Securities Industry Commentator by Bill Singer Esq

KPMG is one of the largest accounting firms in the world.  In recent years, KPMG fared poorly in PCAOB inspections and in 2014 received approximately twice as many comments as its competitor firms.  By 2015, KPMG was engaged in efforts to improve its performance in PCAOB inspections, including but not limited to recruiting and hiring former PCAOB personnel such as HOLDER and HOLDER's co-conspirator, Brian Sweet. 

KPMG's efforts to improve inspection results, however, were not limited to legitimate means.  Instead, between 2015 and 2017, HOLDER, David Middendorf, Thomas Whittle, Jeffrey Wada, Sweet, and others worked to illicitly acquire valuable confidential PCAOB information concerning which KPMG audits would be inspected, in an effort to game the system and improve inspection results.  For example, after Sweet began employment at KPMG, but while HOLDER was still employed by the PCAOB, HOLDER fed Sweet confidential PCAOB information about certain pending inspections.  HOLDER did so while simultaneously seeking employment at KPMG.  During the pendency of her efforts to obtain employment at KPMG, HOLDER - in violation of PCAOB rules - continued to work on KPMG inspections at the PCAOB.  Once she secured a job at KPMG, HOLDER stole valuable confidential information on her way out of the PCAOB and then passed it on to Sweet, her new boss at KPMG.     

In March 2016, HOLDER obtained the PCAOB's confidential 2016 inspection selections for KPMG from Wada, who was still working at the PCAOB but who had recently been passed over for a promotion.  Wada - who was not responsible for KPMG inspections at the PCAOB - accessed and stole valuable confidential information from the PCAOB and passed it on to HOLDER.  HOLDER, in turn, provided the 2016 inspection selections to Sweet, who passed them to Middendorf, Whittle, and others.  Middendorf, Whittle, Sweet, and others then agreed to launch a stealth program to "re-review" the audits that had been selected.  In order to cover up their illicit conduct, the KPMG engagement partners were given a false explanation for the re-reviews.  The stealth re-review program allowed KPMG to double-check its audit work, strengthen its work papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.

In January 2017, Wada, who had again been passed over for promotion at the PCAOB, again stole valuable confidential PCAOB information, misappropriating a preliminary list of confidential 2017 inspection selections for KPMG audits and passing it on to HOLDER.  At the same time, Wada provided Holder with his resume and sought her assistance in helping him to acquire employment at KPMG.  Sweet shared the preliminary inspection selections provided by Wada with Whittle and Britt, while noting that the information was only preliminary.  Whittle's response was to ask Sweet to confirm that they would get the final list as well.

In February 2017, Wada texted HOLDER saying, "I have the grocery list. . . . All the things you'll need for this year."  Wada then spoke to HOLDER and provided her with the full confidential 2017 final inspection selections.  HOLDER again shared the stolen information with Sweet, who shared it with Middendorf, Whittle, and others.  Middendorf, Whittle, and Sweet agreed to inform engagement partners on the list so that extra attention could be paid to these audits in light of the forthcoming PCAOB inspections. 

In 2017, a KPMG partner who received early notice that her engagement was on the confidential 2017 inspection list reported the matter, as a result of which KPMG's Office of General Counsel launched an internal investigation.  Thereafter, HOLDER and Sweet took a number of steps to destroy or fabricate evidence relevant to the investigation.  For example, HOLDER deleted a number of relevant text messages, emails, and documents, and said she was going to purchase a "burner phone" so her conversations could not be monitored.  Similarly, Sweet burned evidence of the 2017 inspection list and provided a falsified version of the list to KPMG counsel.

[F]rom 2010 to 2017, Garrido served as the president, director and registered agent of G & C Investment Corp (G&C).  In those capacities with G&C, Garrido solicited investors for advance contributions of as much as $1 million, which Garrido stated he would use to monetize bank instruments, engage in platform trading, or fund humanitarian platforms, among other things.  Garrido promised staggering returns to his investors of as much as 15- or 20-times their initial contribution.  Garrido also claimed he could guarantee the safety of the investors' principal by asserting he owned U.S. Treasury Notes which would serve as collateral for the investments.  In reality, the Treasury Notes did not exist.

Garrido failed to provide promised returns to investors, and instead used nearly $5 million for his personal benefit.  He then attempted to flee the country in March 2017 after learning of the Government's case against him, and was apprehended at Palm Beach International Airport by the FBI as he was preparing to board a private charter jet headed for Europe.

