years in Prison and Ordered to Pay $14M in Restitution for Ponzi Scheme (DOJ Release)
https://www.justice.gov/usao-wdtx/pr/keller-man-sentenced-14-years-prison-and-ordered-pay-14m-restitution-ponzi-scheme
Marco Perez Jr. a/k/a Sully Perez, 37, pled guilty in the United States District Court for the Western District of Texas to one count of wire fraud and one count of engaging in monetary transactions in property derived from specified unlawful activities; and he was sentenced to 168 months in prison and ordered to pay $14,538,967.27 in restitution. Perez was the founder/director of: 

[P]ermian Basin Proppants, Inc. (PBP), a company headquartered in Midland that claims to sell proppants such as sand for fracking operations, i.e., "frac sand." Between 2017 and 2022, Perez used PBP to perpetuate a Ponzi scheme by soliciting investor money based on misrepresentations. During this time, Perez received over $14 million from the scheme. He used most of the funds for his own personal benefit, buying property, vacations, a lavish wedding, and luxury vehicles including a Lamborghini, a Rolls-Royce, a BMW, and a Cadillac Escalade.  Perez also purchased a helicopter.

Perez enticed victims to fund or invest in PBP transactions, promising substantial guaranteed returns on their investment. However, the representations Perez 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 that frac sand would then be resold at a profit to fracking operations in and around the Permian Basin. Investors were promised they would receive back their entire investment plus an additional return, often within a relatively short time period. Perez rarely used the investment money to purchase frac sand or complete promised transactions. Instead, he diverted significant amounts of investor money to fund his lifestyle and keep the scheme running, such as by making payments to prior PBP investors.

https://riabiz.com/a/2022/7/18/boom-boom-boom-charles-schwab-corp-just-spent-220-million-to-shuck-three-lawsuits-a-likely-deck-clearing-before-the-td-ameritrade-merger-closes-say-multiple-analysts
As with many chess games, the endgame may be underway, but the adversary, who is slowly being maneuvered into checkmate, may not see the demise unfolding. In a sense, that's what seems to be afoot as Charles Schwab slowly (some would say "painfully") but patiently presses its advantage with an eye on the prize of closing its merger with TD Ameritrade. Enjoy the recap of the most recent moves and gambits as expertly told by veteran Wall Street Grandmaster Oisin Breen.

Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2022/33-11083.pdf, that it had violated the antifraud provisions of the Securities Act, Equitable Financial Life Insurance Company agreed to cease and desist from committing or causing any future violations of the provisions and to pay a $50 million civil penalty that it will distribute to affected investors; and, further, agreed to revise how it presents fee information in its variable annuity account statements. As alleged in part in the DOJ Release:

The Securities and Exchange Commission today announced fraud charges against Equitable Financial Life Insurance Company for providing account statements to about 1.4 million variable annuity investors that included materially misleading statements and omissions concerning investor fees. Equitable agreed to pay $50 million to harmed investors, most of whom are public school teachers and staff members, to settle the charges.

As described in the SEC's order, since at least 2016, Equitable gave investors the false impression that their quarterly account statements listed all fees paid during the period. The SEC's investigation found that, in reality, the statements listed only certain types of fees that investors infrequently incurred and that more often than not the statements had $0.00 listed for fees.

SEC Obtains Final Judgment Against Individual in ICO Promotion Scheme; Files Notice of Death as to John McAfee, Resulting in Dismissal of Claims (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25445.htm
The United States District Court for the Southern District of New York entered a Final Consent Judgment against Jimmy Gale Watson, Jr.,
https://www.sec.gov/litigation/litreleases/2022/judg25445.pdf for his role in John McAfee's alleged initial coin offering promotion and scalping scheme. Also, the SEC filed a Notice of Death as to John McAfee, which resulted in an Order dismissing the claims against McAfee.
https://www.sec.gov/litigation/litreleases/2022/order25445.pdf As alleged in part in the SEC Release:

On October 5, 2020, the SEC filed a complaint alleging that McAfee, with Watson's assistance, promoted investments in ICOs to McAfee's Twitter followers without disclosing that they were paid to do so. The complaint alleged that Watson assisted McAfee by negotiating the promotion deals with the ICO issuers and helping McAfee cash out the crypto payments for the promotions, among other things. McAfee and Watson also allegedly engaged in a separate scheme to profit from a crypto asset security by secretly accumulating a large position in McAfee's accounts, touting that security on Twitter while intending to sell it, and then selling McAfee's holdings as the price rose.

