Securities Industry Commentator by Bill Singer Esq

October 11, 2022





DOJ RELEASES


SEC RELEASES



CFTC RELEASES


FINRA RELEASES




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10/11/2022

https://www.financial-planning.com/news/wells-fargo-suing-ex-lawyer-may-have-chilling-effect
Financial Planning's Victoria Zhuang reports about a brewing, puzzling, troubling federal lawsuit that pits a veteran in-house Wells Fargo lawyer against his former employer. Wells Fargo alleges that its former lawyer Steven Satter wrongly facilitated the departure of a $1.2 billion advisory group; and that he did so on its dime when still employed and the producers were still affiliated with the firm. Oh boy, talk about potentially opening a can of worms when a company sues a former staff lawyer! 

OFAC Settles with Bittrex, Inc. for $24,280,829.20 Related to Apparent Violations of Multiple Sanctions Programs (Department of the Treasury, Enforcement Release)
https://home.treasury.gov/system/files/126/20221011_bittrex.pdf
As asserted in part in the Treasury Department Release:

Bittrex, Inc. ("Bittrex"), a private company based in Bellevue, Washington, that provides an online virtual currency exchange and hosted wallet services, has agreed to remit $24,280,829.20 to settle its potential civil liability for 116,421 apparent violations of multiple sanctions programs. As a result of deficiencies related to Bittrex's sanctions compliance procedures, Bittrex failed to prevent persons apparently located in the Crimea region of Ukraine, Cuba, Iran, Sudan, and Syria from using its platform to engage in approximately $263,451,600.13 worth of virtual currency-related transactions. The applicable sanctions programs generally prohibited U.S. persons from engaging in transactions with these jurisdictions. Based on internet protocol ("IP") address information and physical address information collected about each customer at onboarding, Bittrex had reason to know that these users were in jurisdictions subject to sanctions. At the time of the transactions, however, Bittrex was not screening this customer information for terms associated with sanctioned jurisdictions. The settlement amount reflects OFAC's determination that Bittrex's apparent violations were not voluntarily self-disclosed and were not egregious.

DOL asserts that its Proposed Rule https://public-inspection.federalregister.gov/2022-21454.pdf will provide guidance on properly classifying workers as independent contractors or employees in accordance with the Fair Labor Standards Act ("FSLA"). In part the DOJ Release states:

Specifically, the proposed rule would do the following:

  • Align the department's approach with courts' FLSA interpretation and the economic reality test.
  • Restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA. 
  • Ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
  • Revert to the longstanding interpretation of the economic reality factors. These factors include the investment, control and opportunity for profit or loss factors. The integral factor, which considers whether the work is integral to the employer's business, is also included.
  • Assist with the proper classification of employees and independent contractors under the FLSA.
  • Rescind the 2021 Independent Contractor Rule. 

Former Comptroller Of Investment Adviser Firm Sentenced To 80 Months In Multimillion-Dollar Investment Fraud (DOJ Release)
https://www.justice.gov/usao-sdny/pr/former-comptroller-investment-adviser-firm-sentenced-80-months-multimillion-dollar
Former Executive Compensation Planners, Inc. ("ECP") Comptroller/Chief Compliance Officer Vania May Bell, 57, pled guilty to one count of conspiracy to commit wire fraud in the United States District Court for the Southern District of New York, and she was sentenced to 80 months in prison plus three years of supervised release, and ordered to pay $8,041,233 in restitution, and forfeit $589,942. Previously, Bell's father and former ECP President Hector May pled guilty to charges of conspiracy to commit wire fraud and investment advisor fraud, and he was sentenced to 13 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, HECTOR 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 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.  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, when ECP was running out of cash and desperately needed to make supposed bond interest payments to avoid exposing the Ponzi scheme, BELL reached out to Victims directly.  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.  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.

To help perpetuate the fraud, BELL and MAY 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.  As part of the scheme, MAY personally drove to the home of a stroke victim he and BELL had been defrauding of millions of dollars in order to retrieve the legitimate statements being sent by Broker Dealer-1 and later replace them with BELL's fake consolidated statements purporting to show the victim's investments had been growing.

BELL was instrumental to the scheme in multiple ways.  BELL processed and spent client money from ECP's custodial and operating accounts, watching the money dwindling and helping her father achieve more thefts at many months' ends; BELL faked account statements that made people believe that they held millions, even when she knew that their money was gone; and BELL wielded her role as Chief Compliance Officer and Comptroller to help conceal the fraud from Broker Dealer-1.

