I entered Wall Street in 1982 in the Law Department of Smith Barney, Harris Upham & Co.
There is no more Smith Barney.
Nor, if memory still serves me, is there a Bear Stearns, Dean Witter Reynolds, Drexel Burnham Lambert, Kidder Peabody, Lehman Brothers, PaineWebber, Saloman Brothers, Shearson -- they are all gone, sliced and diced into oblivion. In 2023, the winnowing continues, and it is only a matter of time until the FINRA broker-dealer community is reduced to little more than Goldman Sachs, Vanguard, Charles Schwab, Fidelity, Bank of America/Merrill Lynch, J.P. Morgan, Morgan Stanley, and Wells Fargo.
Bigger is not always better, so perhaps with fewer brokerage firms, Wall Street will become more nimble and less bloated. That could be. I don't think so but it's possible. What I see, unfortunately, is the ongoing erosion of independence and professionalism to the detriment of the industry and public investors. Once, stockbrokers did their own research and knew the stocks that they sold. Nowadays, it's up-selling. It's cross-selling. It's cold calling. It's pushing house product and in-house services. Sorry, I'm not going to play the apologist. I will not whitewash the dumbing-down of Wall Street. If anything, it's a history of bad going to worse.
Over the last quarter of a century of Wall Street regulation, the result has been one step forward and two steps back. Always, the SEC is behind the curve and regulating yesterday's fraud. These days, the federal regulator has invested far too much human and financial capital in overly ambitious rulemaking and rule-amending at the expense of robust, aggressive enforcement. FINRA, a self-regulatory-organization, fares no better. No matter the regulator, the effort seems more about the glossy marketing of the appearance of regulation rather than delivering its substance. We get podcasts. We get videos. We get Zoom calls. We get cable TV interviews. We get seminars at over-priced resorts. We get tweets. We get self-serving press releases. We get inundated with moronic reports that were commissioned to examine the obvious. What we don't get is a singular, passionate, laser-focused regulatory agenda designed to proactively ferret out fraud and retroactively prosecute and punish the scamsters and fraudsters.
The public has already voted by opting for self-directed trading rather than reposing trust and confidence in a tarnished brokerage industry. Unfortunately, in making their own investment decisions, many unsophisticated investors fell prey to what they didn't understand: Meme stocks, Crypto, NFTs, SPACs, Day Trading, and the like. No one to trust. Nowhere to go. Frankly, it's a pathetic landscape filled with the walking wounded.
Maybe this year, finally, someone launches a trade group for the industry's hundreds of thousands of professionals. Yeah, I know, wishful thinking. But there are rumblings. I hear them. I feel them. The industry's grunts are getting fed up. They aspire to more than the glorified role of a teleservice operator working out of a soul-crushing call center masquerading as a branch office. The Covid pandemic showed them that they could work from home, work remote. The purported support services provided by the erstwhile wirehouses have been revealed as illusory - and not worth the hit to gross commissions or fees. In 2023, if pressed, many Wall Street professionals would admit that they now realize that they can deliver better customer service if they weren't shackled to a large industry employer by anti-consumer laws and rules enforced by co-opted industry regulators.
What the public investor and the industry both need is an honest, unconflicted financial professional firmly entrenched in the role of a fiduciary. The consequence of that empowerment would be to put meaning into the phrase: You work for me. The "you" being an independent financial fiduciary; and the "me" being the public-investor-client in contradistinction to the industry-employer.
Is it an unreasonable goal? Perhaps, but as George Bernard Shaw opined:
The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.
To all you unreasonable Wall Street professionals out there, contact me. Let's make common cause. Let's see if we can make some progress reforming Wall Street!
