FINRA's Travesty of a Transamerica Settlement (BrokeAndBroker.com Blog)

Joint Statement by Department of the Treasury, Board of Governors of the Federal Reserve System, and Federal Deposit Insurance Corporation (March 12, 2023)

JOIN the Financial Professionals Coalition, Ltd

4Cir Affirms Denial of Motion to Vacate FINRA Arbitration Award
Kayvan Karoon; KS Capital Management, Inc., Appellants, v. National Securities Corporation (4 Cir Opinion)

Litigation funder Burford sues Sysco over $140 mln antitrust investment (Reuters by Mike Scarcella)

RIDING OFF INTO THE SUNSET / Alex Rosenberg says goodbye to Citywire RIA / Here’s what he’s learned about the RIA business over the past three years.

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3/14/2023

JOIN the Financial Professionals Coalition, Ltd
https://www.finprocoalition.com/
The Financial Professionals Coalition, Ltd. is the one-stop, go-to clearinghouse for financial professionals - registered reps, associated persons, traders, bankers, back-office staff, and owners of broker-dealers and RIAs. Join our network of like-minded professionals. Membership is free.  

Arizona Licensed Insurance Agent Charged with Scheme to Defraud Elderly Clients (DOJ Release)
https://www.justice.gov/usao-az/pr/arizona-licensed-insurance-agent-charged-scheme-defraud-elderly-clients
In the United States District Court for the District of Arizona, Victoria Totten, 71, was charged with six counts of mail fraud. As alleged in part in the DOJ Release:

[T]otten, while working as a licensed insurance agent, defrauded various elderly clients out of approximately $114,000. It asserts that Totten fraudulently represented and advised prospective clients to pay insurance premiums in advance and directly to her company instead of making payments to the insurance companies. Totten falsely represented the actual terms of the premium payment structure offered by the insurance companies, and claimed that payment should be made in advance to lock in a lower rate. After receiving the fraudulently obtained funds, instead of transmitting the victims’ premium payments directly to the insurance companies, Totten misused large portions of the victims’ funds for her own personal use and to pay insurance premiums for her other clients. 

Two Men Plead Guilty to $1.3 Million Penny-Stock Scheme (DOJ Release)
https://www.justice.gov/usao-edva/pr/two-men-plead-guilty-13-million-penny-stock-scheme
In the United States District Court for the Eastern District of Virginia, Phillip W. Offill and Justin Wallace Herman pled guilty to conspiracy to commit securities and wire fraud. As alleged in part in the DOJ Release, the Defendants and toher:

conspired to misappropriate millions of shares of a publicly traded company that held mining claims in Arizona and Idaho. The defendants then fraudulently marketed the shares for sale through third parties, including call centers, who made materially false statements to potential investors, while manipulating the market so that the stock falsely appeared to be trading more actively than it actually was. As a result of the scheme, victim investors lost approximately $1.3 million.

Over a decade ago, in January 2010, Offill, a former attorney with the U.S. Securities and Exchange Commission, was convicted during a jury trial in the Eastern District of Virginia for participating in multimillion-dollar pump-and-dump stock manipulation schemes. Offill was sentenced on April 23, 2010 to eight years in prison in connection with that case. Offill was serving a three-year term of supervised release when he committed the new offense to which he pleaded guilty yesterday.

Miami Man Charged for Running Fraudulent Cryptocurrency and Stock Investment Scheme (DOJ Release)
https://www.justice.gov/usao-sdfl/pr/miami-man-charged-running-fraudulent-cryptocurrency-and-stock-investment-scheme
In the United States District Court for the Southern District of Florida, Ryan James Crawford, a/k/a “Brody" was indicted on eight counts of wire fraud. As alleged in part in the DOJ Release:

[F]rom around June 2020 through March 2022, Crawford tricked victims into investing about $800,000 in his scheme by: falsely claiming to be a highly successful licensed stockbroker who had made tens of millions of dollars through similar cryptocurrency and stock investments; falsely claiming to have access to enough money to timely repay potential investors; falsely claiming that he had developed an artificial intelligence trading software that “never lost,” and misrepresenting the investment as low-risk and high reward, among other things.

