The Wall Street Legal & Regulatory Feed
Securities Industry Commentator by Bill Singer Esq
January 4, 2023
DOJ RELEASES
SEC RELEASES
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1/4/2023
https://www.brokeandbroker.com/6829/schwab-order-system/
The Wall Street of 2023 isn't the Wall Street of 2020 or 2021. The meme stock frenzy has passed. We're not talking as much about Robinhood and Reddit, or how social media and Covid are fueling a trading mania. Looking back to those frenetic days, in the rush to cut commissions, expand online trading, and cater to those eager to "play" the stock market, brokerage firms were frequently overwhelmed by surges in volume or computer outages. Unfortunately, Wall Street expanded to a point where its operational capacity didn't keep pace -- and the industry's regulators failed to keep up. In a recent lawsuit against Schwab, a customer raises many of these issues on a stroll down a not-too-distant memory lane.
Superintendent Adrienne A. Harris Announces $100 Million Settlement with Coinbase, Inc. after DFS Investigation Finds Significant Failings in the Company's Compliance Program / DFS Investigation Found Wide-Ranging and Long-Standing Failures in Coinbase, Inc.'s Anti-Money Laundering Program, Including with Regard to its Know Your Customer/Customer Due Diligence, Transaction Monitoring, and Suspicious Activity Reporting Systems, Among Others / Settlement Requires Coinbase to Pay $50 Million Penalty and to Invest an Additional $50 Million in its Compliance Program (NYS Department of Financial Services Release)
https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202301041
The headline sort of says it all. Click on it and read the NYSDFS Release.
Arizona man arraigned in the District of New Mexico on mail and wire fraud indictment (DOJ Release)
https://www.justice.gov/usao-nm/pr/arizona-man-arraigned-district-new-mexico-mail-and-wire-fraud-indictment
In the United States District Court for the District of New Mexico, a 27-count Indictment was filed charging John Lopez with 16 counts of wire fraud and 11 counts of mail fraud. As alleged in part in the DOJ Release:
In the United States District Court for the District of New Mexico, a 27-count Indictment was filed charging John Lopez with 16 counts of wire fraud and 11 counts of mail fraud. As alleged in part in the DOJ Release:
[L]opez was the founder and president of Personal Money Management Company (PMMCO), which ostensibly provided financial management services to clients, many of whom were retired or near retirement. Beginning in 2014, Lopez held himself out as an investment advisor with considerable expertise who could consistently and substantially beat the market average return on investment.Lopez allegedly communicated to clients and prospective clients various false promises and misrepresentations related to his investment ability and strategy. As alleged in the indictment, Lopez falsely told clients and prospective clients that he could guarantee annual returns of 10 percent on their principal investment no matter how volatile the stock market might be, and that he could make an annualized 19.2-percent return on a retirement investment, in which clients would keep their initial principal investment as well. Lopez allegedly claimed that he had developed a computer program or algorithm that resulted in consistent and substantial above-average market returns on investments. He allegedly told clients and prospective clients that he would invest their money primarily in stocks and bonds, moving their money between those two investment instruments when market indicators or his computer algorithm told him to move them between the two.From February 2014 through November 2021, Lopez received approximately $19.4 million from clients. During that same period, rather than invest primarily in stocks and bonds, Lopez allegedly purchased $13.3 million in precious metals, such as gold and silver. Lopez disbursed approximately $6.1 million to clients, which he allegedly represented as investment gains.After securing client money, Lopez allegedly generated periodic account statements, purportedly showing substantial investment gains. For example, in November 2021, a client received a purported account statement reflecting that an investment of $200,000 with Lopez and PMMCO in 2016 had grown to $3,289,273, a 1,544-percent increase over an approximate five-year period. This growth calculation excluded a $565,000 withdrawal during 2021. In October 2021, those statements represented that PMMCO client account values were collectively worth approximately $39 million.On Nov. 9 and 10, 2021, government agents seized PMMCO assets, mostly comprising precious metals, which were valued at less than $15 million.Lopez allegedly continued to generate deceptive PMMCO account statements after the government seized PMMCO's assets. On May 31, 2022, those statements represented PMMCO client account values worth approximately $49 million.