CEO Of Security Company Sentenced To Five Years In Prison For International Boiler Room Fraud Scheme (DOJ Release)
In the United States District Court for the Southern District of New York, DirectView Holdings, Inc. Chief Executive Officer Roger Ralston, 54, pled guilty to conspiracy to commit wire fraud; and he was sentenced to five years in prison plus three years of supervised release, and ordered to pay restitution in the amount of $15,714,859 and forfeiture in the amount of $15,713,621.20. Co-defendants Christopher Wright and Steven Hooper were sentenced to 52 months in prison and 42 months in prison, respectively, for their roles in the fraud. As alleged in part in the DOJ Release:
Between approximately 2009 and 2015, RALSTON and other co-conspirators engaged in a scheme to defraud victims in the United Kingdom of nearly $16 million through the sale of false, fraudulent, and materially misleading investments, and to launder the proceeds of the fraud through bank accounts in multiple foreign jurisdictions. RALSTON and his co-conspirators used the services of telemarketing call centers to identify and cold-call potential victims, who were primarily elderly or retired individuals residing in the United Kingdom. Over a series of telephone calls, the telemarketers persuaded victims to invest money under various false and misleading pretenses, including the promise of short-term, high-yield, no-risk returns, when in fact the investments were high-risk, illiquid, and in some instances, entirely fictitious. Many victims were persuaded to make additional investments under the false pretense that they would be permitted to sell their holdings if (and only if) they purchased more. In reliance on the false representations and promises, the victims wired funds to various bank accounts in the United States, including in the Southern District of New York, in the names of corporate entities controlled by RALSTON. RALSTON then mailed and emailed documents related to the fraudulent investments, including purchase contracts and investment certificates, to the victims. Victims who tried to sell their investments found that they were unable to do so. The victims never received a refund on their principal or any return on their investments.
In order to conceal the nature, location, source, ownership, and control of the proceeds of the fraudulent scheme, RALSTON regularly transferred a substantial portion of the fraud proceeds from bank accounts in the United States, including in the Southern District of New York, to overseas bank accounts, including accounts in Cyprus, Switzerland, and the United Kingdom, in the names of various shell companies controlled by RALSTON’s co-conspirators.
The nature of the particular fraudulent investment vehicles being marketed to the victims changed over time. From in or about 2009 until in or about 2011, RALSTON and his co-conspirators sold DirectView stock to the victims based on telemarketers’ false representations and promises that the shares were a no-risk, short-term investment in a debt-free company and that the shares were likely to increase over 100% in value in a short period of time. In contrast to what RALSTON represented to victims, DirectView’s annual report filed with the United States Securities and Exchange Commission for the year ending December 31, 2010, contained dire warnings about the poor fiscal health of DirectView and the risk attendant in purchasing stock, including that the company “may be forced to cease operations” due to losses and cash flow problems, and purchasers “may find it extremely difficult or impossible to resell our shares.”
From in or about 2011 until in or about 2015, RALSTON and his co-conspirators engaged in the sale of fraudulent carbon credits and offsets. The boiler room callers appealed to victims by claiming that the investments would be environmentally friendly and help address the climate crisis. The victims were falsely promised that the carbon-related investments they purchased could be easily sold, carried no risk, and would yield a significant, short-term return. In fact, the carbon credits and offsets that were sold to the victims were fake and did not represent any actual carbon credits or offsets. RALSTON caused fraudulent carbon certificates to be created and sent to the victims.
Former Coinbase Insider Pleads Guilty In First-Ever Cryptocurrency Insider Trading Case / Ishan Wahi Tipped His Associates Regarding Crypto Assets That Were Going To Be Listed On Coinbase Exchanges (DOJ Release)
In the United States District Court for the Southern District of New York, former Coinbase Global, Inc. product manager Ishan Wahi pled guilty to two counts of conspiracy to commit wire fraud. As alleged in part in the DOJ Release:
[C]oinbase was one of the largest cryptocurrency exchanges in the world. Coinbase users could acquire, exchange, and sell various crypto assets through online user accounts with Coinbase. Periodically, Coinbase added new crypto assets to those that could be traded through its exchange, and the market value of crypto assets typically significantly increased after Coinbase announced that it would be listing a particular crypto asset. Accordingly, Coinbase kept such information strictly confidential and prohibited its employees from sharing that information with others, including by providing a “tip” to any person who might trade based on that information.
Beginning in approximately October 2020, ISHAN WAHI worked at Coinbase as a product manager assigned to a Coinbase asset listing team. In that role, WAHI was involved in the highly confidential process of listing crypto assets on Coinbase’s exchanges and had detailed and advanced knowledge of which crypto assets Coinbase was planning to list and the timing of public announcements about those crypto asset listings.
On multiple occasions between June 2021 and April 2022, WAHI violated his duties of trust and confidence to Coinbase by providing confidential business information that he learned in connection with his employment at Coinbase to Nikhil Wahi and Sameer Ramani so that they could secretly engage in profitable trades around public announcements by Coinbase that it would be listing certain crypto assets on Coinbase’s exchanges. Following Coinbase’s public listing announcements, on multiple occasions, Nikhil Wahi and Ramani sold the crypto assets for a profit.