It is alleged that Crawford did not return any victim funds, or generate the exponential returns he promised. Rather, on some occasions, he simply diverted investors’ funds and cryptocurrency for his own personal use, including to pay for luxury rental cars and gambling at the casino.

Court Issues Amended Final Judgment Against Penny Stock "Mailman" and His Two Companies (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25665.htm
In the United States District Court for the Northern District of Alabama, an Amended Final Judgment was issued against Brian Robert Sodi and the now-defunct Capital Financial Media LLC (CFM) and List Data Solutions LLC (LDS) for securities fraud and other violations in connection with promoting penny stocks in scalping and pump-and-dump schemes in 2013. The Amended Final Judgment orders  disgorgement and prejudgment interest of $929,995. Separately, Sodi has also been suspended from appearing or practicing before the Commission under Rule 102(e)(3) of the Commission's Rules of Practice.Further, in a separate parallel criminal action, Sodi pled guilty to one count of securities fraud and was ordered to pay $338,056 in forfeiture. As alleged in part in the SEC Release:

The Commission's complaint, filed February 26, 2018, alleged that Sodi, a CPA, secretly acquired shares of two companies and then sold those shares while using CFM and LDS to disseminate statements urging investors to buy those stocks, and without disclosing his holdings, sales, or plans to sell. Sodi, CFM, and LDS agreed to settle the charges in September 2019, agreeing to injunctive relief and to pay, jointly and severally, a total of $1,268,000 in disgorgement and prejudgment interest, with this obligation to be offset by the total amount of restitution and/or forfeiture ultimately ordered in the parallel criminal proceeding against Sodi. The court entered final judgment on April 16, 2020, requiring any funds paid by the defendants to be remitted to the United States Treasury. 

SEC Charges IT Services Provider DXC Technology Co. for Misleading Non-GAAP Disclosures (SEC Release)
https://www.sec.gov/news/press-release/2023-49
Without admitting or denying the findings in an SEC Order that it had negligently violated the anti-fraud provisions of the Securities Act of 1933 and reporting provisions of the federal securities laws
https://www.sec.gov/litigation/admin/2023/33-11166.pdf, DXC Technology Company consented to a cease-and-desist order, to pay an $8 million penalty, and to undertake to develop and implement appropriate non-GAAP policies and disclosure controls and procedures. In determining to accept DXC’s offer of settlement, the SEC considered DXC’s cooperation and remedial actions.As alleged in part in the SEC Release:

[DXC] materially increased its reported non-GAAP net income by negligently misclassifying tens of millions of dollars of expenses as non-GAAP adjustments for so-called transaction, separation, and integration-related (TSI) costs and improperly excluding them from its non-GAAP earnings. While DXC publicly claimed that its non-GAAP metrics allowed investors “to better understand the financial performance of DXC,” the SEC’s order finds that the company’s non-GAAP disclosure controls and procedures were inadequate to ensure that the company’s expense classifications were consistent with its own public description of TSI costs. According to the order, by misclassifying TSI costs, DXC materially overstated its non-GAAP net income in three fiscal quarters. DXC also failed to evaluate the company’s non-GAAP disclosures concerning TSI costs. 

SEC Charges California Fuel Business Operator with Defrauding Retail Investors and Misappropriating Funds (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25664.htm
In the United States District Court for the Central District of California, the SEC filed a Complaint charging John David Gessin, Equifunds, Inc., and Ice Fleet LLC, with violating the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder.
https://www.sec.gov/litigation/complaints/2023/comp25664.pdf As alleged in part in the SEC Release:

[G]essin presented himself as a successful entrepreneur and used the alias "John David" to disguise his past, including a criminal record and bankruptcies, raising over $1.6 million from five retail investors, including a veteran and an elderly retired nurse. Gessin told investors their money would be used to purchase, sell, and distribute fuel. However, Gessin misappropriated a significant portion of investor funds to pay his personal expenses, including the mortgage and taxes on a home in a gated community, cars, hotel stays, and gifts to friends and family members.

