Wall Street Whistleblowers Tip Off SEC -- But Hear Nothing Back (Bloomberg, DEEP DIVE by John Holland)
Iconix, whose shares traded on the NASDAQ, was in the business of acquiring various brands, including clothing and fashion brands, and then licensing those brands to retailers, wholesalers, and suppliers who, in turn, produced and sold clothing and other products bearing the brand names.Iconix utilized joint ventures ("JVs") to profit from its brands in foreign markets. With respect to these JVs, Iconix transferred ownership of a trademark or brand to the JV while maintaining a 50 percent ownership interest in the JV itself. The other party involved in the JV purchased a 50 percent interest in the JV from Iconix. As part of the JV agreements, each JV partner was generally entitled to 50 percent of the JV's licensing revenue. When it entered into a JV, Iconix recognized as revenue the buy-in purchase price paid by the JV partner, less Iconix's cost basis in the trademarks.Among the most critical financial metrics disclosed in Iconix's public filings with the SEC were Iconix's quarterly and annual revenue and non-GAAP diluted earnings per share ("EPS"). Iconix executives, including COLE, publicly identified revenue and EPS as the principal metrics demonstrating Iconix's growth. They also touted Iconix's consistent record of revenue and earnings growth and of meeting or exceeding Wall Street analyst consensus with respect to these metrics.The Accounting Fraud SchemeCOLE engaged in a scheme to falsely inflate Iconix's reported revenue and EPS by orchestrating a series of "round trip" transactions in which COLE and a senior Iconix executive induced a JV partner, a Hong Kong-based international apparel licensing company ("Company-1"), to pay artificially inflated buy-in purchase prices for JV interests, with the understanding that Iconix would then reimburse Company-1 for the overpayments. COLE executed the scheme for the purpose of enabling Iconix to report fraudulently inflated revenue and EPS figures based on the inflated buy-in purchase prices it obtained from Company-1.COLE arranged for Iconix to enter into at least two JVs with Company-1 that included inflated buy-in purchase prices from Company-1: (1) an amendment to a preexisting Southeast Asia joint venture, which closed on or about June 30, 2014 ("SEA-2"), and (2) a second amendment to the Southeast Asia joint venture, which closed on or about September 17, 2014 ("SEA-3") (collectively, the "SEA JVs"). SEA-2 and SEA-3 involved a fraudulent "round trip" transaction, lacking in economic substance, in which Company-1 paid an artificially inflated buy-in purchase price for its interest in the JV, in exchange for COLE's agreement that Iconix would give back the inflated portion of the purchase price to Company-1. COLE and a senior Iconix executive hid from Iconix's lawyers and outside auditors that COLE had reached an understanding with Company-1 to artificially increase the consideration Company-1 paid Iconix in exchange for COLE's agreement to round-trip the overpayment back to Company-1.Through the scheme, COLE caused Iconix to report fraudulently inflated revenue and EPS figures to the investing public. COLE did so, in part, to ensure that the reported figures met analyst consensus and to fraudulently convey the impression to the investing public that Iconix was growing quarter after quarter, as COLE had touted to the investing public.
Claimant 2's information did not cause Enforcement staff to open the Covered Action investigation or to inquire into different conduct as part of the Covered Action investigation and did not significantly contribute to the success of the Covered Action. Enforcement staff responsible for the Covered Action investigation did not review Claimant 2's first tip. Enforcement staff received Claimant 2's second tip on the same day the Covered Action was filed, and the tip related to Redacted which was not part of the Commission's charges. Furthermore, Enforcement staff provided a supplemental declaration, which we credit, confirming that the law firm to which Claimant 2 provided his/her second tip did not represent the Company in the underlying investigation, and as such, there is no evidence supporting Claimant 2's supposition that the second tip motivated the Company to settle the charges.. . .Enforcement staff opened the Covered Action investigation based on a source unrelated to Claimant 5. Enforcement staff responsible for the Covered Action investigation clarified in a supplemental declaration, which we credit, that on Redacted, OMI sent an email to an Enforcement accountant ("Accountant"), summarizing information that had been provided by Claimant 5 in his/her Redacted complaint and proposing that a disposition of no further action appeared warranted given the lack of substantiating evidence supporting Claimant 5's allegations. That same day, the Accountant agreed with the proposed disposition. On Redacted , almost nine months after the Redacted email communication discussed above, Enforcement staff opened the Covered Action investigation based on information provided by an individual other than Claimant 5. While the Accountant became the lead accountant on the Covered Action investigation, the information in Claimant 5's Redacted complaint was not used in the Covered Action investigation and did not contribute to the Covered Action.