On April 12, 2022, a Twitter account that is well known in the crypto community tweeted regarding an Ethereum blockchain wallet “that bought hundreds of thousands of dollars of tokens exclusively featured in the Coinbase Asset Listing post about 24 hours before it was published.” The trading activity referenced in the April 12 tweet was trading previously conducted by Ramani based on tips provided by WAHI. Coinbase thereafter publicly replied on Twitter, noting that it had already begun investigating the matter and, a few weeks later, stated in a public blog post that any Coinbase employee who leaked confidential company information would be “immediately terminated and referred to relevant authorities (potentially for criminal prosecution).” On May 11, 2022, Coinbase’s director of security operations emailed WAHI to inform him that he should appear for an in-person meeting relating to Coinbase’s asset listing process at Coinbase’s Seattle, Washington, office on May 16, 2022. WAHI confirmed he would attend the meeting.
On the evening of May 15, 2022, WAHI purchased a one-way flight to India that was scheduled to depart the next day shortly before WAHI was supposed to be interviewed by Coinbase. In the hours between booking the flight and his scheduled departure, WAHI called and texted Nikhil Wahi and Ramani about Coinbase’s investigation and sent both of them a photograph of the messages he had received on May 11, 2022, from Coinbase’s director of security operations. Prior to boarding the May 16, 2022, flight to India, WAHI was stopped by law enforcement and prevented from leaving the country.
2023 SEC EXAMINATION PRIORITIES / SEC Division of Examinations
Okay . . . so, ummm, look, I gotta post this because there are a lot of my readers that like to read this stuff. Many of them know (as I do) that this is all nonsense because every year the SEC posts this silliness about their priorities and then, the next year, it's pretty much more of the same, except, y'know, they change the names of things and add a few topics that are all the day's rage. Sadly, little if any of the priorities ever attract sufficient staffing to get the job done. Frankly, the amount of time and staffing allocated to producing the glossy annual report could be better invested in putting those same dollars and staff into actually conducting more timely and thorough exams but, what can I say? So, in the spirit that I'm just going through the motions here, this is what the SEC Press Release announcing the above 2023 priorities asserts in part:
New Investment Adviser and Investment Company Rules – The Division will focus on the new Marketing Rule (Advisers Act Rule 206(4)-1) and whether registered investment advisers (RIAs) have adopted and implemented written policies and procedures that are reasonably designed to prevent violations by the advisers and their supervised persons of the new rule and whether RIAs have complied with the substantive requirements. The Division will also focus on new rules applicable to investment companies, including the Derivatives Rule (Investment Company Act Rule 18f-4) and Fair Valuation Rule (Investment Company Act Rule 2a-5).
RIAs to Private Funds – Examinations will review issues under the Advisers Act, including an adviser’s fiduciary duty, and will assess risks, including a focus on compliance programs, fees and expenses, custody, the new Marketing Rule, conflicts of interest, and the use of alternative data. The Division will also review private fund advisers’ portfolio strategies, risk management, and investment recommendations and allocations, focusing on conflicts and disclosures around these areas. In addition, the Division will focus on RIAs to private funds with specific risk characteristics, including highly leveraged private funds and private funds managed side-by-side with business development companies.
Retail Investors and Working Families – The Division will continue to address standards of conduct issues for broker-dealers and RIAs to ensure that retail investors and working families are receiving recommendations and advice in their best interests. Specifically, these examinations will focus on how registrants are satisfying their obligations under Regulation Best Interest and the Advisers Act fiduciary standard to act in the best interests of retail investors and not to place their own interests ahead of retail investors'. Examinations will include assessments of practices regarding review of investment alternatives, management of conflicts of interest, and consideration of investment goals and account characteristics.
Environmental, Social, and Governance (ESG) – The Division will continue its focus on ESG-related advisory services and fund offerings, including whether funds are operating in the manner set forth in their disclosures. In addition, the Division will assess whether ESG products are appropriately labeled and whether recommendations of such products for retail investors are made in the investors’ best interests.
Information Security and Operational Resiliency – The Division will review broker-dealers’, RIAs’, and other registrants’ practices to prevent interruptions to mission-critical services and to protect investor information, records, and assets. Reviews of broker-dealers and RIAs will include a focus on the cybersecurity issues associated with the use of third-party vendors, including registrant visibility into the security and integrity of third-party products and services and whether there has been an unauthorized use of third-party providers.