SEC Charges Creator of CoinDeal Crypto Scheme and Seven Others in Connection with $45 Million Fraud / Orchestrator used investors' funds to buy cars, real estate, and a boat (SEC Release)
https://www.sec.gov/news/press-release/2023-2
In the United States District Court for the Eastern District of Michigan, the SEC filed a Complaint https://www.sec.gov/litigation/complaints/2023/comp-pr2023-2.pdf charging:
- Neil Chandran, Garry Davidson, Michael Glaspie, Linda Knott, Banner Co-Op, Inc, and BannersGo, LLC with violating the antifraud and registration provisions of the Securities Act and Exchange Act;
- Garry Davidson, Michael Glaspie, Linda Knott, Banner Co-Op, Inc, and BannersGo, LLC with aiding and abetting certain of Neil Chandran's violations of the antifraud provisions of the Exchange Act; and
- Amy Mossel and AEO Publishing Inc. with aiding and abetting Michael Glaspie's violations of the antifraud and registration provisions of the Securities Act and Exchange Act
Previously, in the U.S. District Court for the District of Nebraska, Chandran was charged with three counts of wire fraud and two counts of monetary transaction in unlawful proceeds for his involvement in CoinDeal. As alleged in part in the SEC Release:
[C]handran, Davidson, Glaspie, Knott, and Mossel falsely claimed that investors could generate extravagant returns by investing in a blockchain technology called CoinDeal that would be sold for trillions of dollars to a group of prominent and wealthy buyers. From at least January 2019 to 2022, Chandran, Davidson, Glaspie, Knott, and Mossel allegedly disseminated false and misleading statements to investors regarding the purported value of CoinDeal, the parties involved in the supposed sale of CoinDeal, and the use of investment proceeds. According to the complaint, no sale of CoinDeal ever occurred and no distributions were made to CoinDeal investors. The complaint further alleges that the defendants collectively misappropriated millions of dollars of investor funds for personal use, and that Chandran used investor funds to purchase items such as cars, real estate, and a boat.
SEC Obtains Judgment Against Individual in Multi-Million Dollar Securities Offering Fraud (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25607.htm
The United States District Court for the District of Maine entered a Final Consent Judgment against Paul Hess https://www.sec.gov/litigation/litreleases/2023/judg25607.pdfordering him to pay disgorgement of $2,382,116, prejudgment interest of $434,670, and a civil penalty of $160,000. The Judgment permanently enjoins Hess from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; the broker-dealer registration requirements of Section 15(a) of the Exchange Act; and the securities offering registration requirements of Sections 5(a) and 5(c) of the Securities Act. Further, Hess is prohibited from participating in the issuance, purchase, offer, or sale of any security with the exception of Hess purchasing or selling securities for his own personal accounts. As alleged in part in the SEC Release:
[H]ess schemed with co-defendants, including Michael Liberty, to induce investors to purchase unregistered interests in shell companies controlled by Michael Liberty that supposedly owned transferrable interests in a fintech startup then known as Mozido, LLC. In reality, the shell companies either did not own, or were not permitted to transfer, interests in the company. The SEC's complaint also alleged that Paul Hess and Michael Liberty lied to investors about Mozido's valuation and finances, the amount Michael Liberty had personally invested in Mozido, and the use of their funds. In total, Hess, Liberty, and the other co-defendants fraudulently raised more than $48 million from 2010 through 2016.
SEC Obtains Partial Judgments Against Two CodeSmart Defendants (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25606.htm
In the United States District Court for the Eastern District of New York, the SEC filed a Complaint charging Marc Wexler and Matthew Bell
https://www.sec.gov/litigation/litreleases/2015/lr23400.htmwith violating Sections 5(a), 5(c) and 17(a) of the Securities Act, Sections 9(a) and 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. On December 22, 2022, the Court entered a Partial Consent Judgment against Wexler and Bell in which they agreed to be permanently enjoined from violations of the charged provisions and agreed to a penny stock bar. Wexler additionally consented to an officer-and-director bar. As alleged in part in the SEC Release:
[S]tarting in 2013, Wexler and Bell, along with the other defendants, were involved in a scheme to manipulate the securities of CodeSmart Holdings, Inc. ("CodeSmart"). The SEC alleged that Wexler and others sought to flood the market with CodeSmart shares and engaged in a promotional campaign to artificially inflate the price of the stock. Meanwhile Bell and another individual invested their brokerage clients in CodeSmart. In short, the SEC alleged that the plan was for the defendants to profit at the expense of Bell's brokerage clients.