According to the complaint, in March 2020, Gessin suddenly stopped paying investors the amounts they were owed. Gessin falsely told investors that the COVID-19 pandemic had severely impacted his business and that he was unable to repay them, despite receiving nearly $1.3 million in relief funds from the Small Business Administration.

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3/13/2023

FINRA's Travesty of a Transamerica Settlement (BrokeAndBroker.com Blog)
https://www.brokeandbroker.com/6928/finra-transamerica-awc/
There is none so blind as those who will not see; and on Wall Street, the industry's regulators are blinded by their refusal to see the disparity between their sanctioning of associated persons versus larger firms. Suspending or barring a stockbroker/advisor is as powerful an arrow as there is in the regulatory quiver. In contrast, conglomerates tend to get fined, and those dollars are more likely paid by public shareholders. No, I am not arguing for lesser sanctions for the industry's human beings, but I sure as hell am asking why large corporations get off so much lighter. Why aren't we closing down Wall Street's entities for the same durations and with the same frequency as we place its employees in the penalty box?   

4Cir Affirms Denial of Motion to Vacate FINRA Arbitration Award
Kayvan Karoon; KS Capital Management, Inc., Appellants, v. National Securities Corporation (Opinion, United States Court of Appeals for the Fourth Circuit, No. 22-1295)
https://www2.ca3.uscourts.gov/opinarch/221295np.pdf
Reduced to somewhat over-simplified basics, in 2017 the Appellants filed a FINRA Arbitration Statement of Claim against National alleging "conversion, breach of fiduciary duty, breach of the covenant of good faith and fair dealing, and negligence;" and the Panel rendered a 2021 FINRA Arbitration Award
https://www.finra.org/sites/default/files/aao_documents/17-01718.pdf denying the claims and finding Appellants jointly and severally liable to National for $22,500 in attorneys fees plus various hearing-related fees. Following Appellants filing of a Motion to Vacate the FINRA Arbitration Award, the United States District Court for the District of New Jersey denied the Motion and confirmed Respondent's Motion to Confirm the FINRA Arbitration Award. https://www.finra.org/sites/default/files/aao_documents/17-01718%282%29.pdf. Thereafter, the Appellants appealed to 4Cir. In affirming the lower court's denial of the Motion to Vacate, in part the 4Cir offers this fairly succinct analysis and rationale:

Karoon and KS cannot clear this high bar. Though they now challenge the selection of one arbitrator, they waived that objection. The rules of FINRA (the Financial Industry Regulatory Authority) require a three-arbitrator panel to comprise two public arbitrators (those who have not worked in the securities industry) and one non-public arbitrator. FINRA Rules 13100(r), (x), 13402(b). In 2017, FINRA sent the parties a list of arbitrators, and they chose three. Over the next three years, Karoon and KS asked for and got three postponements. In 2020, one of the public arbitrators withdrew, and FINRA replaced her with Leslie Nydick. The 2017 list of arbitrators had classified her as a public arbitrator, but an attachment to the 2020 letter correctly listed her past work in the securities industry. Although Karoon and KS got this information before the hearing, they did not object until after they lost. That was too late. Goldman, Sachs & Co. v. Athena Venture Partners, 803 F.3d 144,
150 (3d Cir. 2015).

Karoon and KS also object that the arbitrators must have been biased. “Evident partiality is strong language and requires proof of circumstances powerfully suggestive of bias.” Kaplan v. First Options of Chi., Inc., 19 F.3d 1503, 1523 n.30 (3d Cir. 1994) (internal quotation marks omitted), aff’d, 514 U.S. 938 (1995); see 9 U.S.C. §10(a)(2). Yet they have none. They allege only that the panel charged them fees for the three adjournments that they themselves asked for, split the $200 fee for one of their successful motions to compel, and declined to impose sanctions on National. But FINRA’s rules do not mandate certain fee allocations or sanctions. Instead, the rules leave these matters to arbitrators’ discretion. See FINRA Rules 13214(c)(1), (3), 13902(c), 13511. And Karoon and KS have not explained why the arbitrators’ conclusions were unreasonable, let alone powerfully suggestive of bias. So we will affirm the District Court’s refusal to vacate the arbitral award.