Emerging Technologies and Crypto-Assets – The Division will conduct examinations of broker-dealers and RIAs that are using emerging financial technologies or employing new practices, including technological and on-line solutions to meet the demands of compliance and marketing and to service investor accounts. Examinations of registrants will focus on the offer, sale, recommendation of, or advice regarding trading in crypto or crypto-related assets and include whether the firm (1) met and followed their respective standards of care when making recommendations, referrals, or providing investment advice; and (2) routinely reviewed, updated, and enhanced their compliance, disclosure, and risk management practices.
Former Convicted Felon to Pay $24 Million to Settle SEC Charges for Operating a Ponzi and Pyramid Scheme (SEC Release)
In the United States District Court for the Central District of California, without admitting or denying the allegations in an SEC Complaint, Eric J. "EJ" Dalius and Saivian LLC agreed to settle the SEC's charges and to jointly and severally disgorge $20,080,784.41 (the net profits of the Saivian enterprise) plus prejudgment interest of $919,215.59, and to each pay a $1,500,000 civil penalty. The SEC's litigation against Ryan Morgan Evans, a top executive in the Saivian scheme, is ongoing.
[B]eginning in October 2015, Dalius and the companies he controlled under the umbrella name "Saivian" sold securities that entitled holders to receive 20 percent cash back on their retail shopping purchases every month in exchange for paying a $125 fee every 28 days and the submission of shopping receipts. The SEC's investigation uncovered that Dalius and Saivian falsely claimed that the company funded these cash back payments to members by monetizing the point-of-sale receipt data submitted by its members. Instead, they allegedly operated a Ponzi scheme by satisfying promised returns to some investors through the investments of others. Dalius and Saivian also allegedly operated a pyramid scheme that promised a daily residual income stream for affiliates who sold Saivian memberships to downline recruits. Dalius also allegedly hid his creation and ownership of the Saivian scheme and failed to disclose his 2001 criminal conviction for carrying out a prior multi-level marketing fraud to investors.
SEC Charges Las Vegas Resident in Crypto Fraud Targeting Filipino Community in California (SEC Release)
Without admitting or denying the allegations in a Complaint filed in the United States District Court for the District of Nevada by the SEC
https://www.sec.gov/litigation/complaints/2023/comp25634.pdf, GexCrypto Corp a/k/a GexCrypto Global Trading Corp and Emilano S. Ryn consented to final judgments permanently enjoining them from violating the charged provisions and ordering them to pay, on a joint-and-several basis, disgorgement of $825,994.37, prejudgment interest of $187,567.87, and a civil money penalty of $1,000,000; and, further, Ryn is prevented from serving as an officer or director of a public company and from participating in the issuance, purchase, offer, or sale of any security with the exception of Ryn purchasing or selling securities for his own personal accounts. The SEC alleges violations of the registration provisions of Sections 5(a) and (c) of the Securities Act, as well as 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. As alleged in part in the SEC Release:
[R]yn presented himself as a successful Filipino entrepreneur in the cryptocurrency space who could help the members of his community also become rich through investing in GexCrypto, a purported first-of-its-kind crypto asset trading platform, and in a second crypto asset mining business. From late 2017 through mid-2018, Ryn allegedly raised over $800,000 from 26 investors, some of whom took out home equity loans in order to invest. According to the complaint, despite Ryn portraying GexCrypto as a world-class trading platform with superior service and technology, the platform was never built and was never operational. The complaint further alleges that Ryn's promises to investors of guaranteed returns from the crypto asset mining business, a minimum of $10,000 per month, were also false. In reality, Ryn never paid any returns, and investors lost all of their contributions.
FINRA Fines and Suspends Rep For Changed Rep Code
In the Matter of Robin Bailey Liebes, Respondent (FINRA AWC 2020068820101)
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, Robin Bailey Liebes submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Robin Bailey Liebes was first registered in 1993 and by 2009, she was registered with Morgan Stanley. In accordance with the terms of the AWC, FINRA imposed upon Liebes a $5,000 fine and a 45-calendar-day suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:
In June 2016, Liebes entered into an agreement through which she agreed to service certain customer accounts, including executing trades for those accounts, under a joint representative code (also known as a joint production number) that she shared with a representative who was part of her team and a retired representative (the First Joint Production Agreement). The First Joint Production Agreement set forth what percentages of the commissions each representative would earn on trades placed using the joint representative code. Shortly thereafter, also in June 2016, Liebes entered into a second Joint Production Agreement (the Second Joint Production Agreement) with the other representative on her team (but not the retired representative).