For engaging in outside business activities without providing prior written notice to his member firm employer, Respondent Partho S. Ghosh is fined $25,000, suspended for six months from associating with any FINRA member firm in any capacity, and ordered to requalify. Respondent is also ordered to pay costs

Ghosh is a former registered representative of NYLife Securities, Inc. ("NYLife

Securities" or "Firm") and a former insurance agent with its affiliate, NYLife Insurance, Inc. ("NYLife Insurance") (collectively referred to as "the NYLife entities"). Before joining the NYLife entities, Ghosh formed a company, Trans Global, Inc. ("Trans Global"). Its purpose was to provide corporate finance advisory services to financial technology companies regarding financing contingent liabilities. Later, during the hiring process at the NYLife entities, their Corporate Compliance Department ("CCD") told Ghosh that he must seek and obtain their approval to operate Trans Global as an outside business activity ("OBA"). Ghosh then filed an OBA request with the CCD. The CCD, however, denied the request and instructed Ghosh to dissolve the company as a condition of joining the NYLife entities. Ghosh complied and was hired as an insurance agent for NYLife Insurance and as an associated (non-registered fingerprint) person at NYLife Securities.

Although Ghosh dissolved Trans Global at the direction of the CCD, a few months later

he started, and began conducting business activities under, an identically purposed company, P.S. Ghosh Inc. ("P.S. Ghosh"). Ghosh was its sole owner and director. Several months after forming P.S. Ghosh-and just before he became registered with NYLife Securities-a Firm manager discovered P.S. Ghosh's existence and directed Ghosh to file an OBA request for that company with the CCD.

This time, however, Ghosh did not immediately comply. Instead, after registering with

the Firm, he resisted filing the request while trying, without success, to convince Firm

management that P.S. Ghosh was not an OBA. Meanwhile, Ghosh provided financial advice and sold NYLife Insurance products through P.S. Ghosh. When he finally submitted the OBA request several months later, the CCD denied it. But Ghosh continued conducting business through P.S. Ghosh. Then within a few weeks, he resigned when the Firm told him that his business model was not compatible with the NYLife entities' business.

The Department of Enforcement filed a Complaint against Ghosh, charging him with the above-referenced violations. Ghosh denied committing these violations and requested a hearing. For his defense, Ghosh mainly argued, first, that Enforcement failed to prove that P.S. Ghosh was a business activity outside the scope of his relationship with NYLife Securities. And, second, even if it were, according to Ghosh, his pre-registration written communications with Firm management, and the instructions he received in response, satisfied the notice requirement of FINRA Rule 3270.

A five-day disciplinary hearing was held before a FINRA Extended Hearing Panel. After

considering the evidence, the Extended Hearing Panel rejects Ghosh's defenses and concludes that Enforcement proved that he violated FINRA Rules 3270 and 2010. We set forth below our findings of fact, conclusions of law, and impose appropriate remedial sanctions.

Especially troublesome were Ghosh's misrepresentations in emails to several prospects that he was a registered investment adviser who owed them a fiduciary duty. Ghosh made these misrepresentations in four emails to four prospects in June, July, and August 2016. In one of those emails, he also identified himself as an "investment banker." Ghosh was never registered as an investment adviser and was not an investment banker. At the hearing, he compounded this wrongdoing by, at turns, splitting hairs, equivocating, and trying to justify his misrepresentations while, at the same time, purporting to express remorse for them. 

Ghosh testified that he has "never been known for brevity" and liked to hear himself talk. Indeed, at times, his testimony was rambling, evasive, and inconsistent. This was particularly the case when he tried to explain these emails. Asked to confirm that he did not owe a fiduciary duty to the recipient of one such communication, he hedged: "Depends on what you mean by that," he began. Continuing, he explained: 

I put a fiduciary duty on myself because I felt that one of the differentiators is that most brokers and agents operate by the rules of suitability and I wanted to put onthe-record that I consider myself to have a fiduciary duty and they should sue me if I didn't fulfill that duty, . . . So did I have a legal duty, no. That is why I wanted to write the Series 65, so [it] would be imposed. But I was a fiduciary, they should sue me if I don't live up to those duties.

Upon further questioning, he clarified his response: "I live up to the standards of [a] fiduciary and advertise myself as such. I didn't say I am legally a fiduciary. I just said I am a fiduciary." He went on to say, "The distinction I am making, I had no legal obligation to be a fiduciary. I am saying I imposed the fiduciary standard on myself."