In an audio recording made in 2016, after more than sixteen years in the scheme, BELL said the following about MAY:  "I am his daughter, I am his confidante, I am the backbone that saves his butt in every promise he makes out of there. . . . The virtue of my knowledge is just by the presence of time here.  There is nothing in this office that I don't know, haven't touched, haven't seen, haven't done, haven't taught.  Everyone is always intimidated by the time I come in or the things I get to do personally that I've earned over time based on my life circumstances. It's what we call the perk of being the boss's daughter."  At the end of that year, MAY thanked BELL in a handwritten note: "My Dearest Vania: you have always been there for me.  You always watch my back.  I couldn't do it without you[.] Love, Daddy".

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-96012; Whistleblower Award Proc. File No. 2023-01)
ttps://www.sec.gov/rules/other/2022/34-96012.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending that Claimant receive a Whistleblower Award for about $825,000. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnote omitted]:

[C]laimant, Redacted expeditiously provided detailed information that prompted the opening of the investigation and thereafter met with Commission staff in person and provided additional information after submitting the initial TCR. Redacted

Federal Court Orders Texas Fraudulent Forex Trader and His Company to Pay Over $940,000 (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8607-22
The United States District Court for the Southern District of Texas entered a Consent Order against Troy Mason and Ztegrity, Inc.
https://www.cftc.gov/media/7856/enfmasonconsentorder100722/download requiring Mason and Ztegrity to pay $643,570 in restitution and a $300,000 civil monetary penalty; and, further, permanently prohibits the Defendants from further violations of the CEA and CFTC regulations, as charged, and imposes permanent registration and trading bans. As alleged in part in the CFTC Release:

The order finds that from approximately October 2019 to June 2021, the defendants used various websites and social media platforms to fraudulently market their forex trading pool as a version of a savings account that offered a greater yield with similarly low or no risk. The defendants called this forex trading pool "The Black Club" and "The Forex Savings Club," which their website claimed had received over $460,000 from 411 participants.

The order further finds the defendants induced participation in their forex trading pool by falsely claiming to "guarantee" to repay participants the funds they contributed to their individual "Forex Savings Accounts" and falsely offered participants "with a 100% certainty" portions of the "substantial profit[s]" to be generated using participants' pooled funds to trade forex. In truth, the defendants knew or recklessly failed to appreciate that no forex trader can guarantee profitable trading, or the avoidance of losses required to guarantee all participants' contributions, and knew, but failed to inform participants, they had no U.S.-based forex trading accounts. 

Finally, the order finds the defendants illegally operated their commodity pool by failing to register as commodity pool operators, in violation of the CEA and CFTC regulations. 

https://www.finra.org/sites/default/files/fda_documents/2021069405501
%20Charles%20V.%20Malico%20CRD%201507282%20AWC%20va.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, Charles V. Malico submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Charles V. Malico was first registered in 1987, and from June 2016 through April 2022, he was registered with Network 1 Financial Securities Inc. In accordance with the terms of the AWC, FINRA imposed upon Malico a $5,000 fine and six-month suspension from associating with any FINRA member in all capacities. The AWC includes this admonition:

Respondent understands that this settlement includes a finding that he willfully violated Rule 15l-1 of the Securities Exchange Act of 1934 and that under Article III, Section 4 of FINRA's By-Laws, this makes him subject to a statutory disqualification with respect to association with a member.

As asserted in part in the AWC:

From July 2020 through November 2021, Malico recommended to one of his retail customers (Customer A) at Network 1 a series of transactions that was excessive in light of that customer's investment profile. In so doing, Malico placed his and Network 1's interests ahead of the interests of the customer. Customer A was a 63-year-old tax preparer with an annual income of approximately $100,000 and a liquid net worth of approximately $50,000. Although Customer A's average account balance during the relevant period was less than $30,000, Malico recommended that he make more than 350 trades in his account, which caused Customer A to pay more than $54,000 in commissions and other trading costs. 

Malico frequently recommended that Customer A buy and then sell a security, only to repurchase the same security weeks or even days later. For example, between January and July 2021, Malico recommended that Customer A buy and then sell shares of the same biotechnology company on six separate occasions. On four of those occasions, Malico recommended that Customer A buy shares of the company only to sell them on the same day or the next day. Such in-and-out trading caused Customer A to lose more than $6,000, while generating more than $3,200 in commissions and trading costs to Malico and Network 1. 

Collectively, the trades that Malico recommended in Customer A's account resulted in an annualized cost-to-equity ratio exceeding 158 percent-meaning that Customer A's account would have had to grow by more than 158 percent annually just to break even. As a result, Malico's recommendations made it virtually impossible for Customer A to realize a profit and, in fact, Customer A lost more than $17,500 during the relevant period.