From August 2016 through March 2020, Liebes placed a total of 342 trades in accounts that were covered by the First Joint Production Agreement using a representative code other than the one she should have used pursuant to the agreement. Specifically, although the firm's system correctly prepopulated the trades with the applicable joint representative code for the First Joint Production Agreement, Liebes entered the 342 transactions at issue under a joint representative code for the Second Joint Production Agreement. Liebes negligently failed to verify whether the trades were made in an account that was subject to the First Joint Production Agreement. As a result, Morgan Stanley's trade confirmations for the 342 trades reflected an inaccurate representative code.
Liebes's actions resulted in her receiving higher commissions from the 342 trades than what she was entitled to receive pursuant to the First Joint Production Agreement. In December 2020, Morgan Stanley reimbursed the retired representative.
By causing Morgan Stanley to maintain inaccurate trade confirmations, Liebes violated FINRA Rules 4511 and 2010.
FINRA Censures and Fines For Untimely Private Placement Filings
In the Matter of Rosenblatt Securities Inc., Respondent (FINRA AWC 2021069319601)
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, Rosenblatt Securities Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Rosenblatt Securities Inc. was first registered in. In accordance with the terms of the AWC, FINRA imposed upon Rosenblatt Securities Inc. a Censure and $30,000 fine. As alleged in part in the AWC:
From April 2018 through September 2021, Rosenblatt failed to timely file with FINRA a private placement memorandum or any other offering document used in connection with 12 private offerings sold by the firm’s registered representatives, as required by FINRA Rule 5123. For the 12 private offerings, Rosenblatt made the required regulatory filings on average approximately 400 days late.
During the same period, Rosenblatt failed to establish and maintain a supervisory system and WSPs reasonably designed to achieve compliance with FINRA Rule 5123.2 The firm failed to make any reference to FINRA Rule 5123 in its WSPs, and failed to establish any system or procedures for complying with the rule.
By failing to timely file with FINRA a private placement memorandum or any other offering document for 12 private offerings, Rosenblatt violated FINRA Rules 5123 and 2010. By failing to establish and maintain a reasonable supervisory system and procedures for compliance with FINRA Rule 5123, Rosenblatt violated FINRA Rules 3110 and 2010.
FINRA Censures and Fines Sage Trader For AML Issues
In the Matter of SageTrader, LLC, Respondent (FINRA AWC 2022073705601)
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, SageTrader, LLC, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that SageTrader, LLC has been a FINRA member firm since 2006 with eight registered persons at two offices. In accordance with the terms of the AWC, FINRA imposed upon : SageTrader, LLC Censure, a $100,000 fine, and an undertaking to certify compliance with the cited issues. As alleged in part in the AWC [Ed: footnotes omitted]:
First, from April 2016 to June 2018, SageTrader employed a “three-strike” policy for reviewing alerts. Under the policy, if the firm determined an alert was “valid,” individual traders were: (1) given a warning for the first alert; (2) suspended from trading on the firm’s platform for one day for the second alert, and (3) terminated from accessing the firm’s platform upon the third alert. Although the firm considered whether to file a SAR after a third “valid” alert resulted in a trader’s termination, it typically failed to consider whether to file a SAR after the first and second “valid” alerts. The firm’s WSPs, which contained the firm’s AML Compliance Policy, unreasonably failed to address when the firm should consider filing a SAR based on a first or second alert.
Second, from April 2016 to June 2018, the firm also terminated certain traders based on external notice from a regulator or executing broker. However, the firm did not generally consider filing a SAR when a trader was terminated based on external notice from a regulator or executing broker.
Third, from June 2018 through December 2019, the firm replaced the “three-strike” policy with a “one-strike” policy and began terminating traders’ access to the firm’s platform after one “valid” alert. However, even when a trader was terminated under the “one-strike” policy, the firm did not generally consider whether the trading required a SAR filing.
As a result of the foregoing, SageTrader failed to establish and implement AML policies and procedures reasonably expected to detect and cause the reporting of suspicious activity. Therefore, Respondent violated FINRA Rules 3310(a) and 2010.
FINRA's new Machine-Readable Rulebook is designed to enhance firms' compliance efforts, reduce costs and aid in risk management, with a lot to gain for firms of all sizes and various business models.