Litigation funder Burford sues Sysco over $140 mln antitrust investment (Reuters by Mike Scarcella)
https://www.reuters.com/legal/litigation-funder-burford-sues-sysco-over-140-mln-antitrust-investment-2023-03-13/
Reuters' Mike Scarcella brings us to the intersection of Capitalism and litigation -- and it's a busy crossroads with no working stop lights and a lot of cars whizzin' by. A really fun read about what happens when an investor has poured a ton of cash into the prospect of a high-ball settlement but the funded-litigant purportedly opts for low-ball numbers. It's a discomforting ethical story well-told by Scarcella.  

RIDING OFF INTO THE SUNSET / Alex Rosenberg says goodbye to Citywire RIA / Here’s what he’s learned about the RIA business over the past three years.
https://citywire.com/ria/news/alex-rosenberg-says-goodbye-to-citywire-ria/a2411476
A fine industry pundit and editor offers some parting views about the biz. Refreshing commentary. We wish Citywire/RIA's Alex Rosenberg the best.

Joint Statement by Department of the Treasury, Board of Governors of the Federal Reserve System, and Federal Deposit Insurance Corporation (March 12, 2023)
https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm

Washington, DC -- The following statement was released by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg:

Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.

After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today's actions demonstrate our commitment to take the necessary steps to ensure that depositors' savings remain safe. 

SEC Obtains Judgment Against Individual in Multi-Million Dollar Securities Offering Fraud (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25663.htm
In the United States District Court for the District of Massachusetts, Final Judgment was entered against Joshua Dax Cabrera ordering him to pay about $1,126,000 in disgorgement, prejudgment interest, and penalties. As alleged in part in the SEC Release:

The SEC's complaint alleged that Cabrera partnered with co-defendant Paul Hess to fraudulently raise more than $12.9 million from more than 150 U.S. and foreign investors by offering unregistered securities in Medsis International, Inc. from 2015 through 2020. The complaint alleged that while offering Medsis securities, Cabrera and Hess made multiple material misrepresentations and misleading statements about Medsis to investors concerning the existence and value of contracts with customers, existing and expected revenue, and business operations. The complaint also alleged that Cabrera and Hess misrepresented to investors their personal use of investor funds.

Without admitting or denying the SEC's allegations, Cabrera consented to a final judgment in the SEC action that permanently enjoins him from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the securities offering registration requirements of Sections 5(a) and 5(c) of the Securities Act. The judgment also prohibits Cabrera from participating in the issuance, purchase, offer, or sale of any security with the exception of Cabrera purchasing or selling securities for his own personal accounts, and finds him liable for disgorgement of $536,895, prejudgment interest of $52,816, and a civil penalty of $536,895.

The District Court previously entered final judgment against Cabrera's co-defendant, Paul Hess, on December 19, 2022, as part of a settlement in which Hess agreed to pay approximately $840,000 in disgorgement, prejudgment interest, and penalties and be enjoined from future violations of the securities laws and from offering and selling securities to others.

SEC Charges Investment Adviser for Failing to Adopt New Compliance Policies for Clients and Seek Best Execution Despite Prior Notice of Deficiencies (SEC Release)
https://www.sec.gov/enforce/34-97114-s
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2023/34-97114.pdf
that it had violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder, E. Magnus Oppenheim & Co. Inc. ("EMO") consented to a Censure, a cease-and-desist order from committing or causing further violations of these provisions, the payment of a $50,000 penalty, and the imposition of an independent compliance consultant. As alleged in part in the SEC Release:

[F]rom at least 2019 to 2021, EMO's written compliance policies and procedures were adopted from another investment adviser's compliance manual without removing references to the other adviser and without adequately tailoring the manual to its own business. The order finds that the policies and procedures did not address certain areas relevant to EMO's business and operations, including policies and procedures involving access to client funds and custody, billing fees, and conducting due diligence of third-party service providers.