Regarding a similar email he sent to another prospect, Ghosh took a different approach. He testified that at the time he sent the email, he failed to understand the "distinction between imposing a fiduciary duty on [himself and] having a legal duty imposed upon [him]." He continued, "I considered myself to have a fiduciary duty but not necessarily a legally imposed fiduciary duty. I realize now I was wrong. It was my mistake, I take full responsibility for it. I won't do it again." When asked why he made the misrepresentation, Ghosh explained: "I intended to take the exam but I should have phrased it, [‘]I intend to take the 65['] but it was my error."Finally, during his testimony, Ghosh apologized for an email he sent to a prospect telling him that he had a series 65 license and a fiduciary duty, calling it "unconscionable and unacceptable." 

We find Ghosh's justifications and explanations troubling. Ghosh has had a lengthy career in the financial services industry. He certainly knew he was not a registered investment adviser and, thus, did not owe the email recipients a fiduciary duty. Plainly, Ghosh made these false statements to differentiate himself from registered representatives to gain the trust of his prospects and obtain their business. Ghosh was right: this conduct was unconscionable and unacceptable.

This case concerns the ethical obligations FINRA Rule 2010 imposes on a registered person entrusted with others' money even when his conduct is unrelated to the purchase or sale of securities. The Complaint's first cause of action alleges that Respondent William James Potter converted a portion of funds entrusted to him as a third party to a business agreement between two other parties. The second cause of action alleges that Potter acted unethically and misused another portion of the entrusted funds when one of the parties failed to perform as the agreement required. 

The critical events described in the Complaint occurred over a brief span of time in March 2013. However, the bought a valuable commercial property in Chicago, referred to as the Chicago Parcel, with an ambitious plan to develop it. 

Development of the Chicago Parcel was a complex, multifaceted project. In the aftermath of the 2007-2008 financial crisis, the developers had to refinance the Chicago Parcel under new, less favorable terms. They eventually fell behind on their obligations and in early 2013, their mortgage lender prepared to foreclose. The developers, by this time organized as Old Prairie Block Owner, LLC ("OPBO"), struggled to find a new source of financing to intervene and take over the mortgage under terms that would permit the development to proceed. Business contacts referred them to the representative of an investment company, American Capital Group LTD ("American Capital"), based in Germany. 

American Capital agreed to negotiate a settlement with the lender to forestall the foreclosure and save the project for OPBO. For its part, OPBO agreed to provide a $2 million retainer to American Capital. If American Capital failed to reach a settlement, it was to return the $2 million to OPBO. 

OPBO insisted that the retainer be deposited in a third party's account in the United States until American Capital fulfilled certain conditions. RD, a Swiss businessman acting as American Capital's agent, invited Potter, with whom he had a years-long business relationship, to facilitate the transaction as the third party who would hold the retainer. 

Unknown to OPBO, RD was substantially indebted to Potter. RD told Potter that he could keep $250,000 of the retainer for himself to defray the debt. Also unknown to OPBO, Potter and his business had been experiencing serious financial difficulties. On the day Potter received the $2 million retainer, he began spending it for personal and business purposes. Three days later, Potter wired most of the money to an entity affiliated with American Capital and to RD. Potter kept and used the rest of the funds. 

American Capital did not achieve the settlement OPBO hired it to reach. The foreclosure sale of the Chicago Parcel proceeded. OPBO lost the property and all of its equity in it. OPBO demanded return of the retainer, but American Capital refused to return it. After unsuccessful attempts to seek legal redress, OPBO's principals complained to the U.S. Postal Inspection Service. A Postal Inspection Service agent subsequently contacted FINRA.

A FINRA investigation ensued and led the Department of Enforcement to file the twocause Complaint in this case. It charges Potter with conversion and unethical business conduct, including misuse of OPBO's deposit, in violation of FINRA Rule 2010. Potter denies the charges.genesis of those events dates back to 1998 when a group of investors.

Furthermore, aggravating factors present here underscore the appropriateness of imposing a bar for each cause of action. As noted above, Potter acted intentionally, converting thousands of dollars of OPBO's funds on the day they reached his account, and three days later transferring $50,000 to RD and $1.7 million to an affiliate of American Capital. Within a month of signing the Release Agreement, Potter had spent virtually all of the remaining funds. 

Potter denies responsibility for his wrongdoing, and shows no remorse for the harm he caused. To the contrary, he was fully aware that KS had loaned OPBO the $2 million and desperately needed repayment to avoid laying off employees. When confronted by his failure to offer to return any part of the funds he misused, Potter blithely shrugged off any concern or responsibility stating, "[t]hat was [RD's] problem or [BV's]."

• Securities Industry Commentator
• Bill Singer