On this episode, Afshin Atabaki, Associate General Counsel with FINRA's Office of General Counsel, and Haime Workie, Vice President of FINRA's Office of Financial Innovation, join us to delve into what exactly the Machine-Readable Rulebook is, how it works, and how you can start taking advantage of all it has to offer.
‘Phishing-as-a-service’ kits are driving an uptick in theft: What you can learn from one business owner’s story (CNBC by Dawn Giel)
An absolutely wonderful article from CNBC's Giel -- consider it a public service announcement! Revealed to us is the infuriating tale of small business owner Cody Mullenaux, who fell prey to a $120,000 wire transfer fraud. As Giel relates in part:
Whether the scammers realized they were doing it or not, they successfully exploited two loopholes in current consumer protection legislation that resulted in Chase not being required to replace Mullenaux’s stolen funds. Legally, banks do not have to reimburse stolen funds when a customer is tricked into sending money to a cybercriminal.
However, under the Electronic Fund Transfer Act, which covers most types of electronic transactions like peer-to-peer payments and online payments or transfers, banks are required to repay customers when funds are stolen without the customer authorizing it. Unfortunately, wire transfers, which involve transferring money from one bank to another, are not covered under the act, which also excludes fraud involving paper checks and prepaid cards.
Criminals use Telegram to recruit ‘walkers’ as America’s big banks see an 84% increase in check fraud (CNBC By Eamon Javers and Paige Tortorelli)
Not that you needed more things to keep you awake at night but CNBC posted this frightening article about how easy it is for fraudsters to wipe out your banking account.
SEC Charges Pennsylvania Investment Adviser with Multi-Million Dollar Fraud (SEC Release)
Without admitting or denying the allegations in a Complaint filed by the SEC in the United States District Court for the Eastern District of Pennsylvania
https://www.sec.gov/litigation/complaints/2023/comp25633.pdf alleging violations of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, as well as Sections 206(1), (2), and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 promulgated thereunder, Joshua W. Coleman agreed to the entry of a judgment, subject to court approval, imposing a permanent injunction and an officer-and-director bar, while reserving the issue of disgorgement and a civil penalty for further determination by the court. Coleman also has agreed to the imposition of associational and penny stock bars as part of a settled follow-on administrative proceeding. As alleged in part in the SEC Release:
[C]oleman entered into six successive loan transactions between December 2018 and June 2022 and diverted the proceeds for his personal use, including financing personal investments and paying outstanding business expenses. Coleman's scheme allegedly involved a wide range of misconduct, including forging signatures on loan documents, lying to advisory clients, and fabricating and altering emails, bank statements, and other documents. The complaint alleges that Coleman obtained the initial loans in part by pledging as collateral over $160 million in advisory client assets, a portion of which were seized by Coleman's lender after Coleman defaulted. The complaint further alleges that, to repay these clients, Coleman procured additional loans by pledging his own securities as collateral while misleading his new lenders concerning the purpose of the loans and the value of certain pledged collateral. According to the complaint, Coleman defaulted on those loan transactions and owes over $50 million in proceeds.
It's Not Sewer Service But SEC Enforcement's Effort to Serve Ex-Inmate Deemed Falling Short
In the Matter of Charles K. Topping (Order Denying Motion to Deem Service Complete and Directing the Filing of a Status Report, SEC, 1934 Release No. 96806; Admin. Proc. File No. 3-20817 / February 6, 2023)
On April 8, 2022, the SEC issued an Order Instituting Administrative Proceedings ("OIP") against Charles K. Topping; and, thereafter, the Division of Enforcement was ordered to file status reports concerning service of the OIP -- ultimately ending with the Division seeking an Order on January 12, 2023, that service was complete. Pointedly, the SEC Order asserts that:
The Division’s most recent status report, filed on December 15, 2022, states that Topping recently was released from prison and that the Federal Bureau of Prisons advised that Topping could be contacted by mail at a P.O. Box address at a Residential Reentry Management Office in Miami, FL. The status report further states that the Division mailed the OIP to that address by Priority Express Mail and included the U.S. Postal Service’s tracking information, which stated that the package was “Picked Up at Postal Facility” on August 24, 2022, and that “waiver of signature was exercised at the time of delivery.”
Okay, sure, that's nice -- except, howsabout we take a look at SEC Rule of Practice 141: Orders and Decisions: Service of Orders Instituting Proceedings and Other Orders and Decisions, which states in part that [Ed: highlight added]:
(a) Service of an Order Instituting Proceedings.