The SEC's order further finds that, also from at least 2019 to 2021, EMO failed to satisfy its duty to seek best execution because it did not make an adequate assessment of the commission rates, fees, or ticket charges charged by its clearing broker, try to negotiate better terms with its clearing broker, or make an adequate assessment of the commissions, fees, ticket charges, and execution quality available from other clearing brokers. EMO was on notice of both of these deficiencies following an examination by the Division of Examinations in 2019. EMO's founder, President, Chief Investment Officer, and Chief Compliance Officer passed away in June 2019, but EMO did not adequately address the identified compliance deficiencies thereafter.

SEC Charges Water Treatment Company and Former Executive with Accounting Violations (SEC Release)
https://www.sec.gov/litigation/litreleases/2023/lr25662.htm
In the United States District Court for the District of Rhode Island, the SEC filed a Complaint charing Evoqua Water Technologies Corp. and its former division-level finance director Imran Parekh for improper accounting practices. https://www.sec.gov/litigation/complaints/2023/comp25662.pdf
As alleged in part in the SEC Release:

[F]rom at least the fourth quarter of 2016 through August 2018, Parekh, as the Finance Director of one of Evoqua's divisions based in Rhode Island, engaged in fraudulent accounting practices that resulted in Evoqua improperly reporting materially false revenue amounts in its financial statements filed with the Commission. The SEC's complaint alleged that Parekh inflated the revenue Evoqua reported quarterly and at year-end by counting revenue from sales much earlier than accounting principles permitted. The complaint alleged that Parekh improperly accounted for so-called "bill-and-hold" transactions (where a company bills a purchaser for a product but the seller does not deliver the product to the purchaser until some future date), for which Evoqua recognized revenue from the sale of filtration products earlier than permitted and without meeting the criteria found in accounting principles to be able to immediately recognize the revenue.

The complaint further alleges that negligent conduct at Evoqua's corporate level in managing the financial reporting and accounting controls processes facilitated Parekh's improper accounting practices. As a result of the fraudulent scheme, the complaint alleges, Evoqua improperly reported nearly $12 million of additional expected revenue for its fiscal year 2017 in its registration statement and its initial public offering (IPO) Prospectus filed with the Commission in October and November 2017; that the misconduct continued through Evoqua's first year as a public company, resulting in inaccurate books and records and material misstatements of Evoqua's financial condition in subsequent filings with the Commission; and that by failing to disclose to investors (or in filings with the Commission) that Evoqua reported uncompleted sales as revenue by misapplying bill-and-hold accounting criteria, Evoqua misled investors and potential investors about the true financial picture of the company.

Evoqua has consented to the entry of a final judgment that permanently enjoins it from violating the antifraud provisions of Section 17(a)(2) and (3) of the Securities Act of 1933 ("Securities Act"); the periodic reporting provisions of Section 13(a) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rules 12b-20, 13a-l, 13a-11, and 13a-13 thereunder; and the books and records and internal accounting controls provisions of Sections 13(b)(2)(A) and (B) of the Exchange Act. The final judgment would also order Evoqua to comply with certain undertakings, including an agreement to implement recommended improvements to its system of internal accounting controls, and to pay a civil penalty of $8.5 million.

Parekh has consented to the entry of a judgment that permanently enjoins him from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10(b)(5) thereunder; from aiding and abetting the periodic reporting provisions of Section 13(a) of the Securities Act and Rules 12b-20, 13a-l, 13a-11, and 13a-13 thereunder; from aiding and abetting the books and records and internal accounting controls provisions of Sections 13(b)(2)(A) and (B) of the Exchange Act; and from knowingly circumventing an issuer's system of accounting controls or knowingly falsifying an issuer's books and records in violation of Section 13(b)(5) of the Exchange Act. The judgment also orders that Parekh will be ordered to pay disgorgement, prejudgment interest, and a civil penalty, the amounts of which will be determined by the court, and that the court will determine whether Parekh should be barred from serving as an officer or director of a public company and if so the duration of such a bar. The settlements with Evoqua and Parekh are subject to court approval.