The final judgment against Watson permanently enjoins him from violating Sections 17(a) and (b) and of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and orders him to pay disgorgement of $316,401.48 and prejudgment interest of $59,533.38. The final judgment also permanently enjoins him from participating, directly or indirectly, in the issuance, purchase, offer, or sale of any digital asset security, provided, however, that such injunction shall not prevent Watson from purchasing or selling securities for his own personal accounts.

https://www.sec.gov/litigation/litreleases/2022/lr25446.htm
The United States District Court for the Eastern District of New York entered a Final Consent Judgment against Joshua Tyrell that enjoins him from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act and the registration requirements of Section 5 of the Securities Act. The Judgment imposes a penny stock Bar, $125,000 in disgorgement, $26,883.95 interest, and a  $100,000 civil penalty. In part, the SEC Release asserts that 

[T]yrell entered into a sham agreement with Medifirst Solutions, Inc. to provide consulting services to the company in return for millions of shares of the issuer's stock. According to the complaint, Tyrell knew he never provided any business consulting services to Medifirst Solutions, but instead, Medifirst Solutions issued stock to Tyrell as compensation for promoting its stock to potential investors through a stock promotion entity affiliated with Tyrell. Tyrell allegedly falsely represented to his brokerage firm that he received Medifirst Solutions stock as compensation for business development services and that he was not involved in promoting the company's stock, and thereafter, Tyrell sold over 19 million shares in the public market, reaping proceeds of approximately $125,000.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95304; Whistleblower Award Proc. File No. 2022-66)
https://www.sec.gov/rules/other/2022/34-95304.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the a Whistleblower Award of over of 30% of sanctions collected to a Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

[C]laimant provided more than limited assistance, as Claimant provided multiple interviews to Commission staff, and application of the presumption would not be inconsistent with the public interest, the promotion of investor protection, or the objectives of the whistleblower program.

https://www.sec.gov/news/press-release/2022-123
Jaime Lizárraga was sworn in as an SEC Commissioner. As set forth in part in the SEC Release:

Commissioner Lizárraga most recently served as Senior Advisor to House Speaker Nancy Pelosi. In that role, Commissioner Lizárraga oversaw issues related to financial markets, small business, international finance, and immigration. He also served as Speaker Pelosi's liaison to, and worked closely with, the Congressional Hispanic Caucus.

Commissioner Lizárraga has more than 30 years of experience in public service. He served as a Senior Professional Staff Member/Director of Legislative Affairs for the Democratic staff of the House Financial Services Committee, Deputy to the Assistant Secretary of Legislative Affairs at the U.S. Department of the Treasury, and Deputy Director of the SEC's Office of Legislative and Intergovernmental Affairs.

Commissioner Lizárraga earned his bachelor's degree with high honors from the University of California San Diego and his master's degree in Public Affairs from the Lyndon B. Johnson School of Public Affairs at the University of Texas.

Commissioner Lizárraga fills a term that expires on June 5, 2027.

https://www.cftc.gov/PressRoom/PressReleases/8558-22
The United States District Court for the Southern District of New York entered a Consent Order
https://www.cftc.gov/media/7481/enfjimmywatsonconsentorder071422/download against Jimmy Gale Watson requiring him to disgorge over $146,000 and to pay an equal amount in a civil monetary penalty; further, he is permanently prohibited from engaging in further violations of the Commodity Exchange Act and CFTC regulations as charged, and subject to registration and trading bans. As alleged in part in the CFTC Release:

As found in the order, Watson participated in the scheme by assisting in the strategic selection of suitable digital assets. As is typical of pump-and-dump schemes, he also secretly accumulated positions in digital assets in anticipation of price spikes following the misleading social media endorsements that touted the assets. These endorsements "pumped" the asset in order to increase demand, while deceptively concealing the previously accumulated position and the intent to promptly sell the position. He then "dumped" the digital asset by selling it into the inflated demand as price levels rose in response to the deceptive touting.

https://www.cftc.gov/PressRoom/PressReleases/8556-22

The order imposes [sic] Black, Financial Tree, Financial Solution, New Money, Mancuso, Glenn, and Glenn's law firm obligations to pay nearly $10.5 million in restitution jointly and severally; and Tufo to pay over $4.5 million of that restitution jointly and severally with the other defendants. The order further imposes civil monetary penalties of approximately $5.4 million on Black, Financial Tree, Financial Solution, and New Money; $12.1 million on Mancuso; $680,000 on Tufo; and $850,000 on Glenn and his law firm. Additionally, under the order, the defendants are permanently enjoined from engaging in conduct that violates the Commodity Exchange Act (CEA), registering with the CFTC, and trading in any CFTC-regulated markets. Finally, the order requires seven relief defendants to disgorge over $2.6 million they received from the scheme to which they have no lawful entitlement. The order resolves a CFTC enforcement case filed June 15, 2020. [See CFTC Press Release No. 8197-20]