(1) By Whom Made. The Secretary, or another duly authorized officer of the Commission, shall serve a copy of an order instituting proceedings on each person named in the order as a party. The Secretary may direct an interested division to assist in making service.
(2) How Made.
(i) To Individuals. Notice of a proceeding shall be made to an individual by delivering a copy of the order instituting proceedings to the individual or to an agent authorized by appointment or by law to receive such notice. Delivery means -- handing a copy of the order to the individual; or leaving a copy at the individual's office with a clerk or other person in charge thereof; or leaving a copy at the individual's dwelling house or usual place of abode with some person of suitable age and discretion then residing therein; or sending a copy of the order addressed to the individual by U.S. Postal Service certified, registered or Express Mail and obtaining a confirmation of receipt; or giving confirmed telegraphic notice. . . .
Ummm . . . so, lemme see if I got this, the SEC's Division of Enforcement contacted Topping at a POB after his release from prison and the package was picked up at the POB per a "waiver of signature." Looking at the checklist in the SEC Service Rule above, that's not quite obtaining a confirmation/receipt, right? More to the fact, consider this from the SEC Order Regarding Service [Ed: footnotes omitted]:
Commission Rule of Practice 141(a)(2)(i) provides that service of an OIP on an individual respondent can be accomplished by “sending a copy of the [OIP] addressed to the individual by U.S. Postal Service . . . express mail and obtaining a confirmation of receipt.” We cannot determine whether such service was accomplished here. According to the Bureau of Prisons’ website, the Miami Residential Reentry Management Office (“RRMO”) is a field office that administers and monitors “local Residential Reentry Centers, which are responsible for providing federal offenders with community-based services that will assist with their reentry needs.” The Bureau of Prisons’ website further explains that the Bureau of Prisons does not house inmates at the RRMO itself, but rather at a physically separate Residential Reentry Center, typically run by a third party under contract with the Bureau of Prisons. Topping’s receipt of the OIP thus appears to turn on the RRMO’s forwarding the OIP to the appropriate third-party facility, and then staff of that facility delivering it to Topping.
Unable to determine if the above service complied with its Rule, the SEC denied Enforcement's Motion for an Order Deeming Service Complete and ordered a further status report on subsequent service efforts.
Bill Singer's Comment: Compliments to the SEC's Office of the General Counsel for flagging this service.
FINRA Fines and Suspends Rep For Improper Meal and Transportation Expenses
In the Matter of Jong Ik Lee, Respondent (FINRA AWC 2022074194701)
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, Jong Ik Lee; submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Jong Ik Lee entered the industry in 2019, and by October 2021, he was registered with Jefferies LLC. In accordance with the terms of the AWC, FINRA imposed upon Lee a $5,000 fine and a nine-month suspension from associating with any FINRA member in all capacities. As alleged in part in the AWC:
During the period when Lee was associated with Jefferies, the firm’s travel and business expense policy permitted employees to be reimbursed for meals consumed when working late or on a weekend or public holiday. Employees were also entitled to reimbursement for the cost of transportation to a major commutation point or to an employee’s primary residence when working late on weekdays, or for the cost of one round trip to the office from the employee’s primary residence when working on a weekend or public holiday. Employees were required to submit expense reports with dated, time-stamped, itemized
receipts (including the pick-up/drop-off time, address, date, and total fare for any transportation expense), and to allocate the expense to an active project code.
From October 26, 2021, through December 30, 2021, while associated with Jefferies, Lee submitted 31 meal and 38 transportation expenses for reimbursements totaling $1,878.32. Lee characterized the expenses as business expenses when, in fact, they were personal in nature and did not comply with the firm’s travel and business expense policy. For example, Lee requested and received reimbursements for meal and transportation expenses using project codes Lee knew he was not entitled to use, either because the codes had expired or because they were from projects on which Lee was not staffed. Lee also altered some receipts to make the meal and transportation expenses appear as if they were eligible for reimbursement under the firm’s travel and business expense policy, such as by altering the time of the ride, pick-up location, drop-off location, or the map route on car service receipts. Lee then submitted those receipts to Jefferies, and the firm reimbursed him. In April 2022, Lee voluntarily repaid Jefferies the $1,878.32 for which he was improperly reimbursed.
Therefore, Lee violated FINRA Rule 2010.
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