Therefore, Malico willfully violated Exchange Act Rule 15l-1 and violated FINRA Rule 2010. 
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Footnote 2: This AWC does not require that Malico pay restitution to Customer A because Network 1 has already compensated Customer A in connection with the settlement of an arbitration claim filed by the customer.

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10/10/2022

(BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/6700/saliba-finra-sec/
In today's featured case, we start things off in 2011, when NMS Capital Group, LLC  (wholly owned by Trevor Saliba) purchased MCA Securities LLC (whose name was changed to NMS Capital Securities). By 2016, Saliba came within FINRA's crosshairs, but six years later, his case is still not fully resolved. As with far too much of what is passed off these days as Wall Street regulation, we got periods of activity, periods of inactivity, and, ultimately, things that never quite move forward or backward but spin their wheels. 

As set forth in part in the SEC Release:

[D]ue to a technological error that resulted in a number of public comments submitted through the Commission's internet comment form not being received by the Commission. The majority of the affected comments were submitted in August 2022; however, the technological error is known to have occurred as early as June 2021.

To ensure that interested persons, including any affected commenters, have the opportunity to comment on the affected releases or to resubmit comments, the Commission is reopening the comment periods for the affected releases until 14 days following publication of the reopening release in the Federal Register.

As further described in the reopening release, all commenters who submitted a public comment to one of the affected comment files through the internet comment form between June 2021 and August 2022 are advised to check the relevant comment file on SEC.gov to determine whether their comment was received and posted. If a comment has not been posted, commenters should resubmit that comment.

. . .

Affected Releases:
  • Reporting of Securities Loans, Release No. 34-93613 (Dec. 8, 2021)

  • Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps; Prohibition against Undue Influence over Chief Compliance Officers; Position Reporting of Large Security-Based Swap Positions, Release No. 34-93784 (Feb. 4, 2022)

  • Money Market Fund Reforms, Release No. IC-34441 (Feb. 8, 2022)

  • Share Repurchase Disclosure Modernization, Release Nos. 34-93783, IC-34440 (Feb. 15, 2022)

  • Short Position and Short Activity Reporting by Institutional Investment Managers, Release No. 34-94313 (Mar. 16, 2022); see also Notice of the Text of the Proposed Amendments to the National Market System Plan Governing the Consolidated Audit Trail for Purposes of Short Sale-Related Data Collection, Release No. 34-94314 (Mar. 16, 2022)

  • Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Release Nos. 33-11038, 34-94382, IC-34529 (Mar. 23, 2022)

  • Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Release No. IA-5955 (Mar. 24, 2022)

  • The Enhancement and Standardization of Climate-Related Disclosures for Investors Release Nos. 33-11042, 34-94478 (Apr. 11, 2022)

  • Special Purpose Acquisition Companies, Shell Companies, and Projections, Release Nos. 33-11048, 34-94546, IC-34549 (May 13, 2022)

  • Investment Company Names, Release Nos. 33-11067, 34-94981, IC-34593 (June 17, 2022)

  • Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices, Release Nos. 33-11068, 34-94985, IA-6034, IC-34594 (June 17, 2022)

  • Request for Comment on Certain Information Providers Acting as Investment Advisers, Release Nos. IA-6050, IC-34618 (June 22, 2022)
Heightened Threat of Fraud: FINRA Alerts Firms to Recent Trend in Fraudulent Transfers of Accounts Through ACATS (FINRA Regulatory Notice 22-61)
As set forth in part in the "Summary" portion of the FINRA Regulatory Notice:

FINRA alerts member firms to a rising trend in the fraudulent transfer of customer accounts through the Automated Customer Account Transfer Service (ACATS), an automated system administered by the National Securities Clearing Corporation (NSCC), that facilitates the transfer of customer account assets from one firm to another. 

As more fully explained in part on Page 3 of the Notice [Ed: footnotes omitted]:

ACATS fraud is related to the growing threat of new accounts being opened online or through mobile applications using stolen or synthetic identities. In connection with the COVID-19 pandemic, FINRA previously advised member firms that bad actors may be "targeting firms offering online account opening services and perhaps especially, firms that recently started offering such services" by using stolen or synthetic identities to establish new accounts at member firms as a way to "divert congressional stimulus funds, unemployment payments or to engage in automated clearing house (ACH) fraud." Similarly, with ACATS fraud, bad actors may be taking advantage of the efficiencies of the account transfer process offered through ACATS to fraudulently transfer assets out of an existing account of a legitimate customer whose identity is stolen to a new account the bad actor established at another broker-dealer using the stolen identity.