Case Background

In the order, U.S. District Judge Troy L. Nunley found that from approximately June 15, 2015 to June 15, 2020 the defendants fraudulently solicited members of the public (pool participants) to contribute funds to fraudulent binary options and forex commodity pools; misappropriated millions of dollars of those funds for personal use; made Ponzi payments to existing pool participants with new pool participants' funds; and made false statements to explain their failure to return funds and deliver promised profits. The order further finds the defendants failed to register as CPOs and APs of CPOs, as appropriate, and certain defendants violated multiple requirements applicable to CPOs relating to acceptance and commingling of funds, operation of CPOs as separate entities, and required disclosures to pool participants.

https://www.finra.org/sites/default/files/fda_documents/2019062183901
%20Wilson-Davis%20%26%20Co.%2C%20Inc.%20CRD%203777%20AWC%20gg.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, Wilson-Davis & Co., Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Wilson-Davis & Co., Inc has been a FINRA member firm since 1968 with 43 registered representatives. In accordance with the terms of the AWC, FINRA imposed upon Wilson-Davis & Co., Inc. a Censure and $100,000 fine. As alleged in part in the AWC's "Overview":

Between March and July 2018 and June and August 2020, Wilson-Davis had deficiencies in the reserves in its special reserve bank account for the exclusive benefit of customers (Customer Reserve Account) ranging from $101,468 to $693,703. Additionally, between February 2018 and August 2018, Wilson-Davis had deficiencies in the reserves in its proprietary securities account of a broker or dealer (P AB Account) ranging from $100,000 to $200,000. Therefore, Wilson-Davis violated Section 15(c) of the Securities Exchange Act of 1934 (Exchange Act), Exchange Act Rule 15c3-3(e), and FINRA Rule 2010. 

Between September 2019 and November 2020, Wilson-Davis failed to maintain customer securities in an outside money market/sweep account that was a good control location. Therefore, Wilson-Davis violated Exchange Act Section 15(c), Exchange Act Rule 15c3- 3(c)(l), and FINRA Rule 2010. 

Between February 2018 and March 2021, Wilson-Davis's supervisory system, including its written procedures, was not reasonably designed to achieve compliance with the Customer Protection Rule, specifically the obligation to accurately calculate PAB account requirements and detect errors in that calculation under Exchange Act Rule 15c3- 3 ( e ). Therefore, the firm violated FINRA Rules 3110 and 2010. 

https://www.finra.org/sites/default/files/aao_documents/19-01006.pdf
In a FINRA Arbitration Statement of Claim filed in April 2019, public customer Claimant Lee/IRA asserted breaches of fiduciary duty and contract; violation of Kentucky's Securities Act; negligence/negligent misrepresentation/omission; common law fraud; restitution; and negligent supervision. At the hearing, Claimant sought between $299,399.25 and $1,254,488.32 in compensatory damages, attorneys' fees in the amount of 1/3 of the gross recovery based on contingency fee agreement, forum fees, and $8,625.13 in costs. As set forth in part in the FINRA Arbitration Award:

The causes of action related to Claimant's allegation that Respondent's agent engaged in a highly speculative investment strategy and invested a large portion of Claimant's retirement funds in two energy stocks, Breitburn Energy and Linn Energy, which did not align with Claimant's risk tolerance. 

Respondent First Kentucky generally denied the allegations, asserted affirmative defenses, and filed a Counterclaim asserting fraud, bad faith, violation of common law and "FINRA equitable requirements." The FINRA Arbitration Panel found Respondent First Kentucky liable to and ordered it to pay to Claimant $450,000 in compensatory damages, $150,000 in attorneys' fee, $8,625.13 in costs, and $425 in filing fees. 

https://www.finra.org/sites/default/files/aao_documents/19-01006.pdf
In a FINRA Arbitration Statement of Claim filed in April 2021, public customer Claimant Rakhmanov asserted breach of duty of care; breach of fiduciary duty; unauthorized executions; and failure to disclose in connection with Nikola Corporation options ("NKLA").  At the end of the hearing, Claimant sought "damages of $66,000.00; $446,000.00 or $106,680.00 or $175, 290.00." The Panel denied Claimant's claims. Adding insult to injury, the Panel assessed $7,150 of $7,800 in hearing session fees against Claimant.
Bill Singer's Comment: Initially, Claimant had demanded $66,600 in compensatory damages and $440,000 in lost profit/expectation damages. As to how or why the Panel translated that into a request for an "at the close of the hearing" range of damages highlighted by four different dollar amounts is puzzling. Regardless, I've never been a proponent of pleading damages in the alternative. That being said, sometimes there's no recourse to asking for what comes off as a smorgasbord of damages; however, it often suggests a lack of conviction and provides arbitrators with a license to pick the lowest proposed dollar amount. In this case, the wide range of damages doesn't seem a substantive concern because the Panel denied all of Claimant's claims.