https://www.finra.org/sites/default/files/fda_documents/2021071200801
%20Kevin%20Dominic%20Klickna%20CRD%205640324%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, Kevin Dominic Klickna submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Kevin Dominic Klickna was first registered in 2009 with AXA Advisors, LLC n/k/a Equitable Advisors; and that he left AXA in 2011 but rejoined in 2013. In accordance with the terms of the AWC, FINRA imposed upon Klickna a $5,000 fine and a three-month suspension from association with any FINRA member in all capacities. As alleged in part in the AWC:
On March 23, 2021, Klickna affixed a customer's signature electronically on an annuity account application without the customer's consent. Further, on March 25, 2021, Klickna copied the same customer's signature and affixed it to a rollover form. The customer eventually noticed the forgery on the rollover form and complained to Equitable.Therefore, by forging the customer's electronic signature on the annuity account application and affixing the customer's signature on the rollover form, Klickna violated FINRA Rule 2010.In addition, by causing Equitable to maintain inaccurate books and records, Klickna violated FINRA Rules 4511 and 2010."
FINRA Censures and Fines Blaylock Van, LLC for MSRB Supervision
https://www.finra.org/sites/default/files/fda_documents/2017054852001
%20Blaylock%20Van%2C%20LLC%20CRD%20145317%20AWC%20va.pdf
%20Blaylock%20Van%2C%20LLC%20CRD%20145317%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, Blaylock Van, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Blaylock Van, LLC has been a FINRA member firm since 2007 with about 35 registered representatives at seven branches. In accordance with the terms of the AWC, FINRA imposed upon Justly Markets LLC a Censure, a $50,000 fine, and an undertaking to certify compliance with the cited supervisory issues. As alleged in part in the AWC:
Bill Singer's Comment: Compliments to FINRA on a very well crafted AWC that sets out the allegations in a straightforward manner.Blaylock's Supervisory System was not Reasonably Designed to Detect Pre-Arranged Trading.From October 2016 through June 2021, Blaylock failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations prohibiting manipulative pre-arranged trading.Blaylock's WSPs prohibited pre-arranged trading, a form of manipulative trading. However, the firm's supervisory system failed to provide for reasonable surveillance or supervisory reviews for pre-arranged trading. A single supervisor conducted a daily review of the firm's trade blotter to identify potential pre-arranged trading. The daily trade blotter listed hundreds of transactions but did not associate transactions between potentially related customers - i.e., by name or account number that would assist the supervisor in identifying potential pre-arranged trading.In addition, the firm's WSPs did not provide guidance regarding how a supervisor was to identify or review for possible indicia of pre-arranged trading.Blaylock Failed to Detect Potential Pre-Arranged Trading.Between October 2016 and April 2017, Blaylock executed 34 pairs of municipal securities transactions on a principal basis with two institutional customers that were under common control. In these instances, the customers directed a Blaylock representative to buy from one customer and then sell the same bonds to the other customer at prices that were agreed to by the customers.2 The customers would trade the bonds back and forth sometimes at increasing prices that were between three and twelve points above the prevailing market price.As a result of the firm's failure to have a reasonably designed supervisory system, the firm did not detect the pre-arranged trading pattern even though the transactions appeared on the firm's daily trade blotter. The trading stopped in April 2017, when one of the two customers refused to pay for bonds purchased from Blaylock. The firm immediately closed the customers' accounts and sold the bonds into the marketplace for a monetary loss.By failing to establish and maintain a supervisory system, including WSPs, reasonably designed to detect and prevent pre-arranged trading, Blaylock violated MSRB Rule G-27.= = =Footnote 2: In some instances, the pattern of trading commenced with one customer selling the bonds to Blaylock.
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1/3/2023
Removal of FINRA Arbitrator Cited by Schwab and Interactive Brokers in HFT Customer Dispute (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/6819/finra-arbitration-nondisclosure/
As we start a new year, we are asked, yet again, to consider whether FINRA provides a fair arbitration venue. Yet again, we are asked to consider whether FINRA is competently running its arbitration venue. Yet again, we are asked to consider whether FINRA is making an effort to tackle the growing chorus of complaints by both the industry and public customers about a lack of policing of its roll of arbitrators and a lack of effective, timely intervention to nip problems in the bud. All of which prompts veteran industry reform advocate Bill Singer, Esq. to call upon FINRA's Board of Governors to conduct an inquiry. To do something. To do anything. Yet again, Bill knows that FINRA's lackluster Board will likely punt, if even that.