In March 2014, Garapedian and other registered representatives working from the same branch office entered into an agreement through which they agreed to service certain customer accounts, including executing trades for those accounts, under a joint representative code (also known as joint production number) that they shared with the estate of a retired representative. The agreement set forth what percentages of the commissions the estate of the retired representative, Garapedian, and the other representatives earned on trades placed using the joint representative code.From July 2014 through November 2016, Garapedian directed a junior registered representative on his team to place trades in accounts that were covered by the agreement using different joint representative codes than the one Garapedian should have used pursuant to his agreement with the estate of the retired representative. Specifically, although Morgan Stanley's system correctly prepopulated the trades with a joint representative code Garapedian shared with the estate of the retired representative, Garapedian directed the junior registered representative to enter 417 transactions under different joint representative codes through which Garapedian received a higher percentage of commissions than what he was entitled to receive pursuant to the agreement.2 Garapedian mistakenly assumed that he had permission to change the representative codes in this manner to equalize commissions earned by him and the other registered representatives across accounts serviced by the branch office, including those covered by the joint production agreement. However, Garapedian had not verified that the estate of the retired representative agreed that Garapedian could change the representative code for the transactions at issue.As a result, Garapedian's actions caused Morgan Stanley's trade confamations for the 417 trades to inaccurately reflect another joint representative code instead of the joint representative code that Garapedian shared with the estate of the retired representative. Garapedian's actions resulted in his receiving higher commissions and the retired representative's estate receiving less commissions from the 417 trades than what each was entitled to receive pursuant to the agreement. In January 2021, Morgan Stanley paid restitution of approximately $8,000 to the estate of the retired representative, which is the approximate amount of additional commissions Garapedian received as a result of changing the representative code on the 417 trades.By falsifying the representative code on the 417 trades, Garapedian violated FINRA Rule 2010. In addition, Garapedian violated FINRA Rules2 During this same time period, Garapedian directed the junior registered representative to enter an additional 322 trades under different joint representative codes through which Garapedian received a lower percentage of commissions than what he was entitled to receive pursuant to the agreement.Footnote
Before becoming associated with any FINRA member firm, Seymour provided tax preparation and trust administration services through his wife's tax and estate business. Beginning around 2010, Seymour also served as co-trustee of Trust A. Both Trust A and the beneficiaries of Trust A later became customers of Seymour at Morgan Stanley and Raymond James.Upon associating with Morgan Stanley and Raymond James, Seymour sought to continue working for his wife's tax and estate business. In considering Seymour's requests for approval of his outside business activity, each firm placed restrictions on the scope of his participation in the activity. In June 2014, Seymour disclosed to Morgan Stanley that he served as co-trustee of Trust A, and that he worked for his wife's tax and estate business. Morgan Stanley approved Seymour's work for his wife's business as an outside business activity, but prohibited him from continuing to serve as co-trustee for Trust A. When Seymour later became associated with Raymond James in February 2017, he again requested approval to work for his wife's business, but did not disclose to the firm that he provided trust administration services, including performing the duties of a co-trustee for Trust A, through his wife's business. Instead, Seymour's written request for approval described his responsibilities for his wife's business merely as "[t]ax [p]reparation." Raymond James subsequently approved Seymour's work for his wife's business as an outside business activity, but prohibited him from serving as a trustee or maintaining billpaying authority over any third-party bank account.Seymour exceeded the scope of his approved outside business activity while he was associated with each firm. From June 2014 to November 2020, Seymour, at the direction of the remaining co-successor trustee, continued to perform the duties of a co-trustee for Trust A, even though both Morgan Stanley and Raymond James had prohibited him from serving as a trustee. And from February 2017 to at least November 2020, Seymour failed to comply with Raymond James's prohibition against having bill-paying authority over any third-party account. Using his check-writing authority for Trust A's bank account, Seymour issued checks, including checks to compensate himself for the services he provided Trust A. In so doing, Seymour engaged in outside business activities without providing full and accurate prior written notice to his firms of those activities.Additionally, from 2017 to 2020, Seymour submitted five compliance questionnaires to Raymond James, in which he falsely attested that he had not participated in outside business activities that he had not disclosed to the firm.Therefore, Seymour violated FINRA Rules 3270 and 2010.
During the period Jtne 2017 through September 2019, FFEC failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with the suitability requirements of FINRA Rule 2111 as they pertain to margin use. In addition, FFEC and Graves failed to reasonably supervise the use of margin in two customer accounts and failed toreasonably supervise mutual fund switches in two customer accounts. These failures caused the customers to pay more than $112,000 in commissions, fees, and margin interest. By this conduct, FFEC and Graves violated FINRA Rules 3110 and 2010.