Former Chief Financial Officer Of Two SPACs Pleads Guilty To Fraud Scheme / Cooper Morgenthau Embezzled More Than $5 Million and Caused False Statements to Be Made to Accountant and Auditor and in SEC Filings (DOJ Release)
https://www.justice.gov/usao-sdny/pr/former-chief-financial-officer-two-spacs-pleads-guilty-fraud-scheme
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SEC Charges Former SPAC CFO for Orchestrating $5 Million Fraud Scheme (SEC Release)
https://www.sec.gov/news/press-release/2023-1
In the United States District Court for the Southern District of New York, in response to an Information https://www.justice.gov/usao-sdny/press-release/file/1560631/download, Cooper J. Morgenthau (former Chief Financial Officer of two special purpose acquisition company ("SPACs") pled guilty to one count of wire fraud; and he agreed to forfeit $5,111,335 and to pay restitution of $5,111,335. As alleged in part in the DOJ Release:
Between in or about June 2021 and in or about August 2022, MORGENTHAU, who was the CFO of SPAC-1 and SPAC-2, embezzled more than $5 million from the two companies. SPAC-1 had recently had its initial public offering, while SPAC-2 was raising money from private investors in preparation for its anticipated IPO. MORGENTHAU used the embezzled funds to trade equities and options of so-called "meme stocks" and cryptocurrencies, losing almost all of the money that he stole. To conceal and facilitate his embezzlement from SPAC-1, MORGENTHAU fabricated bank statements, which he provided to SPAC-1's accountant and auditor; made and caused to be made material misstatements in SPAC-1's public filings with the Securities and Exchange Commission ("SEC"); and transferred some of SPAC-2's funds to SPAC-1 to cover up the funds he had misappropriated from SPAC-1.
In the United States District Court for the Southern District of New York, a Complaint was filed charging Cooper J. Morgenthau (former Chief Financial Officer of the special purpose acquisition company ("SPAC") African Gold Acquisition Corp) with having violated antifraud provisions of the federal securities laws, lying to African Gold's auditor and accountants in violation of the Securities Exchange Act of 1934, and knowingly falsified African Gold's books and records, and filed false certifications with the SEC. Morgenthau consented to a Judgment enjoining him from further federal securities laws violations and barring him from serving as an officer or director of a publicly traded company, with monetary remedies to be determined at a later date. As alleged in part in the SEC Release:
[F]om June 2021 through July 2022, Morgenthau embezzled money from African Gold and stole funds from another SPAC series called Strategic Metals Acquisition Corp. I and II to pay for his personal expenses and to trade in crypto assets and other securities.SEC Obtains Final Judgment Against Individual Behind Bogus Tender Offer (SEC Release)
According to the SEC's complaint, Morgenthau concealed unauthorized withdrawals by falsifying African Gold's bank account statements and then provided those falsified documents to African Gold's auditor and accountants for purposes of preparing African Gold's SEC filings. During the same general time period, Morgenthau raised money from Strategic Metals' investors based on misrepresentations that the money would be used to launch the Strategic Metals SPACs, when in fact Morgenthau misappropriated the money for personal uses, including to conceal his embezzlement of African Gold's funds.
https://www.sec.gov/litigation/litreleases/2023/lr25604.htm
In the United States District Court for the Southern District of New York, the SEC filed a Complaint against Melville Peter ten Cate
https://www.sec.gov/litigation/complaints/2023/comp25604.pdf. Without admitting or denying the allegations in the Complaint, Ten Cate consented to entry of a Final Judgment
https://www.sec.gov/litigation/litreleases/2023/judg25604.pdf permanently enjoining him from violations of the antifraud provisions of Sections 10(b) and 14(e) of the Securities Exchange Act; imposing a permanent conduct-based injunction that will prevent him from, among other things, participating in any securities offerings; permanently barring him from acting as an officer or director of a public company; and ordering him to pay a civil penalty of $500,000. As alleged in part in the SEC Release, the SEC had previously charged ten Cate with:
fraud for orchestrating a phony offer to purchase a major U.S. aircraft, defense, and industrial company.The SEC's complaint was filed on April 5, 2022. The complaint alleged that ten Cate and his now-defunct private company, Xcalibur Aerospace, Ltd., placed an advertisement in The New York Times announcing a proposed plan to purchase all existing stock of Textron, Inc., at a 56% premium over the stock's previous closing price. The announcement allegedly contained a number of false and misleading statements about Xcalibur's size and financial condition and failed to disclose that ten Cate and entities he controlled had been the subject of multiple bankruptcy and default judgments.